Motley Fool Hidden Gems Investing - One Step Closer to a $69B Deal

Episode Date: July 12, 2023

The FTC failed to prove the Microsoft/Activision Blizzard deal would substantially lessen competition, which means blockbuster acquisition might come together before next week’s deadline.  (00:21) Bill Mann and Dylan Lewis discuss: - Why the FTC’s attempt to block the Microsoft/Activision Blizzard deal failed. - The “concessions” Microsoft is making to make the deal happen.  - How we’re seeing a similar response to regulatory interest in Broadcom’s planned acquisition. (14:09)  Is it the end of an era for superheros? Mary Long caught up with Catie Peiper to discuss trends in entertainment and Mattel's big bet on Barbie. Companies discussed: MSFT, ATVI, VMW, AVGO, DIS, MAT, HAS Host: Dylan Lewis Guests: Bill Mann, Mary Long, Catie Peiper Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Because we have your number. Dylan Lewis is done playing Will They, Won't They? Maybe. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined in the studio by Bill Mann. Bill, thanks for joining me today! Bill Mann It's great to see you, Dylan! How are you doing? Good to see you, too, man! I'm excited! We have the latest update in what has been kind of a long saga with the Microsoft Activision FTC deal. We have what seems like good news for Microsoft, maybe good news for Activision. Depends on what side of the shareholder coin you're on there. Judge Jacqueline Scott Corley denied the FTC's efforts to block the two

companies' blockbuster $75 billion acquisition. Bill, this is the latest in, like I said, a long saga with this deal. What stuck out to you in this recent development that we have? It's important to note that the FTC does have the right to appeal, although it is pretty rare that the FTC actually takes a move to appeal once a judge has rendered an opinion at this level. I think the thing that jumped out to me is that I have always wondered, usually when you're talking about antitrust, you're talking about two competitors that are joining together. The question becomes, do they have enough of the market so that they can control pricing? Can they be predatory, which is a word that gets bandied around a lot when you're considering

these merger deals at the FTC and then other institutes of competent jurisdiction, I guess you would say. So, I'd always questioned, because Activision and Microsoft were not competitors what the real basis was for an antitrust hearing. Of course, you can look and you see there's Call of Duty and World of Warcraft, and the combined entity could deny other platforms the right to use it. I'm not saying there was never an argument, but I was always a little bit interested as to what it actually was. In this case, it seems like the judge, What do I say without sounding too obnoxious? That she agreed with me? Yeah, you called it. You nailed the call.

I wonder, to some extent, we're seeing a lot more regulatory scrutiny on deals. You mentioned that this is not one that is expressly competitive. These are not two players in the same space here. Do you think that some of what we're seeing is a little bit of an acknowledgment that big tech has gotten very big very quickly, maybe in ways that regulators weren't expecting? Yes, absolutely. It has been an area of focus of the FTC chair, Lina Khan, that she wants to find ways to rein in the size and the dominance of the large tech companies. I like to put scale around things. The market cap of Apple, basically $3 trillion. If this were GDP,

that would put it at about the same size as France. You are talking about massive entities that, on some level, have the capacity to destabilize a lot of our economy. If they are a bad actor, and I'm not saying that to be the case for any of these companies. But increasingly, they have their hands in everything, which I think, if you're a regulator, kind of makes looking at these deals a little bit harder. Gaming is not where the majority of Microsoft money comes from, but they are a major player, especially in the distribution and the way that people access games. Yeah. And this is what's so funny about this case, is that in the U.S., in order to show an antitrust concern, you have to be able to show

that there's a potential for consumers to be harmed. That's the ultimate test of what antitrust is. So, I don't think that you can look at some of these massive companies, again, I keep going off-menu. But let's talk about Google, for example, which has a huge component of the ad sales market. But their search is free. So, it's really hard to say from a consumer perspective that there is harm. But this is something that probably, ultimately, I don't know that Lena Kahn and the FTC will be able to fix without a relook at what the laws are and how they are applied. But in this case, Judge Corley came to the conclusion that the laws as they stand in the United States don't really apply for Microsoft and Activision.

