Chris DeMuth's State of the Markets June 2023 (podcast #176)

It's time to welcome back Chris DeMuth for his monthly state of the markets. For this June 2023 edition, Chris provides the latest news on the Activision / Microsoft antitrust case + his thoughts on the case.

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Transcript begins below

Andrew Walker: 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 it wherever you're watching or listening to it. With me today, I'm happy to have on for our monthly State of the Markets podcast, my friend and the founder of Range of Capital. Chris Demuth. Chris, how's it going?

Chris: It's going great. Thanks for having me on, Andrew.

Andrew: Thanks for coming on. Before we jump into our usual spiel, let me start with my usual spiel that is a disclaimer, to remind everyone that nothing on this podcast is investing advice. That is always true, but particularly true today because we're going to go through a variety of I think we've got a variety of legal situations teed up for today, so people should remember, like we're not presenting financial advice. We're also not presenting legal advice, so please do your own work, consult a financial advisor, all of that.

Chris, I wanted to start with, look, I thought we were done with this. We've talked about this for most of our podcasts since we started doing these State of The Market podcasts, the Activision Microsoft trial, but it kind of kicked into when the CMA, the UK CMA, the UK regulators, announced a surprise block in April.
I kind of thought, "Hey, maybe Microsoft moves on. Maybe everyone looks to move on." But here we are. The walk date is in the middle of July.

The FTC and Microsoft have been in a big battle over the past few days, to the FTC wants a preliminary injunction to stop Microsoft from closing this deal. Microsoft is saying, "Hey, we don't think we should do a preliminary injunction." And if the judge in the US doesn't order one, Microsoft might just close this deal in the middle of July. I think a lot of people think the FTC has maybe not shown their brightest best selves in court over the past few days, but I have rambled a lot. I want to flip it over to you. What do you think is going on with Activision, Microsoft these days?

Chris: Well, it's very interesting, I have been quite impressed by a number of people at Microsoft and Activision positively. I mean, quite separately from the specifics of the antitrust legal issues. When you pay people millions and millions of dollars to be good at their kind of thing. I mean, some of these people, you just start paying a lot of attention to these high executives in big companies in tech, and they're smart people. I mean, I just haven't been that familiar in the past with this Sarah Bond, Phil Spencer, some of these people at Microsoft.

Microsoft, I've never thought of as that cool a company, but I guess Xbox is kind of cool, and they're just really smart people, and I would throw out also that my perception of them isn't wholly irrelevant to the case, in that I also find them highly credible people, not just bright, but they come across to me as bright people whose version of what they're trying to do, which is both completely wholesome sounds to me like people with nothing to hide.

In fact, some of the things I think that is going on here is that the FTC is kind of off in terms of the purpose of the deal. I think that they are defensively very concerned about mobile offensively need to get in almost by any means necessary, and this Call of Duty kind of conspiracy theory that the FTC has, has no econometrics behind it. In fact, it was based on some arithmetic errors. The CMA then pulled back when they realized they just kind of goofed on the basics.

Also, it's just not how these people think. I mean, this is not well, what they're trying to do, and the tone of the case, I've listened to every word of the case so far, the judge is conversational. She's quite impressive, engaged. I think she's open-minded. She has a kid who works at Microsoft. I haven't heard anything that sounds prejudicial from her. She gets a little bored and irritated when they're being boring and irritating, and kind of just expressed her view on that at the expense of the FTC so far.

The nature of the back and forth between the Microsoft witnesses and their own lawyers, sounds to me kind of conversational. It's very easy as not a tech person to kind of follow the logical train, and then the FTC guys come in there and they're very arch, they're very kind of gachi[?], but they're trying to be gachi[?] and they don't like in many cases understand the basic, like terms of how the industry is structured, so the witnesses they're kind of trying to be cornered and explain to the FTC lawyers kind of just like basics that the FTC lawyers will get wrong in the course of their questions.

They kind of come in and they're kind of... it's a little hard to follow what they're trying to accomplish, and a number of times it appears that they've kind of proved the opposite thing that they're trying to accomplish. Like well, Mr. Spencer, if that is in fact your real name, would you hear it now promise that you would... and he is like, "Yeah, I raise my hand. I promise that under oath." And then they're like, "That was half our case."

