Motley Fool Hidden Gems Investing - Microsoft's Deal Under Investigation

Episode Date: July 6, 2022

The UK's regulatory authority on competition has officially opened an investigation into Microsoft's deal to buy Activision Blizzard. (0:21) Bill Mann discusses: - Why Wall Street is shrugging off the news - What to expect when the decision is announced by September 1st - Amazon's deal to take a small stake in GrubHub - The prospect for more companies (e.g., Salesforce, Atlassian) to take stakes in smaller software companies (11:51) Deidre Woollard talks with Jacob Goldstein about his recent interview with Redfin CEO Glenn Kelman, the 3% commission model, and more. Got a question about stocks? Call the Motley Fool Money Hotline at 703-254-1445. Stocks mentioned: MSFT, ATVI, UBSFY, AMZN, JET, CRM, TEAM, RDFN, ZG Host: Chris Hill Guests: Bill Mann, Deidre Woollard, Jacob Goldstein Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

This family is on the brink of civil war. On September 18th, Mobland, the hit original series, is back on Paramount+. We are the Hartigans. Don't know them yet? Then Google us. From the underworld of Guy Ritchie. Do you want to step up the ladder?

I want Comet dead. Starring Tom Hardy, Pierce Brosnan, and Helen Mirren. Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th Paramount+. Two tech giants are in the headlines, but only one of them is causing ripples in the stock market. Motley Fool Money starts now. I'm Chris Hill. Joining me today, Motley Fool

Senior Analyst Bill Mann. Thanks for being here. How are you, Chris? I'm doing well. We're going start with the CMA, which is not the Country Music Awards. That's good, because I don't have much to say about that. This is the Competition and Markets Authority, which is the regulatory agency in the U.K., which has officially opened an investigation into Microsoft's proposed acquisition of Activision Blizzard. They say the initial decision will be issued by September 1st. Microsoft's General Counsel said pretty much everything you would expect. We're going to fully cooperate. We're going to answer their questions. We're confident the deal is going

to go through. Is this a big deal, or is this just the anticipated cost of doing business? Basically, what's happening is that the European Competition Authority is worried about Activision joining the platform of the Xbox. In truth, it will have a pretty big impact on the gaming industry, which is a $190 billion industry. So, it is not nothing. And gaming is one of the areas in technology in which Europe and European companies have been very, very strong. There are a lot of great companies out of Scandinavia. There's Ubisoft in France. There are all sorts of gaming companies. So, this is a big concern for them. You know who's not really reacted very strongly is the stock market. I was going to say, shares of Microsoft are basically flat.

Shares of Activision are basically flat. So, the deal is a cash deal, which means that when the deal goes through, Activision shareholders will get $95 a share. The last time I looked, they were trading at about $78.25, which, if I do my math, tells me is substantially lower than 95. So, all along, the market has assumed that there would be antitrust issues and that there was something on the range of an 18% chance that the deal would not go through as structured. So, this is something that everyone has expected. The Federal Trade Commission in the U.S. has said they're looking into the deal also and trying to see what the implications are. I'm not saying that this is a nothing burger, because very much these are the entities that could cause the

deal to collapse. But it was 100% expected. The reason why I say this is that the market's reaction is telling us that this is true. When you talk about the chance that the deal collapses, is that how we should be thinking about this in a binary way? Either the deal goes through or it doesn't, or is there also an option where Microsoft has to make some sort of concessions to the market? Yeah, but again, it's a smart question, but if you think about the entity that is impacted the most as far as the market is concerned, it's the Activision share price. They have a deal for $95 a share, which is what they will get if the deal goes through. Now, it is possible that the deal could be renegotiated if one or more of

these authorities with competent jurisdiction caused them to do so. But that's not Activision nor its shareholders' problems. That's a Microsoft problem. So, the more important gauge to look at is what the Activision shares are trading at. And they haven't moved today on this news. And I think that's a pretty important indicator that the people who know have expected activity on both sides of the Atlantic in terms of an anti-competitive investigation. Last thing, and then we'll move on. Do you anticipate some sort of stock movement on or about September 1st? If the CMA comes out and says, we've looked into this, we're satisfied, as far as we're concerned, this deal can go forward.

