The Long Slow Short of Western Union
I previously wrote up a summary from Marc Rubinstein’s Net Interest newsletter on Burford Capital and the litigation finance industry.
This time I’m writing up a summary on Marc Rubinstein’s post about a company that Marc refers to as a long and slow short - Western Union.
It’s another great post and Marc also discusses Robinhood, banking hours and Compound Treasury at the end which you can read in his full article here:
https://www.netinterest.co/p/the-long-slow-short
Here is my summary below:
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Business is changing so that it is taking a lot less time to create something than it did in the past. For example, Facebook became a trillion dollar company in only 17 years.
Incumbent companies that were being disrupted like Sears, Blockbuster and Kodak but are now bankrupt have been able to hang on for a lot longer these days.
Shorting is hard for that reason - because a company can prolong its death a hell of a lot longer than you think.
A good example that Marc Rubinstein gives is that he was short Western Union because he was confident that they would be the loser in the digital payments space but he underestimated the time it would take for the market shift to actually happen and their ability to generate free cash flow before the market shift actually happened.
Marc then realized that Western Union actually peaked in 1878 and has been on a decline ever since because of the inventions of the telephone, fax, computer, internet and only more recently digital payments so this short idea of his wasn’t a new one.
Western Union back in the 1850's had a similar stance to the telephone as many incumbent companies do today in regards to new technology that has the opportunity to disrupt their business - Western Union dismissed it and claimed in 1876 that the telephone had no value to them.
Marc discusses the history of Western Union over the next 110 years which includes being acquired by AT&T in 1909; then spun out of AT&T less than 5 years later due to antitrust reasons; then experiencing a big drop in telegram traffic from 1929 to the start of World War 2; then the introduction of new business lines such as the telex, leased communication services and information processing and then a leveraged recapitalization backed by Drexel Burnham Lambert which gave control to an investor named Bennet S. Lebow.
Then there was some deregulation in the 1980’s which helped Western Union's money transfer business a lot and in 1994 Western Union was acquired by First Data until they were spun out of First Data in 2006.
According to Marc, Western Union is still around today with 550,000 agents in 200 countries but revenue has been flat and average revenue per transaction went from $28 in 2005 to $14.40 in Q1 2021 meanwhile Western Union is being disrupted once again - this time by digital payments.
And despite Western Union trying to adapt by going digital, a majority of the money that is transferred using Western Union is picked up by the recipient at a retail location as cash so the business model is still tied to cash as opposed to digital.