Andrew: This was, and it was probably the key moment. This was the FTC lawyer saying, "Hey, Mr. Spencer, head of Xbox would you promise that if you close this deal, you'll make Call of Duty, which is Activision's big game for those earnings gaming, you'll make it available on Sony?" And he said, "Yeah, absolutely." And it was really striking. If I remember correctly, you've listened to the case more than I have, but I've kind of like flipped through.

If I remember correctly, the judge instantly realized what he had just said, and that this was a key piece, and the judge says, "Wait, excuse me, Mr. Spencer, you're saying that you'll make Call of Duty available on Activision no matter what, if you close this deal?" And he said, "Yeah, I'll raise my hand right now and swear to it." And that was like it very much as you're saying, it undermined just about every argent the FTC is making here, because they're saying, "You will not put Call of Duty on PlayStation, and that will impact the consumer in some way, shape, or form."

He just said, "No, not a worry. I swear to it, unless you think I'm lying to the courts, like that's what's going to happen."

Chris: Tone wise, since I was, listening to this live and, orally, so I wasn't physically there. I can't watch it, but I'm listening, have somebody watching it and watching apparently it was consistent with my tone indicator, which was I mean, these guys could be super villains who are lying about everything, but within the normal range of how one can judge somebody, they sound like they know what they're talking about.

These are the key decision makers, and it just sounded completely earnest to me, completely just straightforward, he didn't stumble. He was just having a conversation, and then the judge as you described, just vectored in on this moment, as if, "Okay, I'm sorry. There a lot that we can skip over here. This is the whole topic, so let me make positive I get this right." There were no word games. He didn't leave any opening. One thing that's expedited this whole case is both sides essentially came into trial agreeing that the judge doesn't need to be lectured on the wash.

He's a antitrust expert. She's just did an antitrust case on this deal in a class action form, which while a probably not the ideal form for antitrust in this case, so there's lots of scopes for Microsoft to have won the class action and to lose the case against the FTC, so it's not just positive, but she did throw in some verbiage that sounds familiar with this, and dismissive of at least some of the concerns here, so there was, as you described, but let me just throw out 2 things related to that crux moment. That was the crux of the case so far.

Two things fit in with it, I think very cohesively, so if you were a decision maker here, if you were this judge, and you had to kind of make an unappealable unassailable decision to deny a preliminary injunction, 2 other things that fit in with that moment to me were the fact that Sony, the victim here, the multinational multi-billion dollar company that has basically written the FTCs, case, their discovery has been very awkward. They're behind the scenes emails and so forth.

I mean, they talk about this in terms that are quite different than the terms that they bring. I mean, so they are motivated, Google is kind of the JV partner and the kind of motivated side of bringing a case against this deal, but behind the scenes they've said, "Oh, yeah, no, we're not going to be carved out of this. Well, I mean, I don't like it, but we'll be fine." Both sides to me sound like sports teams fans talking about how much they dislike the other side. In Sony's case, it's, "Yeah, if we can screw with these guys, let's do it."

Then behind the scenes they say at, "We'll be fine either way." Which helps the case for the companies, but then the other side, which I find is habitually over analyzed by the FTC is, locker room talk about the other side, so in non-decision making moments, albeit very much a decision maker, Phil Spencer, who I think was probably the most, or one of the most maybe tied to Sarah Bond, a kind of impressive, incredible witnesses here.

He just doesn't like his competitors, and so every once in a while in raw moments with his friends that he works with, probably sometimes many, many hours a day, he'll make some aside, which by God, I hope that's not the standard we're all held to about the competitors, and then with his decision online later, he doesn't deny them. He doesn't do something that is manipulative or anti-competitive, but he has some loose talk in the past decade. Okay. Sure.

Andrew: It reminds me of... and this will actually be a nice segue into my next comment, but it reminds me of in the AT&T Time Warner case, like the government came and they were like, "Hey, you had a person, a middle management person who had graduated from... he was just at MBA school, he'd been at the company for 4 months, and he had an email that said if AT&T buys Time Warner we're going to crush the competition, and like, isn't that evidence of market power?"