One of the things that the judge also noted, which I think probably helped move this through a little bit, is, while this is a historically large acquisition and there's been a lot of scrutiny on this deal, because of that scrutiny, there have been commitments from Microsoft to increase consumer access to Activision content. They've named a couple here, keeping Call of Duty on PlayStation for 10 years on parity with Xbox, an agreement with Nintendo to bring Call of Duty to Switch, and some efforts to bring Activision titles to cloud services. It seems to me like Microsoft knew they were going to have to give some stuff up here in

order to make this happen, and whatever they were willing to do here was enough to satisfy the judge. Yeah, and the way that you put it is exactly right. and I'm not sure that most people recognize just how massive the revenue streams are for these titles. Call of Duty would be, by a long shot, the most successful film franchise in the world if it were film instead of a video game. So, the amount of money that we're talking here is massive. Yes, I think that in a world in which they could call their own shots, that it might be great for Xbox to be able to take those titles on themselves. I think it bears remembering that the platforms themselves generate a fraction of the revenue of what the titles do. I don't know

that there really is that much of a concession being made to say, yeah, we would like for these titles to be available on lots of other platforms, whether we benefit from the platform or not. It's an easy bargaining chip, is what you're saying? Right, exactly! Exactly! Oh, we get to sell this to them? Huh! Twist my arm, why don't you? Let me think! Obviously, if Microsoft's ultimate concern is Xbox revenues, maybe you could make the case that this is going to be something that they would want to bring entirely in-house. I'm not convinced that that's the case. This was clearly a deal that Microsoft wanted to move through, and I think a deal

that initially Activision Blizzard was very excited about, same with their shareholders. What's been interesting to me in watching this deal is, I think there are a lot of Activision shareholders that are rooting against this deal going through because they like the idea of this being a standalone company. They also seem to be getting a $3 billion breakup fee if this deal does not go through, Bill. I'm not used to seeing companies get acquired and having the acquired business be so rooting against it. It is funny. I think some of that has to do with the length of time that it's been since the deal was announced. In that period of time, our favorite hold forever

investor Warren Buffett has come in and bought shares of Activision as an arbitrage play, and then sold them again because he didn't think it was going to go through. It has been a long time. It has obviously been during the pandemic. So, any type of time synapses that you can think of, they've been blown out and distorted anyway. So, yeah, I think at this point, there are plenty of Activision shareholders who would prefer to have seen it maintained as an independent company. But, you know, a deal's a deal. While this does seem like major progress for the deal, it is not the final domino to fall here. We have to note that there are still other things that need to happen.

This is not free and clear quite yet. It is possible that the FTC will appeal the court's decision. We don't know for sure about that. Also, crucially, Microsoft is working with U.K. regulators to overcome some of their objections to the deal. They've been paying close attention to this one, and it seems similar, where they're looking for certain concessions in order to make this go through. That's right.

It's important to note, and not that the U.K. and the E.U. are the same anymore, but their antitrust laws and practices are more based on competition than they are protection of the consumer. They want a broader set of competitors. They are actually looking at this deal and scrutinizing it on slightly different vectors than they would here in the U.S. Again, I hate to make calls when it comes to legal cases. But I'm going to ask you to. Yeah, I know. It's not natural law. You never really, really know. But I think that the concessions that they made are even more convincing in that European framework than they are in the United States. The fact that they said, look, for 10 years, this is going to be available

on every platform that you want, so there's your anti-competitive issues put to bed at least for a decade. More to the point, it's not as if Call of Duty is the only game out there in town. If they were to simply say, hey, we're going to price this two or three times higher just to call numbers out of thin air, consumers have options. Yeah, there are plenty of other very popular titles out there for people that want to enjoy that type of gaming. That's right. If you are paying attention to this deal, some days to keep in mind, the deal cannot closed before Friday of this week, and the deal is set to expire on the 18th, at which