Or they could come out and say, no, we don't like this at all. Right. Or the third option is, yeah. In that case, do you expect some kind of stock movement? Probably. I mean, if you remember, I mean, I don't know if you know this, Chris, but it's been a pretty volatile stock market year. I don't know if you've paid attention. I noticed. Okay, you've noticed. I picked up on that. Things have been said in your general vicinity that would lead you to believe that that's the case. So, all of Activision's competitors have seen their share prices come

down quite a bit since this deal was announced earlier this year. So, if it looks like the deal isn't going to go through or is going to take much longer, and that also matters in an inflationary environment, because you would rather have your money today rather than a year from now, yeah, I think the stock could go down quite a bit. I suspect what's going to happen by September 1st is that the CMA is going to come out and say, we would allow this deal under the following circumstances. And the question to me is not them trying to block the deal. It's that the circumstances would be such that it would no longer make the deal palatable to Microsoft to go ahead and consummate. Let's move on to Amazon, which is taking a small stake in Grubhub

as part of a deal that will give Prime members food delivery perks as part of their subscription. And we are seeing some stock movement with this story. Shares of Grubhub's parent company, Just Eat Takeaway, up 15%. On the flip side, Grubhub competitor DoorDash shares down nearly 10%. Does not like the deal. DoorDash is not in favor of a tech behemoth taking a stake in one of their competitors. And by the way, that's the nightmare that we've talked about for as long as we've been doing this show. In any number of industries, it's like, oh, well, what if, insert name of large company? Usually Amazon. Amazon or Apple or Microsoft, in some cases, Facebook. What if this big company decides to

enter this space? So, you know how one of the more famous Jeff Bezos quotes is, your margin is my opportunity? I think maybe in the time of Andy Jassy, it may be your loss-making is my opportunity, because this has been a struggling segment. There are very low barriers to entry to food delivery. There are thousands of competitors. I mean, there are a couple of big ones, but there are regional ones all around the world. I mean, there's Grab in Southeast Asia, there's Meituan in China, there's Demicon in Japan. There are hundreds and thousands of these. It is an incredibly competitive market. So, for Amazon, who actually had an Amazon food delivery business up until about three years ago and got rid of it, to come back and put this under

the framework of Prime, that has to be terrifying to all of these competitors. And you see it in DoorDash, but it goes across the board. This is interesting to me as an Amazon shareholder, because it seems like the way this deal is structured, Amazon will have the opportunity to take a bigger stake. I mean, right now, just 2% of Grubhub. But this seems like something that is worth watching. At some point, let's say six, 12 months from now, we'll probably get some indication from Amazon as to how they think this is going, because either they're going to invest more money or they're going to wash their hands of this, aren't they? Yeah. I think this is a really interesting time for companies. Jet is one of them. Just Eat

takeaway, I should say, which probably shouldn't just go straight acronyms. So, you have a number of smaller companies, not just in this segment, but also in the software segment and a lot of other segments that have seen their share prices come down a lot. And you have these cash-rich suitors out there. And I would say that Amazon is the top of the list, but you've also got, you know, you've got Salesforce.com, you've got Atlassian, you've got Microsoft that are looking at a lot of these businesses saying, we can pick these up on the cheap. So, this deal to me, in some ways, I don't want to overstate that this is a lifeline to Just Eat Takeaway or to Grubhub, but this is a deal that is being done somewhat

under duress for them. They're getting 2% for a de minimis amount of money and an agreement, And they have the rights to get another 13% also for not a huge amount of money, basically the asset value of the company. So, this is a sign of just how distressed this market is and how much value Amazon can bring to it. And most importantly, that Amazon would be able to wipe its hands if it's not going well and walk away without losing very much at all. I hadn't really thought of this before, but you and I talked recently about the environment that we're in, and you just touched on this, the prospect for more acquisitions coming in the second half of 2022, in part because so many companies have had their valuations

knocked down and larger companies can pick them up on the cheap. I hadn't really thought about this move, which is a prelude in some ways, which is, hey, we're not going to buy Grubhub outright, but we're going to take a stake in it and see what we see. It's possible that we see more of this activity as well, where it's like, we're not buying this software company outright, we are going to take a stake in it though at a lovely valuation as far as we're concerned. To me, Chris, I think looking at the share price response of DoorDash and it's only down 10%, I would think that you would look at the type of deal that has been struck between Amazon and Just Eat Takeaway and say