Everyone was like, "No, absolutely not." And it reminds me very much of that. Like Microsoft, their team, and they say, "Hey, if we get Activision, like these are some great brands, we're going to use it and Xbox is going to crush PlayStation." It's like, we're not actually physically going to go out and crush them. Like we're just trying to take market share here.

Chris: It wasn't a murder threat either, but these are people who live inside the beltway and their whole stock and trade is words, so they're in the words biz, and so they listen to somebody's words and they think, haha, we got to... and they're not just not familiar with people who have day jobs so they're trying to sell video games, and on the side they speak like humans to their friends at a company. I mean, so if that's the best they got, boy, pretty thin rule. I doubt the judge will be impressed, but they have them on that a little bit just some kind of verbiage, but then there's no follow up.

I mean, if the standard is a hunch, the FTC certainly has a hunch if the standard is the law, they don't have anything approaching proof.

Andrew: I want to ask a few questions just about the overall case, not specifics, but I think you and I could both agree that this is a really bad case, right?

Chris: Yes.

Andrew: I think one of the things that's jumping out to me is it's not just you and I agreeing on that, and I think for the most part we think a lot of the cases that we talk about on this podcast or in general from the government are bad cases, and that might be because we're more like economic actors who think companies should be allowed to combine. I don't know. I probably lean the other way a little bit more than you in total, but I think both of us think that FTC's gone way too far.

One of the things that jumped out to me is, I was getting emails from new services that I wouldn't exactly consider niche financial publications. Like, Axios Business comes out with an article last week that says, "Hey, this case is going really poorly for the, FTC." Like it's going really poorly. They say the Sony emails are just like really blowing up the FTCs case in court, and I'm wondering like, "Hey, to start, this is the reason why governments don't like to bring horizontal merger cases." Like it's really tough to prove a horizontal merger case as we've talked about a lot of time, but the second thing I'm wondering is, like...

Chris: It's vertical.

Andrew: Sorry, vertical. Yes, yes. This is why they don't like to... I guess I'm just wondering, like, it's going so badly for the FTC. At what point do they need to engage in damage control mode? Like I know one of the people who's gotten very popular in, ARB circles, I think it's Voss patents or something has been covered. Is like, "Hey, there should be an investigation." Like at what point did the FTC have to look in and say, "Hey, this is going so poorly for us, like we need to just drop this or let this go because there's going to be investigation. Like we're kind of going way over our balance here." Does that line of questioning I'm giving to you make sense?

Chris: Yes, and Voss, by the way, let me put a plugin for him. Has there's been excellent on the coverage, Chance is the one that we really got to know through Twitter last year, and Voss is kind of those are big shoes to fill, but kind of in that role of just excellent information on this case. I think that this is a civil service that is being shown why it's good to have bipartisan or nonpartisan, leadership. You have 3 Yale Law School, progressive Democrats and 0 Republicans, and in an area that has historically been very bipartisan or non-partisan.

They have a zealous leadership with a religious fervor, and the whole thing is motivated and pretextual, so these are people who are paid a salary to do a job, but they are to execute, they have a view, the view historically has been more pro enforcement than the political leadership generally of both political parties, but they're being told to do something and they're doing their darnedest, and so I'm sympathetic for them in that.

Is it more embarrassing than it could have been? Yes, and part of the problem with bringing a pretextual motivated case as a weapon, against companies that this FTC doesn't like, for reasons that are related to this deal, and they're bringing witnesses that whatever you think about whether or not you want to go to court, I've been a witness, and if you're 99% serious, when you see the inside of the kind of oak room with a bailiff and a gun and the judge and the black outfit, you think, "Boy, this is now a 100% serious."

I mean, if you're kind of in the normal range of either ethics and or personal liability minimizing, you're going to tell the truth.

Andrew: Forget normal range. Remember Twitter, one of the bear cases you hear for Twitter is, oh, even if Elon Musk loses in Delaware court, he's going to ignore the Delaware Court Court order, and even Elon Musk, who I would say is out, well, well, well outside the range of just about everything, when he was presented with the consequences of doing a deposition, and then the consequences of, if you lie, if you don't follow, if you go to Delaware Court, like right before it happened, he was like, "Okay, yeah, I throw in the towel. I will follow through on this merger." Like it is very serious.

