HYBRID VIGOR: VOL 3 ISSUE 23 "The World Turned Upside Down"

What a morning!

Thinking about what I’d write for the cover as I drove in, still mesmerized by the Orlando tragedy and the resilient answer of the Tonys, I was listening to my current favorite satellite radio station, Soul Town. My favorite song in junior high school, “They Just Can’t Stop It” by the Spinners, better known as “Games People Play,” came on. Inspired by Lin-Manuel Miranda and Hamilton, I wondered what games we could play in today’s issue while still respecting those we lost.

Parking the car, I glanced at my phone and saw it. Microsoft to buy HOCS stalwart LinkedIn. Kicked myself. I made what I thought was the easy money in LinkedIn after the huge selloff earlier this year and decided to cut bait. As I told one of our summer interns on the way into the office, I give LinkedIn an A for concept and a B or B- for execution. Congratulations to everyone who owned LinkedIn convertibles outright, and special congratulations to those who were creative and put on a Texas hedge, owning both convertible and stock. It made sense here, given the premium and delta. Perhaps we should start a feature called good Texas hedge ideas. One of the best managers we know uses Texas hedges in situations like these.

You don’t have to be Alexander Hamilton to figure out that the most logical “next” is Twitter. There are only so many brands like this out there. Microsoft is paying a huge price by normal valuation standards but a not-unreasonable total dollar amount for something as entrenched as LinkedIn. You could probably get Twitter for about half of what LinkedIn cost even allowing for a decent premium. I may be talking my book, especially after our recent buy-write piece, but I’ll be shocked if Twitter is still independent when Mr. Miranda brings in 2017 on national television.

More generally, I can’t help wondering if this high-profile deal could have ripple effects beyond software and social media. Last week’s dramatic late de-risking knocked weeks of gains out of the small-cap biotech sector. One would have to think some of the big-cap pharmas won’t wait much longer—Jazz Pharmaceuticals, a mid-cap convertible issuer, already did its thing buying Celator.

Let’s raise a glass to freedom and to the spirit of those senselessly, hatefully killed in Orlando. Let’s keep an eye on what promises to be a whirl of activity. Look around, look around.

Note: A principal of Hillside Advisors has a position in Twitter.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).