Chris DeMuth's State of the Markets for April 2023 (podcast #165)
It's time to welcome back Chris DeMuth for his monthly state of the markets. For this April 2023 edition, Chris shares his thoughts on the Spectrum Brands antitrust lawsuit, thoughts on Activision Microsoft following the CMA unexpectedly ruled against the deal, and the Wells Notice sent to Coinbase.
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Transcript begins below
Andrew: All right. Hello and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast would mean a lot. If you could follow rate, subscribe, review all that jazz, wherever you're watching or listening to it. With me today I'm happy to have my friend and the founder of Range of Capital, Chris Demuth. Chris, how's it going?
Chris: It's going well. Thanks for having me on, Andrew.
Andrew: Thanks for coming on. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. That's always true, but particularly true today, we've got a lot of stocks and situations to talk about. All of them have some type of legal situation involved, and we don't want to get involved in a legal situation ourselves, so everybody should just remember not investing advice. Please do your own work, consult financial advisor, everything like that, and we are talking today, what is it, Friday, April 28th. Is it April 28th?
Friday, April 28th, end of the April. It's been a kind of interesting month, strange month on the heels of all the banks failing in March and everything, but I just want to turn it over today. What's on your mind?
Chris: Well, the literal answer of what's on my mind this week is Spectrum Brands, because they are in court. I have been listening in every day, and trying to kind of glean anything I can from their antitrust suit. They were sued by the Department of Justice. They are in court this week, and so that's been probably my primary focus out the the corner of my eye, I've been thinking about AMC. Out of the corner of my eye, I've been thinking about Coinbase, and Greyscale Trust and a few other things, but kind of time-wise and focus wise, mostly spectrum brands.
Andrew: Yeah, so let's just start Spectrum Brands for people. We've talked about it several times on the monthly pod. For people who need a refresher Spectrum Brands, about a year, maybe a little bit more than a year ago at this point, entered a deal to sell their hardware business to ASSA ABLOY, if I remember correctly.
Chris: Correct.
Andrew: The DOJ opposed this deal. The reason they opposed it was part of the business they were selling was very high end locks, as ABLOY had very high end locks. They were saying that this is going to be a monopoly if you guys combined the 2 high-end locks business. As ABLOY and Spectrum said, "Hey, we'll, sell the high-end locks business. Don't worry about it. It's a kind of small piece of their overall deal." Entered a deal to sell the high-end locks business to Fortune, and the DOJ, for reasons that are kind of unclear to me, said no. Not that they didn't necessarily approve divestiture even count in this suit.
Like, we're suing sub block, even though you have a dives. We we're not even considering the divestiture in the suing sub block, so they're in court. The court date writes up today, I know you've got a hard stop, and if in about an hour or 2 go listen to the court date some more, so that's the overall thing. We've had four of the five days. I'll just turn over to you. What's your thought on how the trial's going, the antitrust case, all of that?
Chris: If you didn't want to spend your week in excruciating minutia around door locks, I would sympathize and drum roll. I feel like we're about where we were at the beginning. If you look at it trading off this week, I mean, part of that is we simply didn't have a settlement ahead of time. I didn't predict a settlement, but you own some optionality. I think there was literally no chance the companies would just kind of shrug and give up before court, but there was some chance, even a 5 or 10% chance that the companies could accept a settlement from the government, on something that substantively should be settleable.
That went away, so you kind of had an embedded call option that expired worthless as the court began Monday, 10:00 am in court. I would say that as everybody started, the sincerity of everybody's view was reinforced, and the seriousness of these people, like there's nobody who's obviously stupid, once you get to kind of this level, so I find that in almost every case, and Twitter, a much more entertaining counter example was 1 of the very few times that I was not convinced, at least while they were speaking about their own side.
I mean, once you get into this scale, I have to kind of balance both arguments, and then I'll have my view, maybe my view's 9 to ten, maybe it might be very one-sided, but at least while they're speaking, I'm like that's smarter than just the average kind of conversation you hear in an elevator. Like these are serious people. They spend a lot of time getting ready. We're back in the world of serious people who've thought through this. The government was really influenced by the fact that the DOJ, AAG had a big speech anti this type of divestiture in the middle of this review, so there was kind of a political if you look at the kind of thin political level of the government, a DOJ an aggressive, progressive antitrust enforcer who's kind of playing catch up with an FTC that right now is not only a 100% Democrat, it's a 100% Yale Law School Democrat.
3 people who are... and I'm trying to get through the sentence, without too many pejoratives, they're 1 thing, and they're that thing very much, and he's trying to play catch up, and so the people working on this case kind of had a political incentive right in the middle of the decision on whether or not to accept a settlement. That sure seemed almost comprehensive, and then the issue is whether or not the foreign bits and pieces are necessary to the North American door lock business, that's being divested in whole to a single non-private equity buyer, that happens to be a company that looks in size and scale and sophistication to be at worst a wash from where it came, it might be more competitive.
