The week’s news included; The GameStop short squeeze explained, Dr Martens launches IPO, Boohoo buys Debenhams website and brand, JP Morgan to launch digital consumer bank
Below are our top 10 stories that you need to know about. Be sure to check our twitter page and Facebook page for regular posts of important headlines. Get all the important stories and insights straight into your inbox by subscribing to our mailing list here.
Opinion articles of the week:
- CNBC – How Covid-19 vaccines can shape China and India’s global influence
- LawCareers.net – How will business relations change in the age of remote working and videoconferencing calls?
- City A.M – GameStop: Get Shorty? The case for short sellers has never been stronger
- BBC News – Is there a gap between public and private sector pay?
1. THE BIG SHORT (SQUEEZE)
You’ve probably seen the “stock market” and “GameStop” trending last week, but what exactly happened? Last week saw a frantic clash between Wall Street and Reddit users, with video game store GameStop caught in the middle.
Like many other retailers GameStop is struggling and had announced plans last year to close 450 stores. In April 2020, GameStop’s share price fell to just $3.25. Wall Street firms bet on GameStop’s share price to sink further and held huge “short” positions.
What is short-selling?
Short selling is a way to profit when a company’s share price declines. A short seller will borrow the stock of a company from an exchange and sell this stock immediately. The short seller holds the cash from that sale while owing the stock to the exchange. The short seller will wait until the price declines and then buy the stock back again at a cheaper price. They will then return the owed stock to the exchange. The short seller’s profit is the difference between the original sale price and the price they bought the stock back at. Short sellers often spread negative news, explaining why they believe the stock price will decline.
Shorting is very risky as the stock must always be bought back at market price and returned to the exchange, even if the price rises massively. Losses from shorting are therefore unlimited. This is exactly what happened to short sellers of GameStop.
What happened with GameStop?
WallStreetBets is a forum on social media site Reddit where users encourage each other to buy stock and boost its price. This in turn harms short sellers who bet on the price decline. This is known as a “short squeeze”. Last week, they promoted GameStop. It was pitched as an uprising against Wall Street. It was wildly successful. GameStop’s share price hit a staggering $350, up from just $18 earlier this month. Short sellers collectively lost $19 billion from GameStop shorts alone. Other companies like AMC Entertainment also saw meteoric share price growth. Melvin Capital was a major short seller and lost 53% of its value this month alone. It had to secure nearly $3 billion in emergency funding to stay afloat.
Is it legal?
Technically, yes. Proving market manipulation under US law is very difficult. The people who bought were largely retail investors with no inside information. They simply encouraged each other to buy stock on social media. This isn’t likely to meet the threshold of illegal market manipulation. US Congress are however, having a hearing on the matter, while the SEC are also investigating. No one has been charged with any wrongdoing as of yet.
Trading platforms such as Robinhood, restricted trading of the stocks. Robinhood was sued by customers, accused of manipulating the market by preventing customers from trading. The frenzy has caught the financial world off guard and raises some significant moral and regulatory questions.
2. DOC MARTENS IPO
Dr Martens’ shares soared during its IPO last week, rising 19% on the day. The IPO on the London Stock Exchange was a success and raised nearly £1.3 billion. This spike in share price gives Dr Martens a valuation of £3.7 billion. Due to high demand, it could sell a further 52.5 million shares.
The first Dr Martens boot was made in 1960. Their boots still boast their trademark yellow stitching. The business has gone from strength to strength, despite the pandemic, posting £86.3 million in profit for the half year to September 2020.
3. BOOHOO BUYS DEBENHAMS
Boohoo has purchased the brand and website of Debenhams for £55 million. The deal will not save any of the 12,000 jobs at risk at Debenhams as Boohoo will not be purchasing any of the retailer’s 118 high street stores. Debenhams fell into administration last year after 242 years in business. Administrators have been selling off stock and parts of the business. Boohoo will relaunch Debenhams on its platform later in the year.
Boohoo announced last year that it would be on an acquisition spree and it has certainly delivered. It has recently also bought the brands of Oasis and Warehouse, Karen Miller and Coast. This followed its £200 million fund raising round in May. ASOS is also at the forefront to buy Topshop and other Arcadia Group brands out of administration. Again, this would be a sale of the brand and websites only. Although not confirmed, this deal looks promising.
These purchases symbolise the shift in retail that has been accelerated by the pandemic. Online retailers are taking over, both in terms of market share and now physically. Traditional giants of the high street are either struggling or dying out entirely. In order to survive in the long term these firms will need to adapt quickly.
4. UK TO JOIN CPTPP
The UK is applying to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – or CPTPP. The CPTPP is a free trade area comprising of 11 Asian & Pacific countries, home to over 500 million people. Members include Australia, Canada, Japan and New Zealand. Entering this deal will boost the UK’s exports to fast-growing nations and create new opportunities, according to the government. It will lower tariffs on several exports like whiskey and cars.