that that is a damning indictment on the entire industry and its economic capacity as standalone companies. Bill Mann, always great talking to you. Thanks for being here. Thanks, Chris. Redfin is not doing so hot. Shares of the real estate tech company are down 75% year-to-date. But despite the stock performance, the business can still tell us a lot about the future of home buying. Deidre Woollard caught up with Jacob Goldstein, host of the podcast, What's Your Problem, to talk real estate, the 3% commission model, and his interview with Redfin CEO, Glenn Kelman. I used to work with brokerages and I used to spend a lot of time helping real

estate agents position themselves against Redfin and the lower commissions, and it wasn't easy. Real estate is one of those last commission businesses left standing. Do you think the 3% commission is going to continue on? I mean, in a sense, and with respect to all of the work that real estate agents do, it's amazing to me that it has persisted for as long as it has. And I think part of it is, when people are buying a house up against the price of a house, they forget just how much money 3% is, or they forget just how big of a difference 3% versus 2% is. It can be tens of thousands of dollars that you're talking about. And so, I don't know what's going to happen. I'm surprised that there has not been more change and more innovation in

the fee structure for real estate agents. I mean, what do you think? Yeah. I have seen a lot of disruptors come and go, and there's something about the commission business that is just sort of unassailable. I don't know if that's the strength of the National Association of Realtors as a lobbying organization or what, but it just seems to have it's, it's faced its challenges and Redfin is certainly one of them, but it, it seems, it seems to still be in place. I mean, it's a little bit, the thing weirdly that I think of when I think about it is a wedding, right? It's this one other instance in your life that it's like pretty much a one-off, you know, maybe you buy a few houses in your life, but it's this weird

thing. You're uncomfortable. You don't want to screw it up. It's really expensive. There are all these costs and you just kind of deal. You're like, Oh, I guess I got to write another $1,000 check for this thing. I don't understand. And so I do think, you know, some of the persistence of the, what seemed like me, frankly, to be high fees come, come from that, right? That it's, it's not a thing people do very often. It's very scary and you don't want to mess it up as a consumer. Yeah. I think, I think the emotion is, is a big part of it, which is one of the reasons I think it's sort of interesting that, that iBuying has kind of taken off because it really, it sort of takes a little bit of that process out of it. So Zillow kind of jumped out of iBuying

just about as fast as they jumped in. Redfin, and I think Glenn Kelman has always been kind of more cautious about it. And one of the things that in your interview with Glenn was, I love this, that he said that they won't sell to institutional investors. And I think that's interesting because as Zillow has sold off their homes, that's one of the things that they've been doing a lot. But is that the right move when there's so many institutional investors that will snap up those homes? Glenn Kelman's idea is, look, we're buying from people who live in the house, and then we're going to turn around and sell to people who are going to live in the house. We're not creating a shortage. We're not taking supply away from people who want to buy

a home and live in it, which seems admirable. It seems like it might get harder to do right now, this moment when suddenly mortgage rates shot up really fast, demand is going down really fast. Redfin, as of their last quarterly report, owned over $200 million worth of houses. It'll be interesting to see if they can stick to that in what seems like a really difficult moment. Yeah, a lot will depend on the market going forward. Glenn Kammann also shared what the funding landscape used to look like for his business on your show. We're going to play a clip of that now. I was talking to somebody, I think representing money in the Middle East, and he said, well, we'd have you do some paperwork, and then we'd give you this money,

and we wouldn't really need an interest rate. We wouldn't really need an ownership stake in the company. And I said, well, why are you giving us this money? And he sort of said, I don't know. And I said, well, it's probably not even worth the paper cuts, all the diligence you'd have to do. We kind of don't need it. And then he said, we really wouldn't need to do any diligence either. And then I said, okay, this is getting seriously weird. And now, regardless of whether I'm going to take the money, I just want to understand what the heck is going on? Can you please just level with me? And that's when he said, I've got a problem. I'm sitting on this pile of money. I have to deploy it. That was the word that he used.

There are many sovereign states who have the same issue. They want to put the money into the U.S. because that's considered a safe market. They want to put it into tech because that's sexy. And I am just trying to give you money. And it was like he wanted to be relieved of a burden and that I needed to relieve him of that burden. And the reason it's important for iBuying is that for the longest time, you never could get into the business of being a principal, where you actually own the car or own the house that you were selling, because it's so capital-intensive. And maybe five or 10 years ago, tech just surmounted that huge obstacle. Why is this a story that you think about all the time?