It was in every subjective sense, what the government said they wanted. It is a clean sweep, and the buyer seems happy with this deal. The seller seems happy with this deal. The original merger partners seem committed to the deal, so it seems quite good. 4 days in, the tensions lie around business executives who are very happy to explain themselves in the kind of clunky process of being a witness on the stand, where the government puts yes, no questions, and I think everybody's sincere.
These are lawyers who, if you said, is statute such and such, they have a yes no answer. These businessmen never know what's going on for sure. The market's constantly changing. The competitors are constantly changing. What do these customers want? They don't know. They're always wing at some extent, and they don't neccesarily want to understand, and if you give them a moment to explain things, they're very competent, smart, accomplished people. They're happy to explain it, and they just hate these binaries on things that are not susceptible to a yes no answer, so it's kind of they're talking past each other in that way.
The government thinks that they are Sherlock Holmes who have discovered an amazing clue when there's a hot doc, when there's some notes that seem to be saying something, but in a couple dimensions, it says far less than the government thinks, so middle managers in some company that has a huge amount of their business in the US, has a lot of kind of corporate kind of Harvard Business School, McKinsey, speak about globalism. I mean, it's just kind of the kind of thing you say, if you're at some conference and you're talking to your Vietnamese distributors, and so they'll kind of do this litany of the need and benefits of globalization.
Some of these countries, they'll tick off from a list, have like 0 sales as like no part of what they actually do, but they're not the kind of people whose vernacular would be, "Screw them foreigners. Let's just focus on where we're getting the money." Like that's not how they talk. They talk about the kind of, but it's poetical, and they say this poetical language, and then the government says, "Haha, got you. You need globalization to sell a lock in New Jersey." They don't, and they don't think they do, and they're happy to explain it, but they're both put into this yes, no kind of stilted formulation in trial, and they use poetry about globalization, and the combination makes the government think they really are onto something here, and they're just not, and the judge will see through that, or she won't.
Andrew: Let me ask 2 questions, so I think the 1 thing that... and you have listened to way more of the trial than I have, but the 1 thing that I think jumped out to me, I can't remember exactly when, but I think the judge said something along the lines of, "Hey, government, I understand the precedent that you're trying to set here, but I'm not sure this is the case you want to set that precedent on." And to me, I heard that, and I just heard the judge saying like, "Hey, government, I understand what you're trying to do, but this isn't the case for that, and if you like, make me rule on this case, it's going to set a bad precedent for you." Was I reading too much into that? Was I just [inaudible] it or...
Chris: You weren't, but there's 2 things about... let me just focus on the judge for a second. There's 2 things. 1 clarification I need to make, and then a negative and positive clarification. There was an earlier judge, they switched, the earlier judge had some very promising language indicating how novel the government's case would be. We got further with the earlier judge on something that I thought was very promising for the companies, and then the judge changed up, so my recollection was that we got further with the line of thinking of how unusual siding with the government would be, with the earlier judge in the kind of preliminaries leading up to the trial.
In trial, the biggest negative would be, this is a judge who I think by background in writing would be fair to describe the left of center, certainly a democrat and a progressive Democrat, not in ways they think are that applicable to this case, but takes the government very seriously, has made numerous comments about how she, like the government lawyers make a lot less money than the private sector lawyers, so there's a certain kind of camaraderie. More plural pronouns talking about her and the litigators for the DOJ, and she's very new as a judge, and her history is as a litigator, so she intervenes into questioning more than any judge I've ever heard in kind of charming, quirky ways. I mean, she's the only kind of comic relief fun part of this trial the most...
Andrew: In one of the trial talks she had, like we're delaying the trial by a couple hours or by a week or something, and there was a line like, and the government shall provide the company 2 staplers to make up for the delay, and I, I remember sending you an email, I was like, "Was this a joke? Like who put this in? Is this a sign? Is she making fun of someone?" I've never seen this before.
Chris: She's fun and she's funny, she's clearly extroverted. It's a little awkward when you're a lawyer in such a case because she's the decision maker, so she can be as loose about language as she wants, and then they have to kind of decide how much they want to participate in that. As a litigator, she was somebody who really indulged in being part of the bar socially, like always wanted to interact with the people on the other side outside of trial. I mean, I think she had a lot of fun as a litigator, and I think as her role changes, I think she's kind of catching up to it being a different role.
I mean, nothing I think is inappropriate in any way, but very busy with the hot takes. The most amusing part of the whole trial so far is because this is her first big trial. Her mom's listening in and during breaks offers commentary that she'll sometimes mention. If somebody's talking, her mom started the trial was saying, "You're talking too fast and you're interrupting too much." And if somebody sounds like, "Oh, he sounds really Ivy league." Or "He's not letting this stenographer catch up." And so she kind of mentions her mom's commentary, which is fun but also odd.