Chris: You have friends and you have allies and you have business incentives, and you might have a little bit of gaminess outside of the courtroom, but you look at a smart judge who's probably... I mean, she gives a very good impression of somebody who's going to get to the bottom of this with the fact that you can go to jail if you lie, and so somebody like this Google witness just came apart on the stand. I mean, he was supposed to be an expert in cloud gaming, and he just kind of shrugged and said, "I don't know, just the basics of how things are today."

If I wanted to get incensed about anything, it's the fact that a room full of people, who are not that great at understanding the current circumstances, so this is FTC lawyers with one of their witnesses, and he kind of shrugged, which companies had which market share in Cloud. He didn't really know much about it. I mean, this wasn't somebody who kind of perused w Wikipedia. I mean, this was what he was brought to be expert in and he didn't have anything to say, and...


Andrew: Every now and then I'll do an expert call, and I generally don't like to do expert calls with people who have been... an expert call is, you and I are looking into the video game market, so we have an expert network, find somebody who works in there and they talk to us, and a lot of times they can find people who like worked in there until we're talking in 2023 until 2021, and now they're doing a side hustle, doing something else. They're writing a newsletter or something.

I don't know, but it's not video game focus, and I generally don't do those expert calls because of exactly what you're saying. You talk to them, they say, "Hey, I can only give you information up till 2021. I don't really follow the industry that close anymore." Like I hate doing those expert calls, and the FTC just called like what their secondary key witness, and he was a person who wasn't following the industry anymore. It's absolutely crazy.

I love the answer I don't know. I mean, it's the second best answer to knowing exactly what you're talking about, and you don't get generally in that much trouble, but that's what he was there to talk about. I mean, he presumably took an airplane to get there, and I mean, you're allowed to subpoena people so you can, the government can, whoever they want in America, there are three hundred and forty million people they could have brought. This is the guy he brought, he didn't really know anything.

To the extent he had anything to say, it's that he obliterated the market definition that they were trying to create, so he undermined. I mean, he left them without even going to cross. Just looking at the FTC lawyers talking to him. I didn't think he was credible. I don't think Sony's been credible, but if you took him seriously at all it undermined the FTCs theory of the market definitions. The FTC and one of the thought, the FTC loves the kind of got you thing about people talking to their friends in normal human terms.

They also love, very crisp market definitions, but these markets are fluid and some things kind of compete. How much does, a switch compete kind of. They don't have any room for kind of a dynamic fast moving market that changes all the time. They're certain they know what the future is and how these companies will exploit market share anti-competitive, without understanding how things are now and without any kind of sense for how dynamic the free market is, especially tech with kids who are customers.

They don't seem to care about the customers at all. The benefits to customers hardly touches this suit. It seems like a somewhat sloppy effort to lobby on behalf of Sony, now this is a little bit of a joke because it's a private company, but if this had a government connection, I actually think the FTC lawyers would have to register under FARA as lobbying for foreign agents here, because it is just down the line what Sony asked them to do, and the point that I thought was really dramatic about that, was even after the Phil Spencer crux of his commitment, then the FTC starts to kind of try to lard on other Benny's for Sony.

They're like, "Hey, kind of what"... I mean, it was what if you were, if you were going out for the MBA draft and this was your agent, you'd be really happy with him kind of toss in a car, toss in this or that. Cool. If he has UPS and his job is to work for you, that's great, but as a taxpayer I'm like, what are these guys doing? This is the FTC, I'm a taxpayer, I pay their salary, and, and they're shilling sort of awkwardly for Sony not doing a very good job, but that's what they're doing to the extent they're doing anything.

Andrew: Let's move on, so the trial we are talking here due Tuesday, June, what is today? June 27th, I believe the trial concludes on the 29th, and then the parties will submit kind of post-trial facts on... I don't remember if I've got that word right, but on Friday, June 30th, so when do you expect to hear back from the judge here?

Chris: Lightning fast.

Andrew: Lightning because again, the definitive merger agreement expires in the middle of July. I can't remember the exact date, but she doesn't want this to time out because the merger agreement expires quite quickly.

