In the News
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Markets
Background: Since the Fed’s Sept. 21-22 policy meeting, yields have sharply risen for both short-term bonds and long-term bonds. The yields on short-term bonds are especially sensitive to monetary policy changes, and its rise signals that investors expect the Fed to tighten monetary policy.
Development: On Wednesday, the yield on the 10-year Treasury fell to 1.549% from 1.579% on Tuesday. The yield on the 30-year Treasury bond also fell to 0.065%. While yields on long-term bonds fell, the yield on the two-year Treasury continued to rise, finishing the trading session at 0.368%, the highest since late March 2020. The narrowing gap is fueled by the release of data showing the acceleration of inflation in September, which has made investors wary that the Fed would tighten monetary policy sooner than expected.
Commodities
Details: Energy prices have climbed drastically in many parts of the world (e.g., China, India, and the U.K.). Energy prices have been soaring because of many reasons, some of which include rising power demand due to weather events and an increase in economic activity, Russia limiting pipeline exports to Europe, lower U.S. liquified natural gas exports, and an increase in the price of carbon credits in Europe. These disruptions have led countries to engage in a bidding war, which has dragged energy prices in the U.S. to all-time highs in a decade.
Why it matters: Businesses may be forced to raise prices due to higher operating costs associated with higher electricity bills. This will affect consumers by leading to higher electricity bills, which may lead to less consumer spending and slow down economic recovery. Furthermore, higher energy prices may worsen supply chain disruptions and create inflationary pressures.
Outlook: Mark Zandi, chief economist at Moody’s Analytics, believes that in the U.S., while the high energy prices may affect consumer spending, it is unlikely to lead to a recession. Since the U.S. is a large energy producer, the increase in energy prices is not all negative, so the price increase would need to be very large to cause a recession.
M&A
Background: The global tech and engineering company, Emerson Electric, plans to merge its software businesses with Aspen Technology Inc. in a roughly $11 billion cash-and-stock deal aimed at capturing the industrial technology market.
Details: Emerson, which is contributing roughly $6 billion in cash as part of the deal, would own 55% of the new entity on a fully diluted basis. AspenTech shareholders would own the rest. AspenTech makes software for companies in industries including chemicals, mining and energy. Emerson, a large industrial conglomerate, has a market value of around $58 billion following a sharp rise in the stock since early last year.
Outlook: The deal involves two small businesses from Emerson’s automation unit, which makes software and systems for manufacturers, oil producers and utilities and accounted for about two-thirds of the company’s revenue last year. Industrial companies have had consistent deal activities over the past decade to reconfigure themselves to suit evolving technology. The economy has seen a boom in mergers as companies with surging stocks and ample cash seek to strike deals to boost growth and profitability. In the U.S. there have been more than $2 trillion takeover deals so far in 2021, more than double than the year before.
IPO
Company overview: The Vita Coco Company is a pioneer in packaged coconut water. Since its founding in 2004, the company has been able to make coconut water a mainstream beverage, targeting mainly health-conscious young consumers in North America and Europe. The company has also recently begun to extend into other healthy hydration categories and coconut-based products (e.g., high energy drinks and coconut milk).
Financial details: On Tuesday, the company announced that it plans to raise $224M by offering 11.5M shares at a price range of $18 to $21. Following the IPO, the company expects to have 55.5M shares outstanding, which will value it at $998.9M to $1.2B.
Deal details & outlook: Vita Coco has a good history of financial performance and growth. For the past year, the company reported $334M in net sales, which represented a 17% year-to-year increase. In terms of growth prospects, the company says that it plans on using the proceeds raised through the IPO to expand distribution in new markets, which include big U.S. cities that are not along the coasts and international markets in Asia and Europe. Something that may be of concern to investors is the company’s ability to withstand supply-chain disruptions. Supply chain issues caused by the pandemic have eroded at the company’s margins in the past year, and it is unclear how well the company will adjust going forward.
VC
What happened? Former employees of stock-trading platform Robinhood Markets Inc. are building a small financing company called Parafin Inc. It is reaching small businesses via partners to offer online cash advances, a type of financing that’s repaid as a percentage of a business’s daily sales. Parafin is backed by some of Robinhood’s early investors: the startup raised a $30 million Series A round led by Joshua Kushner’s Thrive Capital this month, which followed a $4 million seed round in October 2020 led by Ribbit Capital.
Diving deeper: One of Parafin’s first clients is Mindbody Inc., a software provider to tens of thousands of small businesses, such as fitness businesses. Clients will be offered customizable financing options on their Mindbody software dashboards. Mindbody chose Parafin as its capital supplier because of its strong technical offering, low financing rates for small businesses, and ability to move fast.
Looking ahead: Many businesses are seeking to layer on financial services to add new revenue including Shopify, Toast and payment processors like Square and Paypal. Parafin’s business model is thought to be more efficient by distributing credit products via partners like Mindbody.