If I was going to parse where things stand in terms of her behavior, I think the parsimonious explanation is, she will ultimately allow a divestiture, and that divestiture might have some probably immaterial tweaks from how it was negotiated. She's asked a lot of questions about her role and whether she can change that contract, and she's asked extremely probing questions about the nature of the divestiture package, that were not on point to the acceptability or unacceptability aspects that the government wanted to talk about.
It would be kind of perhaps strange. I might be overly or misinterpreting this to be so curious about every nook and cranny of a contract, if she's just going to shrug and say, "Nope, no, you can't do that. The buyer wants it, the seller wants it. The government has a theory about why it's unacceptable." But she's probing about everything, but probing and a very specific in a way that looks like a divestiture is part of the decision that she has the job of writing. The part of the trial that maybe least well, from the beginning we kind of started with government witnesses, with government questions, and it's an adversarial process.
They can make their case look as good as as possible, and then the companies undermine it. I think it's on track. I think the companies will win, but I don't think it is, obviously or necessarily so.
Andrew: Let me ask 2 more quick questions here, so the first, and so this has been kind of my theory, and I don't know if it's right or wrong, but generally when we talk about a case like this. A divestiture case, you're talking about a merger going through. This Twitter wasn't a divestiture case, but you're talking something like Twitter versus Elon Musk. If your side wins, you get cashed out basically. Twitter wins, they're going to get $54 and 20 cents per share, and the deal is over. If they lose, then it becomes a standalone company, and then you have to figure out share value and everything, and there were lots of debates around Twitter's fair value, but that on a win, you just get cashed out and that's what you're playing for.
1 of the interesting things here is spectrum brands, as we're talking about a $65 share price, just under 6 billion enterprise value, if they win this case and get to sell HHI, they'll get about 3.5 billion in proceeds, so that is a massive, massive amount versus their enterprise value. More than 50% of their enterprise value, but it's not win, and you get a flat cash number. If if they win, you've got to figure out what the value of the remaining business is, and is the remaining business worth 2 billion, 1 billion, 6 billion?
No one knows, but what I'm trying to say is, I think one of the things, one of the reasons there might be opportunity here is because you, the typical arbitrages, there's not like a number for the upside to plug in, right? That number kind of changes every day based on the value of the Remain Co and everything. There's not 1 number on the upside, so I think it attracts maybe less eyeballs or it's a little harder to hedge or think about. I'm I thinking about that incorrectly, or what do you think?
Chris: No, I agree a 100% and I had a stint before managing Capital of being kind of a consultant to ARB funds, and it was interesting to watch the focus difference between focus difference between prop desks at the time, kind of ARB specialists and so forth, and mandates are a big part of the industry and what creates supply and demand in individual securities, and there were fundamental people who think about a given industry who have no interest or curiosity in ARB, and there's ARBs that part of their mandate, have to be kind of meticulously hedged, kind of arithmetically hedged in ways that this does not allow, so this kind of has some shot at slipping through mandates a little bit.
Then prop desk can always call in more capital, so it can be very indifferent on IRS as long as they're very, very confident of the conclusion, so this doesn't fit tidally into any of those buckets, it's more process than most industry specialists would be interested in. It's more fundamental noise than most ARBs would be interested in. You can make some suppositions. I think winning the case would be good. I think losing the case would be bad, but you can kind of start to put, kind of build a construct of numbers on those, but all the numbers I could come up with, you'd have to then say, give or take $10. Like it's not something that should be subject to any false precision.
Andrew: That was the next place I was going to go so I have been running and reason again, reasonable people could add or subtract $10 to either of these numbers, and I don't know if I have a lot to push back on, but I've been running, if the company wins the stock kind of trades to eighty, if they lose, they kind of trade to forty five. If I put those numbers into my formula versus today's stock price of about sixty five that says the market is pricing this at Spectrum at just under 60% to win. Again, we're 4 days into a 5 day trial, so you've got 1 day left, but where are you kind of plugging the odds of the company winning at?
Chris: By the way, we have separately without coordinating assptions come to virtually identical answer, I think eighty is a very reasonable upside. It could eventually be more, I think forty five is a very reasonable downside, and the way I'd say it is, you could probably sell it for forty at the worst possible. Our puke moment, and it probably settles out closer to fifty, so yeah, forty five is really, really good, but , I'm at eighty. I've been at eighty and I don't want to be stale here. I've kind of been an eighty, when it was trading in the forties I was at eighty.
Andrew: It's tough because like you look at this, the Remain Co, if they win, they get three and a half billion of proceeds, so the Remain Co is trading for 2.2 billion. The Remain Co did 274 million in EBITDA, but they said, "Hey, look at 2021, our go forward earning"... in 2021, they almost hit 400 million in EBITDA. They've said, "Hey, we think 18, 2 years out, we could get to over four hundred. Like what type of global pet care home consables. Like those don't trade for four hundred ABITDA. This would be under 6 times. Those don't trade for 6.