It is worth noting that CPTPP countries collectively accounted for just 8.4% of the UK’s exports in 2019. Furthermore, the UK already has trade deals rolled over with most CPTPP nations, derived from the pre-Brexit EU arrangements. This means the initial material benefits from joining the CPTPP will be limited. The UK can, however, sign further free trade deals with whoever it pleases. The CPTPP membership will not be a ground-breaking move but it is certainly a positive step forward for post-Brexit Britain.
BBC News explores the CPTPP in more detail.
5. CMA TO REVIEW UBER AUTOCAB DEAL
The Competition and Markets Authority is investigating Uber’s proposed acquisition of Autocab. Uber struck the deal last August for an undisclosed sum but there is concern that it could reduce competition in the ride hailing sector. The CMA has launched a formal investigation and will make a decision by March 26.
Autocab is a UK based taxi tech company. It develops booking and taxi dispatch software which private taxi companies can use to pick up passengers. Uber’s acquisition will allow them to connect passengers with drivers from local firms in locations where they do not currently operate.
This latest investigation is just another headache for Uber as its legal and regulatory challenges continue to mount. Alongside the investigation into this deal, it is also facing a huge lawsuit from London cab drivers which could cost them millions.
6. EU GIVES EQUIVALENCE TO US CLEARING HOUSES
The EU has given approval to US financial clearing houses to operate across the EU. This could have significant implications for the UK’s financial services sector. US clearing houses have been given regulatory equivalence by the EU, something which UK clearing houses have not been granted due to Brexit. Instead, UK clearing houses may only operate in the EU until June 2022. US firms could be lined up as replacements for the UK houses.
Clearing houses validate and finalize financial transactions between parties. It is big business. As of 2017, the London Clearing House, part of the London Stock Exchange, cleared €927 billion of euro-denominated financial contracts every single day. This accounted for three quarters of the global market. Losing out on this business to US competitors could be significant.
7. JP MORGAN TO LAUNCH CONSUMER BANK
JPMorgan Chase & Co has announced it is launching a UK digital retail bank later this year. The bank has recruited 400 staff and is the bank’s first attempt in the UK retail banking market. This follows a move by Goldman Sachs who launched their retail bank “Marcus” in 2018. Marcus has enjoyed some success in the UK. It offers high interest rates and has had to stop accepting new customers in 2020 as it reached a huge £21 billion in deposits. Had it reached £25 billion, Goldman Sachs would have had to ringfence Marcus from its investment banking activities. This would have been a huge headache and so the bank decided to halt new customer applications.
JPM may not see the same fate, as its offerings are not expected to be as enticing as Marcus’. This is not however, JPM’s first attempt at running its digital bank. In 2017, it launched, Finn, in the US but was shut down just a year later. Digital banking is lucrative, but it is a saturated market, particularly in the UK. Challenger banks like Monzo and Revolut have established themselves as big players in the digital sphere. Whether JPM will be successful in its attempt remains to be seen.
8. FORD GOES TO CHINA FOR MUSTANG PRODUCTION
Ford has announced it will now produce its Mustang cars in China. Its electric variant, Mustang Mach-E will be made in China to help Ford establish a larger presence in the country. China is the world’s largest electric car market and its growing. Over 20 million electric vehicles were sold in China last year. Tesla, Volkswagen and Mercedes-Benz owner Daimler are all making inroads into China. This comes as China has overtaken the US as the largest recipient of foreign direct investment. China had $163bn in inflows last year, while the US had $134bn (link).
9. COINBASE TO GO PUBLIC
Cryptocurrency exchange Coinbase has announced that it will go public via direct listing. The company has filed confidentially with the SEC. The platform allows users to trade cryptocurrencies like Bitcoin and Ethereum. A direct listing sees the company’s outstanding shares put on the market without the fanfare that comes with an IPO. It also, however, comes without the help of expert underwriters to facilitate sales of shares. An IPO would see new shares created and sold to the public, with the help of underwriters. Direct listings are cheaper and allow current owners to retain their current share of the business. Coinbase was founded in 2012 and has secured over $540 million in private funding.
10. PAPERCHASE RESCUE DEAL
Retailer Paperchase has secured a rescue deal and will be bought of administration by private equity giant Permira Debt Managers. The deal saves a huge 90 of Paperchase’s 125 stores, crucially saving around 1000 jobs. Paperchase has suffered heavily, as it mainly sells stationery, cards and gift wraps. With schools and offices closed and people refraining from hosting celebrations, Paperchase’s income has dried up. The company is confident however, that it will return to profit as the world begins to return to some normality. Despite this, in 2019, it underwent a company voluntary arrangement due to challenging trading conditions. Paperchase now operates under a model which links rent payments to store turnovers, making survival manageable. Although challenges lie ahead, the saving of such a large number of jobs is certainly positive news.