You know, it's because I think it's not just about iBuying or even just about real estate, right? Like, for me, this story explains so much about what has happened much more broadly in the American economy, in particular in technology, over the last many years now, maybe not quite a decade, but coming up on a decade, right? This sort of tsunami of capital that just came in. If you think of SoftBank as maybe another example, this sort of mega venture capital fund that took what people used to do and 10x-ed it or 100x-ed it and was just throwing billions and billions of dollars at startups, basically, in many ways, I think, defined this economic era that we have been living through.

And that might be changing right now. Glenn first told me this story a couple of years ago, and I thought of it and thought of it. And now it's like, whoa, is that era over? Is that era we were living through done now? And I don't know yet. I love that you referenced SoftBank there, because I think that's an interesting example of the way a narrative has changed, that the narrative for SoftBank used to be, you know, oh, these are just genius decision after genius decision. Now the narrative is like, oh, look at that. You know, they flew too high. They put too much in too many places and too many bets. So, narratives shift really fast. And the housing narrative is shifting really fast.

I've been watching existing home sales numbers, pending home sales numbers just came out recently. They're down. And there's a lot of talk about a housing bubble or a housing crash. I don't see a bubble. I don't see a crash. But I can tell that Glenn Kelman is preparing for that bumpy weather. How concerned should we be as investors and as homeowners? I just bought a house last year for more money than I thought I'd ever spend on anything in my life. I plan to live here for a while. I was able to put a significant amount of money down. I plan to live here for many years. For those reasons, I'm not acutely worried. I do think there's some comfort to be had in the fact that there are a lot of homebuyers

like me. One of the things I asked Glenn in our interview on the show was, is this 2008? I'm old enough to remember that, and we get scared about the housing market, and I go to the extreme. I'm like, whoa, is everything going to blow up? He said no, very clearly no, because most of the people buying houses now, A, have equity. Lending standards have remained much, much tighter than they were going into that blow-up in 2008. And it's largely homeowners who are living in the houses. So, I'm not afraid of a 2008-style blow-up, but it seems very reasonable that home prices could fall, right? They've gone up so much, right? I mean, a wild amount in the last two years. So, for home prices to go down a little bit now

would seem unsurprising to me. What do you think? It has been a run-up really since the end of the great financial crisis in 2011. Now, I believe the NIR numbers, it's about 120 months, something like that. It's been a long run. I think it's interesting, too, in your interview, Glenn also explained one significant way that the housing market has changed since his parents' generation. Now, I think the housing market has more characteristics in common with the stock market. Part of that is because there's so much institutional activity in the housing market. Part of it is because there are also these platforms that provide much faster liquidity, much faster price discovery. When we have a problem selling a house, we don't wait two

months to come to grips with it. We mark it down right away. And everyone else on that block is disappointed that we move so quickly. But in part, we're trying to stay ahead of them. So, what do you think this move toward a faster housing market means for homeowners? Well, that's an interesting question. I mean, there's that moment when he talks about, they're going to turn around and sell houses fast, right? And that, again, was a striking thing to go back to the financial crisis. It kind of took a while, and people were holding onto their houses, and it was a less liquid market. I do think, if home prices are more like the stock market, it's scary in that that sounds more volatile. I don't particularly want

the housing market to be more volatile. On the other hand, price discovery is good. It's useful when buyers and sellers find the market clearing price quickly. It provides everybody else on the block information, even if it's information they don't want, that their house is worth less than they thought. At some level, more liquidity in a market is useful. It just means you get the bad news faster than you otherwise would sometimes. Last question for you, which is, we've got so many disruptors. We've got the online brokerages. I wonder if it has fundamentally change how people buy and sell. To me, it still seems like the same experience. What do you think? It seems like there are pockets where it's changing more. I know Phoenix is a very popular

city for iBuying. I think the housing stock is easier for algorithms to price there. I think that's a piece of it. I think there are places where you're starting to see a change. It seems likely, and this is just an intuition, but I do feel like younger people, as they get old enough to buy houses, I feel like surely they'll be ready to try something new. Maybe I'm wrong. Maybe people say that every five years or something. But I do feel like people who sort of do everything on their phone would be comfortable buying a house on their phone in a way that somebody who is 50 or 60 would not be. So I'll be really interested to see what happens in four years, five years. Yeah, me too. Well, Jacob, thank you so much for your time. A reminder that the complete

interview with Glenn Kilman is on the podcast, What's Your Problem? Thank you. Oh, thank you. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thanks for watching!