They trade for like, you would think ten, so do you believe the four hundred, even if you believe the three hundred and ten, like there could be a lot of upside there. You could talk yourself into a lot of upside.
Chris: Yeah, and then the 2 ways I'm soft on this are, 1 a management team is the management team that got you into this situation, so when they're talking about solving problems, their kind of behavior's going to correlate with what they've done in the past more than optimal, and we're not getting the money. I would feel much better if you got a check for eighty than if you got whatever this hodgepodge would be that I otherwise would have no particular interest in, other than the discount that was created because of the antitrust uncertainty. I'm here for the discount.
I'm not really here for what's discounted otherwise necessarily, and these guys probably deserve some discount given they're the people who got themselves into this situation that needs to be clout of that discount shouldn't correctly be 0 even as these problems go away because that's probably going to add some other problem, so I don't think these are A plus players with an A plus business model. That was something we would otherwise gravitate to own. Like say it goes to a hundred, I don't think you and I would be like excited to own it from ninety to a hundred, like, based on what might drive it upwards, so it's a little bit noisy in that respect.
Then the other way, just back to the event for a second, that's noisy, to be super clear about, I believe based on what I know that the deal should go through, based on my understanding of antitrust law and this deal. I think the chance is closer to a 100%. The discount isn't really, because I'm confused about the law or the facts. I think the facts are pretty clear. The law is pretty clear in trial we're seeing some things in the category of hot docs, but they're not really docs. They're kind of warm post-it notes more than hot docs, but what the government would perceive as hot docs.
I know what they're fired up about is the combination of they see what they think they're looking for with Henry the 2nd. Well, no one read me this turbulent priest kind of line of the boss has conveyed his desire for you to do this thing, so the political advantage lined up with the evidence they thought they were looking at. Okay, fine, so why my eighty and not saying a hundred or ninety five even? And the answer is a judge who's been on the job for a few months, like I have no priors on her. I happen to be in almost every particular looking at a decision maker who's different than me in almost every respect you could imagine.
I find her likable and quirky and I don't mean this in an antagonistic way, but my view of the antitrust law is probably not that salient, a predictor of what she will say and do, if that makes sense. We just don't know, and so that's why I want to leave lots of space for me to simply be wrong in what happens here.
Andrew: An interesting way I was kind of thinking about it was, I think historically, if you look at the government bringing a case, the government's like about 60 to 65% likely to win a case they bring, because the government does not want to get in the business of bringing losing cases. If you think about the individual incentive at the department, it destroys your career. Doesn't destroy, but it's a bad mark. It's going to be a limiting factor in your career politically. It it's bad every which way sets bad precedent for cases, so they tend to bring cases they're more likely than not to win, but I do think there's 2 things.
A, who can read the facts of the case and C, that they're really in favor, and B, I do think over the past couple years, the DOJ and FTC has gotten more into, "Hey, let's bring cases that even if they're not winners, just make a political statement by bringing them." And I was thinking about that. I was like, look, this would probably, this is trading, let's just call it 50/50, and it's probably trading 50/50 because people are anchoring into that base case and they like, don't want to step out on a ledge. Even if you read the cold hard facts and look at this and say, "Hey, this is a great case once you get the divestiture."
It kind of reminds me of Twitter a little bit, where the market was almost always pricing at 50/50 and we were going crazy. Just be like, read the docs. Like you can't know everything in a case, but my God, Twitter is just smashing Elon like generously. I think Twitter is 95% to win this, and that's like being generous of the unknown unknowns, but you read these docs, you've got a haircut for, there are docs we are not going to see, we haven't had lots of rulings from this judge, but it does seem like overwhelmingly likely that spectrum's going to win this.
Chris: My my caveat to the caveat is although she's far enough from me politically background and so forth, that I'm more humble than usual about, "Oh, why don't I just come to a reasonable conclusion and then guess that she'll correlate." It's not a political case. I mean, it's about the least ideological thing. I mean, I keep thinking, "Oh my gosh, does anybody really care if rich people play slightly more for fancy locks?" And one of the things that's slightly awkward on the stand is it's very clear once the topic of luxury comes up, in a topic where the standard thing, like the best basic lock you could get would be the kind of lock you'd get inexpensively on a bodega or something.
It's actually the commercial designation slightly more durable than the residential, fine. Then they have to dream up, "Hey, rich people have all this money. How can we get it? Let's just kind of come up with new stuff." The stuff doesn't matter. The rich people don't matter their money, doesn't. It's all just kind of the idea of luxury is this artifice and then the government's swooping in to defend them on something that seems to be trivial. Kind of like several layers of triviality, and of course, the management doesn't want to say this, so they have to kind of be solemn about it, but the extremity of the inconsequential of this is funny, and it's like, is this what they care about? So the fact that, I mean, she is a democrat and appeared to be picked on 2 or 3 or 4 criteria as kind of a she is a gold star DEI hire.