Chris: The equities, are in favor of the companies both substantively in terms of denying a preliminary injunction, and in terms of her schedule, there's been a couple of comments, just a sides, and this was one just listening to it where she said, "Yeah, you guys aren't going to be busy, I will. Well, I'll be busy." And she made these comments as if I think she is going to be a hard worker here and diligent in writing a decision quickly.

There's not that many moving parts, especially because there was nothing really on the law. This was just applying facts to law that they stipulated, she understands and can apply here, and the fact that she's already so familiar with these companies, I think especially if you side with the companies, denying the preliminary injunction could be a short-ish order, and lightning speed days, and I believe that the companies have kind of won on the issue of the significance of the date.

The fact that what the FTC wants to do. Now, this judge might be paying attention to what's going on in the Supreme Court because the Supreme Court is annihilating. I mean, the biggest change in public policy in America right now, has nothing to do with the White House or Congress or the judiciary. It has to do with the executive state, and this Supreme Court is taking it apart piece by piece, especially where the administrative state makes the process the punishment. Now the SEC has said, "Oh, I'm sorry, we have to follow the Constitution. Well then we're going to undo these dozens and dozens and dozens of active investigations." Which I was kind of incredulous about because I thought, "Well, yay for the victims here, but where the hell do they get all the time and money back that they spend defending themselves?"

As soon as the Supreme Court said, "Well, this has to fit within some constitutional bounds." The SEC said, "Oh, we're going home then because in that case, we can't do all this stuff that we're doing." But so the Supreme Court's playing way back on what the FTC is doing here, which is, we don't like what you're doing, pal, so we are going to refer this to ourselves. We're going to be the judge jury in the execution, or we're going to take 3 years, so the fact that they are so preposterously unreasonable in terms of how they want the timing, I think that they've seated to this judge a huge amount of discretion to go very fast, because their version of slow is terminal. It's a death sentence to the deal. They know it. Everybody knows it.

Andrew: This is the definition of [inaudible] thing if anybody remembers from... it recently come up during... well, it came up during tegna, but it generally has come up during kind of mergers of broadcasters is where it's come up. It's kind of surprising to see it used here.

Chris: Their view is, if we can pick the timing, then every sentence is a death sentence, and we pick, we refer it to ourselves. Haha, and so the judge is looking at that and saying, "Okay, so there's this date." And Microsoft, and again, I have to say, I will sound a little in the bag for Satya who I like and I mean, I actually, I've written him fan mail this past week just saying what wonderful people, these top executives of his.

People have never thought about before, this is not one of these companies that I've ever really been a groupie of, and I've just been so impressed by them and said, "Look, you're going to lose all of the leverage after the walk date." I think it gets very likely that Activision, which was in a lot of trouble for a number of things that have been taken care of since then, Activision's going to have all of this leverage after the walk date. I think they're going to ask for a much higher price. I think they will get a higher price.

I think that Microsoft is going to be approaching this walk date and if they can get the PI taken care of, if there's not a preliminary injunction, I think that they close it, and then I think that they deal, as... sorry, go.

Andrew: Let me just back up second so all right, so the judge, you think lightning quick ruling, we've got the walk date coming by the end of July.

Chris; By the walk date.

Andrew: There's a few things that could happen. The judge rules in Microsoft's favor, and Microsoft would then have 2 choices. They would have basically all the regulatory clearances they need except for the UK, CMA, which people who've listened to us, that's the UK regulatory body. We have consistently said, "I don't know if the UK, CMA rejects this deal. I don't know how you get it done. The UK, CMA rejects the deal Microsoft's appealing. I like Microsoft's argent on the appeal, I don't like Microsoft side." So Microsoft would've 2 choices.

We can close the deal, pay Activision shareholders $95 per share. We will own Activision everywhere except for in England, they basically have to separate out the Activision English subsidiary unless I'm mistaken, because England has not approved the deal, so they can't legally close it there, so they could do that or they could say, "We're not going to close the deal. We're going to hit the walk date and we're going to go to Activision and say, Hey, let's extend this contract so that we can try to beat the UK, CMA in court, and if you do, they'll try to say, Hey, let's extend it on terms, and Activision will say, we're doing much better. You've gotta give us a bump if you want us to extend and kind of undergo this uncertainties."