I have to say respectfully of her, like she also seems like she happens to be a smart lady, so she doesn't only have the DEI stuff, but she has every DEI thing you could imagine, that doesn't seem to be salient here. Let me just pull out 1 tiny straw. If there was any aspect of a progressive Democrat woman immigrant background lesbian, and she kind of talks about all these. I mean, her identity, she really brings her whole self to work in terms of inserting who she is into her courtroom. If that had any salience on this case at all. I think it basically doesn't, but a big part of the government's cases, can these people at the divestiture buyer handle this market?
Several of the key, but a key executive is a woman who I found highly credible and can totally handle this, so it's like, "Can this lady handle selling locks in America?" It's like, "Yeah, sure she can, she thinks she can. They're paying the price. They can, they think it's a good buy. Like there's no reason to think it wouldn't work." And it seemed just a molecule of heavy handedness on impressive female executive and her capability of handling jumping over what seems to me like a kind of low bar. Might factor in a little bit, maybe in favor of the deal event, but that's the only one I can come up with.
Andrew: Yeah, I don't know. I have thought it was funny the whole time imagining like Bernie Sanders on the campaign trail being like, "We need to protect the rich homeowners from corporate monopolies in high end door locks." Like it's really funny to me. Let me move on quickly to Activision Microsoft, we've talked about just about every every podcast we've done. Might not be talking about it anymore going forward, but that's because earlier this week, the UKCMA, I think kind of unexpectedly ruled against the Microsoft Activision deal. Sending the deal into complete limbo. I say unexpectedly because a few months ago the CMA had really changed their views on the merger review.
They were limited only to Cloud gaming, if I remember correctly, and people thought that was a sign that they were going to Microsoft had made enough concessions that they were going to allow this through. No, they said, "Hey, this will limit a competition in Cloud gaming. We're not going to allow this to go through the stock." It's funny because a lot of people had said Activision was performing really well. The downside had come up a lot, and I think that's right because when we started talking about this, the stock was seventy five on the hopes that this deal would go through at ninety five.
Right now the stock is just a hair under eighty and nobody thinks the deal's going through anymore, so obviously the downside did come up a lot. I just want to get your thoughts. Microsoft and Activision, Activision have both said, "Hey, this ruling is wrong." I think there's been a lot of press, maybe you and I follow more, like let the deals go through press than normal, but I think there's been a lot of press that says the CMA, they kind of embarrass themselves with this ruling. There's not a lot of logic behind it. Both Microsoft and Activision have said they're going to try and fight this and get it through. The history says it's really tough to overturn the CMA.
I think that's what we always said was our big concern with this, not the US court case, that if CMA ruled against them, there just wasn't going back, so I've rambled a lot. I just want to ask you, what are your thoughts on Activision Microsoft at this point?
Chris: I think that the CMA appeal process is about the most procedurally implausible of any of the reviews we look at. It is a big difference. We're in some ways similar to Europe, some ways different, and in 1 way, the government comes after you in America and you take it in front of the judge, and I think the government deserves no deference. They have to be right, and if they're right, then they should win, and if they're wrong, they should lose, and in Europe, these guys are the representatives of the king, and when they say off with your head, your head comes off and you say, "Okay, who do I talk to now?" It's like...
Andrew: Your head has come off. There is no talking.
Chris: Yeah, and so it's 99.99% that, and the appeals process is not a do-over. It's like is this plausible? Was this handled the correct way?
Andrew: It's basically appealing. Like, "Hey, was there political corruption? Or did the judge go out drinking and write this while he was drunk?" It's not like, was this a bad decision? Was there active malfeasance? I want to say it might be the word. Yeah.
Chris: Analogous process in a different country where somebody who's like literally handled stacks of currency in a manila envelope. Like that would be something you'd appeal, and you'd mentioned like, here's the photograph of the manila envelope filled with currency that the guy took. Like you could bring that up, but like, I really don't like the decision. I think it was dumb. I don't think it's what antitrust is for. This isn't the right market definition. No, that doesn't work in CMA, so it's interesting to see if this was an example of coordination where the US wanted to stop this. The Europeans had the tools, and so the US administration used a foreign government to act against American citizens and American businesses to stop something they wanted to do.
I think that is was the risk with this deal, and it happened. The executives involved is on both sides, especially the Microsoft side, I think were really confident, and they gave a few winks and nods. I mean, I'm impressed. I am a fan of their senior management. I think that Microsoft is an impressive company with an impressive CEO, with an impressive head of this business for them. I just really like these guys and they went beyond kind of boiler plate. We're going to give this a try to a little winks and nods that they kind of, they got this one and guys that really generally are correct, and guys, and I noticed this about their gaming, the guy who said their gaming stuff, who I just followed every word he said during this deal about him. Very impressive.