Walk me through those 2 paths.

Chris: If they have to contend with Activision for unconditional deal that could take months or years, and might not ever happen. Activision then that their kind of executive issues have been cleaned up, their business is stronger, their comps have traded well, their standalone price is likely much higher than it would've been when the deal was announced, and they'll simply say, "Hey, it's new negotiation. We have a contract, but we need to be compensated for the risk and uncertainty and the distraction, and something that's been very risky and distracting and uncertain so far could be and maybe we'll never get the deal done, if you want to kind of reserve us, if you want an option on us, because it's really just an option. We don't know if we'll ever get the deal done. We don't want it for ninety five, we want it for one ten."

I think that that's what both Activision and Microsoft expect. I think that that's when Microsoft went to this... I think that's why the FTC expected that that's why FTC asked for the preliminary injunction when they did, and I think on the way into the court, almost immediately in the preliminaries kind of before we got into this part of evidentiary hearings, they basically told the judge that like, "Your Honor, this matters you"... And one of the reasons why judges have to constantly triage their time.

They have more cases than they could give maximal attention to everything, so one of these things maybe just sound cheerful about humanity cause I've been so positively impressed by both Microsoft and the judge, but these judges are normally by the standards of American government and politics. Like these judges are pretty smart people. I do all this background on them and then I hear them in person. Like they're pretty smart people, smarter than the average person you listen to in the course of the day, and certainly in the government.

She acted as if, "Okay, I need to pay attention to this now. Whatever I come up with is going to be dispositive for this deal." I found Microsoft just sincere in that. If she issues the preliminary injunction, the deal will die. There won't be a deal, but they made a strong innuendo that the inverse is true. That if she rejects the PI, this deal will happen. They will scramble the egg and then they can litigate unscrabling it with whatever process, whatever regulatory agency wants.

Now, the politics in the UK with a centrist nominally right of center, certainly right of the left wing party in the UK party that's pretty weak right now, pretty unpopular. They have Brexit to defend. They are trying to preserve their identity as a place where you can do business that's been kind of threatened since Brexit, and their positions been threatened since Brexit. I think this government, or as we'd say in the US this administration would love some kind of consensual thing, and the UK, CMA think they were kind of JV partners of the FTC.

One thing that Microsoft has done is Microsoft is now in the litigation asked for discovery, and all of the interaction between the UK and the US. I think that's extremely politically dangerous for both countries. I'm not certain and will will reserve judgment, but be eager to see if the US was telling the truth about how when they met right before this decision, they didn't talk about it.
I think we're going to find out if they release in the discovery process what they're being asked for, but if the CMA is left alone in this, I think they're going to feel very isolated.

I think they're going to get pressure from the administration, and although the appeal process there is horrible, Microsoft picked like the best lawyers in the country, and they did a really good job in the kind of preliminaries leading up to this, so you listen to it and it's very hard for me because kind of so much of my professional job is just looking at precedent and giving you odds based on what we know has happened in the past, and that would give you 10% odds in this situation.

Very, very low, but then you look okay, there's so many things that could be unprecedented, and it's not like we're dealing with 20 billion precedents. We're dealing with a half dozen sort of similar situations that all have their uniqueness, so if this is the seventh time we've been in a somewhat like situation and something different happens, the idea of being unprecedented is not saying it would be wildly unexpected. It's just, "Oh, this specific thing hasn't happened before, but winning after you get CMA approval and closing around the UK, that has not specifically happened before. It looks like it's going to happen here."

Andrew: Let me just quickly. I just checked my notes. I mentioned a few times the drop dead date. The drop dead date is July 18th, so you would expect the judge to rule before then, because if they do not, then that is effectively what the FTC is trying to do. You've let the merger kind of time out to the end date and Microsoft might have to pay an extra 5 billion to kind of keep Activision on the hook, just because the process was signing out and I don't think anybody wants that to happen.

Chris: Her tone from the stand, I can't think of anybody enjoys having their time wasted, but she does not hide a certain level of irritation and boredom when something pivots away from being relevant to her making a decision that she has to make. I mean, she kind of has the normal human reaction to somebody who's wasting your time, and she shows that, so I mean, she's not just in there earning a salary on the bench, she's trying to make a decision, so it would be odd for somebody who doesn't like hour to hour having even 5 minutes wasted.

Who would then be wasting her time by letting it time out, in which case she's not the decision maker anyways, so she strikes me as the type of person who is not playing some kind of game here. I think she's going to make a decision.

Andrew: What do you think the odds are that the judge rules in Microsoft's favor here?

Chris: It's so dynamic for me. I think I wrote a note to you earlier this week. I was struggling with that so much, it's roaring higher by the hour that I listen to them, clear and convincing, so I usually say that's kind of 2 out of 3.

Andrew: Two outta 3, and then what do you think the odds that Microsoft would close.

Chris: They have a very hard time defending the difference between that, and seventy and sixty, kind of just like it would not be astonished to be wrong, but it's getting close to the point where she will decide against a preliminary injunction unless there's something that I'm just clearly missing, versus something that I kind of know that we can look in front of us and analyze here.

Andrew: What do you think the odds are Microsoft would close if the she rules against a prelim preliminary injunction and kind of just scramble the egg and say, regulators come at us, try to prove we shouldn't have done this.

Chris: It's my current understanding based on what they've said, and part of my confidence in their case is how un tricky these people seem to me. They just seem like smart people who are trying to do something for reasons that are utterly wholesome and legal and people who are less smart than they are attacking them for things that are unfair, and to the extent that all that is the case, I'm also going to give them high marks for sincerity and say, this is such hard for me. I think it's like again, it's clear and convincing, maybe even higher than that.

Maybe it is not beyond all reasonable doubts. It's not ninety five, but like eighty. I think eighty is about where it is, and that's just such a weird answer for me to give because all of these things were kind of low, low, low. I mean, like line up the precedents and have me look backwards and I'm giving low, like maybe like 5% that they would close the regulators, and 10% that they would avoid a preliminary injunction would be more like the backward...

Andrew: When we had this conversation 6 months ago, I mean, I remember, you and I were talking and when the CMA rejection came down in, I think it was late April, so that was probably 3 months ago, but you and I have consistently said like, look, Microsoft is a global business. This is a global business. They, they do a lot of business with the UK governments, they do a lot of business with governments. Like I don't know if a global business like this wants to close while there are regulatory issues outstanding.

Like maybe if it was just the FTC they would just, because the FTC has been so hostile, but I don't know if they want to close over CMA or all this sort of stuff, but it does seem like they're going to, and I'm with you, like it is very much against precedent. I can't think of... you and I have been working together for closing it on 10 years now, but not quite 10 years, but I can't think of more than 1. Maybe any cases where a company has had an outstanding regulatory not block, but out going to be regulatory rejection and is just closed over in the past 10 years.

Chris: Not in the first world. I mean this is a very clear distinction, but not amongst first world regulators. People have done it kind of third world of developing...

Andrew: I don't want to disparage a country, but if Senegal decided that if there are regulators didn't get together made, but yeah, so I just...

Chris: Or even China. China is specifically precedent than that, but partly here, and I don't want to ever outsource my thinking to anybody else. My thinking's a little stodgy and backward looking, which would get very low odds here, but I'm just paying very close attention to these individuals, and if Satya told me some point about Windows, I might give him my proxy if I had to be rushed before I fully understood the point. I just think he's smarter than I am on some things about Microsoft, and he doesn't strike me as duplicitous.

Maybe I'm at risk here of just liking his style. I mean, he just seems like somebody... he seems trustworthy to me, so if I play the man versus play the ball, here I look at him and think, "Okay, he sounds like he thinks he's going to win this." But he also sounds like he thinks the things we're dealing with at this moment are the key variables, that might or might not come through successfully, and so I'm a little bit taking them at his word here and then giving some flex for, well, it's never really happened like that in the past.

Maybe his advisors crammed this against him at the last moment, but the top decision makers here, so sure they don't necessarily want to go to war with a regulator, but especially where at least some of the CMAs original theory wasn't even correct based on their own analysis. They made some mistakes getting where they were, and the degree that they were dealing with an FTC that was both fanatical and perhaps pressuring them, at least communicating with them.