He was more casual with statements against interests than most upper management guys are, like when they make goofs. Now, partly I feel like he has kind of a spokesman role facing the gaming community, but I find impressively, I mean, one of the things I always look for when I'm listening to, when I'm trying to trying to judge statements is like, like how many statements against interest can you find so that they're not just bullshitters who say good things all the time, and this guy like gets really high marks for like having a distribution of his commentary, that sort of over time matches the distribution of what happens, even though he gets things right or wrong.
I think they thought they could get this and they couldn't, and it was an example of something that I think the target business improved throughout the course of the deal, and it should probably trade out our pans into fundamental holders. Is there some chance that there's a political solution with the UK because Microsoft is such an important company. I don't think so. I don't think Microsoft is big enough, and the UK is small enough that the political level can say, "Hey, I know we have this process and we have these regulators we can't handle that."
There's some precedent for a total regulatory block becoming redeemable just when the deal and the parties are so important, relative to the size of the economy and the kind of counterfactual need for spending outside of the deals they're trying to do, and I just don't see it here, so I think it's pretty dead. I think that the company's kind of ineffectual spatting publicly against the UK's actions looks like weakness, not strength to me, so yeah, dead deal. Valuable target. Moving on.
Andrew: Both like the CEO of Activision said in a interview I saw like 2 days ago, that they're ready to fight this. They're gearing up to fight this. Microsoft has said they're ready to fight this. Like the 2 questions as you went through. I don't know how they fight this, and then the second question I have, I believe the merger outside date, it's either, I think it's July, it might be June, I might be getting my months confused. My months starting with the J confused, but the merger outside date it can be extended. If both parties say, "Hey, we want to extend this weekend." But any review of the CMA would have to go past the outside date, and I just wonder at this point, for Activision, it's been eighteen months their business is performing well.
Like Microsoft might want to extend this because this is really strategic for them, even though it's a big deal, it's kind of a rounding error for them. It's very strategic. It's a great target. They probably don't want the precedent of, hey, governments can block kind of vertical integration deals set for them, but if I'm Activision, do I want to extend this another... as you said, it's probably dead. It's 95% plus dead. We have to take a long shot appeal. Do I want to extend it, keep my company frozen in a merger limbo? Probably not, so I have been wondering, like does Activision just walk and take that 3 billion break fee, or is there a chance Activision gives Microsoft be like, "Hey, you want to extend it, great, but we need more, right? We need you to let us pay our shareholders a $5 dividend right now that you're going to fund."
Or something along those lines to account for time, value of money, uncertainty, unlikelihood, all that sort of stuff. I do wonder if some type of bump or something is in play, or if Activision just times this out and at the end of July says, "All right, we're walking, thanks for playing, but we've got to go."
Chris: It'll be interesting to see. I mean, I think the sensitivities right now are everybody making sure that they're meticulous about living up to their agreement duties, so a lot of the behavior at this point is let's be perfectionists between now and the walk date so that there can't be any question that we've done everything we can to get it done. Even if it's 1 in a hundred. Secondly, there's probably some sensitivities on the Activision side about management going forward and kind of what their plans are in terms of leadership, if it's not part of Microsoft overall.
Especially given the fact that I think it really was sincere recently that they thought that they could get this done, so that might be a little bit of a pivot. I mean, big companies, they always plan for everything, you'd think, but that kind of adjusting to standalone business secondly.
Andrew: There's 1 more situation I want to cover, and then I know you've got to hop to the Spectrum trial that we've been talking about, but the 1 thing I think I don't know if we'll have time to talk MCA, because that is a wild situation there, but the 1 thing I know you and I have been looking at, not really doing too much with, but just thinking about has been Coinbase. I think you've also been doing a little bit of thinking around GPTC, Grayscale Bitcoin Trust, but especially Coinbase, I am sure everybody knows who Coinbase is. It's a large company, but they got a Wells notice, about a month, month and a half ago.
Their response to the Wells notice has been very strange. The stock is down at this point, it's really been cracking this week, I think in part because their response continues to be strange, but it's still a large company. It's still got a decent sized market cap. The stock is down despite Bitcoin screaming kind of higher over the past month. I've rambled a lot. For people who are listening maybe describe what a Wells notice is and how serious this is and why we're both... I think we look at this and say, "Hey, we're coming into this maybe not being like full experts on the business, all dynamics." But we know what a wells notice is, and generally stocks that gets Wells notice they're not down nine, they're down ninety.
Chris: Wells notice is notification to a target of prospective regulatory actions, so they intend to bring an action against the company. You're kind of a little bit no man's land because it's certainly material. It's been disclosed, but we don't know the substance of it, but we kind of do because the SEC chairman has focused on Crypto. You could say all sorts of things about him, but I don't think you could say that he blindsided anybody if he comes after Coinbase right now. You can look this month at his charges against, Better X and I think you could hit find and replace in Word and send that off to Coinbase.