At least showing up right before the key decision, and you could just imagine how much, how much a leeway the FTC would give if in some price fixing case we were meeting late at night right before the key decision and just said, "Oh, no, we didn't talk about it." Nobody on the planet would be less sympathetic to that than the FTC chairman, who's now claiming that as her defense is not coordinating with the CMA. Okay, maybe we'll see in discovery shortly, but when you don't have the coordination and you have a flawed theory, it's not clear to me that you're really making an enemy out of the UK.

Andrew: I just want to pop in real quickly. We've mentioned how unprecedented this is and everybody should remember this isn't financial advice. I'm only using these to show odds, not to imply anything otherwise, but I just look like, so Activision July 21st, 2023 option, so the 92.50's[?] trade for about 80 cents, so that would imply about a 32% chance of this. It's not impossible that Activision closes above 92.50[?] by July it on fundamentals or something else happening. Like not impossible, but almost certainly the most likely way is this gets approved and closed or not approved, the preliminary injunction gets rejected and closed, and I just...

Chris: Well, certainly preliminary injunction gets rejected and closed, or they make it conditional on final closing and they agree to one ten.

Andrew: Well, so that would be the other way, which you can back that out in part because, the $95 calls, which only come into the money of Activision trades higher than the deal price, so something else would happen like trade for about 10 cents, so you can do some math, but I just look at those 80 cents trading for 33%, and that's up significantly over the past week, I think as people have adjusted to the trial, but I look at those and I say, "Look, as you and I are saying in the past, nobody would've given any credence to this, and we're really in no man's land."

Where if it's two thirds the judge closes and 80% chance that Microsoft wins this, then those should be worth the 50% odds, but we're just in no man's land where you can talk to some people and they'll be like, "Look, a big company does not close. No matter what happens, a big company does not close while a regulator is outstanding." And then you talk to other people and they'll be like, "Listen to what Microsoft is saying. They want this preliminary injunction rejected. They want to close this. If the preliminary judge... they will do this, that's what they're going to do." So it's just such a fascinating situation.

Chris: Absolutely.

Andrew: Well, look, we are brushing up on 10:30. The reason we recorded now instead of later is you wanted to go listen to the rest of trial.

Chris: I'm going to miss the trial.

Andrew: We had a long list of things, but again, Activision, it's 60 billion plus deal. It involves some of the biggest companies in the world. It's just we're absolutely in no man's land here, so it's no wonder we're talking about it, I mean we had Liquidia, let's talk about, we had AMC APE, we had Uranium, we had...

Chris: Oh, so many cool things, and I have a specific Uranium thing. There's not even time for one sentence on Uranium. A number of sovereigns including most recently Sweden, are starting to change a lot of small print from renewables to 0 or low emissions, specifically carving in nuclear on a lot of kind of lefty, ESG style, kind of green new deal futuristic energy sources. The European left is joining the world in a consensus that nuclear just is going to be a big part of our solution, and a lot of the language most recently Sweden's changing in that regards. I just think it's going to be huge for the future of Uranium.

Andrew: Cool. Well maybe, we'll focus on that in July, because we've said it like probably three times at this podcast. Maybe we'll focus on July, because next month Activision might be gone. There might not be a trial or you'll talk about here.

Chris: And then, okay. Final sentence for me on this is, as I head back into listening to the trial, I don't think anything's going to change over the next few days when I'm looking at the witnesses. Does the FTC have some brilliant game of jujitsu and they're about to pounce at the last minute and do something that radically changes this? I mean, obviously maybe there's...

Andrew: I mean, maybe we hired new lawyers and had a whole new approach to everything they've done over the past week. I could believe that.

Chris: We go way out of our way to be pretty falsifiable. Like we could be embarrassing ourselves here. I just don't think it's going to change that much this next week. I think that the companies are doing a great job. I think that they deserve to win, and this judge seems like she's going to make the right decision.

Andrew: Cool. Well, that's great, this was a very Activision focused podcast. We'll try to talk about something next month, but Chris, go hop into the Activision Microsoft trial and we will chat soon.

Chris: Great to speak with you. Talk to you later. Bye Andrew.


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