Pretty devastating, and then when I was in DC and I was kind of thinking about regulatory risk for others, I was very, very focused on personnel. One of the things kind of that you could track based on public information is that some people are basically litigators. People are basically settlers, and you could get a lot of a sense of where things were going by who is working on. When Gary Gensler thanks people for their help with Crypto enforcement. It is a long list. It is an aggressive list. It is packed with the sharkiest of litigators. These are law enforcers. These are not the kind of nice people who kind of sort things out if you have a problem. These are killers.
He has a long list of killers that he thanks for their support, and a misperception sometimes when somebody's in this situation and often wants to justify themselves and pay back, is you can pretty much respond. You can kind of bring your war council or your peace council, but the government doesn't really do both at the same time, and so the SEC is giving every possible indication that this is gearing up for a big fight. They're noticing they're acting and they're coming for them, and then the company's response is unlike anything I've ever seen in terms of managing the situations. I mean, if they want to go to war, fine, but they're like, "Maybe we'll leave America, or maybe we're warning the SEC."
Woo, okay. I didn't know we did that, but we're warning the SEC now, so they're warned results, TBD, but it's not the tax I would say.
Andrew: Look, it's April, it's tax month. We just paid our taxes, and I'm warning the government if they try and take this much money from me again, I'm putting it on warning.
Chris: I mean, there are a couple cases. I mean, there are a couple cases. Elon Musk warns the government. Mark Cuban warns the government when they come after him, he warns... but you got to be really, really rich, and you have to have really thick skin, have almost infinite reputational costs insensitivity, but also, either really control the public company, have a fan base that is willing to accept it, but there's very few managers of a public company whose audience can tolerate that.
Andrew: If this was like early 2022, right before we had all the Crypto blow ups, like maybe you would have the political support to.. I could imagine a lot of people maybe on both sides, probably on 1 side more than the other, but I could imagine a lot of people reach out being like, "Hey, free market, this company, this is the government cracking down."
Like you could find thousands and thousands of retail people who were trading on Crypto, who were making a lot of money trading Crypto, who Coinbase could round up and they could sell under, but in the wake of FTX and all these blowups and Crypto going from sixty to fifteenth to like all these coins that rug pulled, like rug pull, literally, "Hey, it was a Ponzi scheme and they pulled it out from under us." It's a thing in Crypto. Like it's hard for me to imagine there's going to be a lot of political support for a single company pushing back on the SEC for enforcing laws. Surprising, so I guess the 1 question that I have, again, this is still a work in progress.
We're still thinking through it. The company literally yesterday responded to the SEC with this, "Hey, we're suing this SEC. We're going to come for you." But Coinbase, they got the Wells notice. I think it was 5 or 6 weeks ago. What is the enforcement process, so the Wells notice says, "Hey, we think you're trading securities and you're not a registered broker dealer, basically, we're going to shut you down and we might find you." What does the timeline look like? And what would the SEC do?
Chris: I think BID-REX Global is kind of the model, so they'll be a complaint, it'll be filed in the next month. It'll come from the SEC. It's going to look real serious, and they take them to court, and the total lack of contrition, or deference from the company means that this is going to be war. They're not going to really be looking to save them. I think tips to the public and to kind of breadcrumbs to say, these are the Crypto assets that will be considered securities. These are the Crypto assets that will be considered commodities. We'll guide them to have as gentle a crash as possible from day 1 to the Complaintant, because I don't think they really necessarily want endless number of kind of mom and pop. Hey Patty. Mom and pop destruction the day they file this thing.
Andrew: You say that, but tell me if I'm wrong. I think they're pretty clear Bitcoin commodity.
Chris: Yes.
Andrew: Maybe Ethereum commodity, I'm not sure on Ethereum, but everything else is a security, and you say mom and pop, but I mean, I don't know many mom and pops that are in Bitcoin, but outside of Bitcoin, like how many mom and pops are trading Dogecoin or some of the ones who... this is a family podcast. I'm not even sure if I can say their names. I probably can, but how many mom and pops are in something more exotic than Bitcoin? I can't imagine that many mom pops are even in Bitcoin.
Chris: Yeah, no, I think, I think the government feels great. You look at the FDA and there was a case around thalidomide that they guys coasted on regulating maybe overregulating for decades and decades and decades, and there's always this one, like here's what happened when the regulator leaves the free market alone for 5 hot minutes, and it is death and destruction. Therefore, I mean, that was a cojual[?] for decades and decades with the FDA, FTX is that this is what happens if you leave the free market alone. That's FTX and they're going to have decade. I mean, we are months into something that they're going to run on for decades in terms of their need to manage everything.
It's a commodity. It's run by the CFTC. It is a security, it is run by the SEC and everything gets in line, and you may agree or disagree, but I can tell you it's sincere and they're going to act on that, and they feel every political wind at their back because of FTX.
Andrew: FTX is great, but I mean, FTX is the main one that's 98% of the battle logic reasoning here. I mean, there's a lot of other reasons, but that's 98% of the political push, I would say, but even something like First Republic and Silicon Valley Bank. Like, "Hey, we kind of regulated these things with a light hand and they blew up, and the government had to intervene to prevent literally billions and billions of dollars in deposits, and a lot of that was Crypto deposits, but a lot of it was also mom-and-pop deposits." If you had a million dollars in the bank that's over the limit, you would've taken a haircut if the government hadn't stepped in and kind of saved these guys.
Like I do think the wins at the back of, hey, we need to make sure that people aren't just running completely unregulated financial exchanges handling of people's money. I mean, the stuff around staking and stuff, I do think there are serious issues and concerns there, and I think the government's going to say, "Hey, if we let staking go like crazy. Yeah, maybe Coinbase isn't the issue." But we're going to have, you said mom and pops it's more like, bro and bros, but we're going to have a lot of people get rug pulled and stuff, and yeah, let's just shut it down now and make sure we're regulating it, and my just 1 more thing here. My favorite thing was 1 of the Crypto people said, "Hey, Gary Gensler doesn't even trade Bitcoin? Like how can you have somebody regulating Bitcoin when they don't even trade it?"
Lots of people said lots of things. 1 of my favorite was like, I instantly thought of, "Hey, like nobody jumps out of an airplane without a parachute, but we can still regulate like airplanes safely descending." My favorite was somebody said, "Hey, nobody at the FDA takes meth, but they can still regulate meth." It was just crazy to me.
Chris: I think it's a terrible miscalculation. I think the demographic and political ghettoization of Bitcoin hurts them, and they think it helps them. They think like it is kind of self reinforced. There's some reflexivity in the boldness of the Coinbase CEO. I think is indicative of somebody who, within their echo chamber, they're like, "Who are these outsiders to tell us what to do?" And it's like, "We're smarter than they are, we're richer than they are." But I think the libertarian ish, techno people, their isolation is 1, leading them to be bolder, but it's also leading the regulators to care less. Like there's not going to be that much collateral damage within this administration's key constituencies, and...
Andrew: A skeptic might say, before FDX, there would've been a little bit of collateral damage, but post FDX, there's just no collateral damage from [inaudible] it all down.
Chris: Yeah. Yeah. I mean, FDX has already given the political donations they needed to, so there's not a lot of downside for this administration, and even the fact that Bitcoin people are so concentrated in Bitcoin. Their economic destruction is a lot of people who's like, hey, I bought this, what the administration might say is pretend money. Like if my wealth had gone to like a billion dollars and then back to 0 I think I'd get very little sympathy from them and if I hadn't done anything. It's not like my having to deliver hurts a lot of their other economic interests, so I think, I think they're, I think the SEC's going to be at least as bold confronting Coinbase as Coinbase sounds confronting the SEC.
Chris: Can you correct me if I'm wrong? I believe if the SEC rules that all of these tokens whatever, were securities, and Coinbase was trading them like not securities, I believe since they're not registered, like one of the end results is anyone who took a loss on any of these things, the SEC could come at Coinbase and say, "Hey, you traded these, they were securities. You didn't treat them like securities. You didn't trade them with all the regulations around securities. You're responsible for any losses anyone took on these securities that they were trading on your platform." And basically it becomes a class action, and I just said, any losses, so it's bankruptcy and then everybody gets an unsecured claim on Coinbase.
I'm I kind of thinking about that correctly, or? That might be too dramatic. Please tell me if I'm wrong. I'm a little bit spitball, but I do think that's in play.
Chris: It'd be short of that based on settlements that I think are off the table on both sides, so yeah, I think it could be careening towards that kind of a conclusion.
Andrew: You'd kind of be looking at, hey, the SEC's holding this over you, like this sort of Damocles, and then it's, "Hey, Coinbase, settle for 4 billion in degree to all of these changes, which you just a absolutely trust."
Chris: I think Bitcoin trades up that day.
Andrew: I'm not in the Crypto prediction business. I don't know.
Chris: I normally wouldn't be, but I think the impact of putting everything squarely in the unregistered securities bucket is more painful than Bitcoin is a commodity. I mean, I think that...
Andrew: It trades up on the certainty that everything else is security, but Bitcoin is commodity, so yeah. That makes sense. Look, it's almost 10. This has been great. We covered 3 really interesting topics. I mean, Activision Blizzard is probably done for the podcast, but I would not be surprised if next month we're talking Spectrum and Coinbase, because these are really fascinating topics. It's certainly on Coinbase. I know that's a big work in progress for us, but Chris, I'm going to let you.
Chris: Maybe AMC next month.
Andrew: Well, that's at least sixty days away, so the good news is we have time, and the other good news is there's always fireworks and popcorn with AMC, so I'm going to let you off to day 5 with the Spectrum trial. Chris, thanks for so much for coming on and looking forward to chat in May.
Chris: Great talking with you. Bye-bye.
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