point Microsoft would likely incur that breakup fee if the deal does not wind up happening. So, all to say, this story is probably going to move quite a bit in the next week or so. And we very well may come back to it on Motley Fool Money, because there are probably going to be some developments along the way. Bill, we were wrapping that conversation taking a look at the regulatory world of Europe. We also saw some regulatory progress in another deal this week with chipmaker Broadcom and their planned acquisition of VMware. This week, EU antitrust regulators approved the $60-plus billion acquisition, which would help Broadcom move into the cloud and software. Tell me if this sounds familiar. The key to the approval

is concessions from the acquirer. Yeah, they were particularly remedies for Marvel technology that would allow them to remain competitive in the market. Again, in the U.K. and in Europe, that competition is considered much more important than an antitrust in the United States is. So, competition is obviously an outcome. But for us, it is all about how are the consumers going to be impacted. In Europe, it's not the same. And so, again, I think that this shows that the regulators are struggling a little bit to figure out exactly how to deal with these massive technology companies. Because if you think about it, most of these regulations, and certainly the bedrock of

these regulations, were written and put into place and philosophized way before big tech ever came onto the scene. To bring it back to your point of scale earlier, Broadcom, hundreds of billions of dollars in market cap. This is an acquisition that is well above $60 billion. It is big, but also, it is not something that would sink Broadcom. It is not so large that the entire business hinges on it. It is an effort for them to move into cloud and software. But I think the scale of these businesses is something that I think a lot of antitrust was not necessarily built to deal with.

No, no. I mean, you think about it in this country, and again, I don't want to make too much of a deal about market cap. But just to put a little scope around how big these companies are, the largest seven companies in the NASDAQ 100 are all tech companies, and they are 55% of the total value of the NASDAQ 100. You are talking about companies that are a level of concentration in this country that has not existed since standard oil was broken up in the early part of last century. It is that level of concentration and that level of, I guess, what they would call structural risk that they're taking into account. If you're paying attention to the VMware and Broadcom deal, some things to pay

attention to. While we did see EU approval, regulators from the U.S. and the U.K. still need to weigh in on this one. You mentioned some of the differences in regulatory environment, Bill. Is there anything from this one that you see as, like, we should be paying attention to this as it shifts over to U.S. regulators? I would suspect that since it has gone through in Europe, which ultimately, because of the difference of focus, I think it's a higher standard in Europe and in the U.K. than it is in the United States. So, I would suspect, I mean, unless they're just mad about the loss from Activision and Microsoft, that they will not have the same level of problems, that the amount of concessions that they've given will

be satisfactory. From your lips to regulators' ears. That's right. We'll see what happens. Give me a call. Bill, thanks for joining me. Hey, thanks, Dylan. Coming up, is it the end of an era for superheroes? Mary Long cut up with Katie Piper to discuss entertainment cycles and Mattel's big bet on Barbie. Yeah, Mattel certainly hopes that this works out. Barbie is the first movie that they're co-producing, but it certainly won't be the last as there are nearly 45 other films that are allegedly in development. And those movies are set to tackle toys like Polly Pocket, Uno, Barney, Hot Wheels. The list is pretty extensive and pretty wild. Do you expect each of these future

productions to get the same star treatment and press takeover that we've seen with Barbie? Obviously, as you said, we haven't seen the movie yet, but the hype around it has been pretty intense? I think it depends. We're going to have to see how Barbie lands and how probably the next two or three successive Mattel features go. My guess is, though, they have sat out of the pool for a little while. They've seen how DC and Marvel or Hasbro, back with the Transformers a decade ago, handled this sort of bridge into the big screen. And they've bided their time. And so, based on the names that they're releasing right now, they've got J.J. Abrams associated with an upcoming film. It looks like they're kind of going for a combination of widescreen appeal or wide audience appeal with a slightly more gritty or more real and adult, arguably, theme than we might have thought coming from, say, a Marvel franchise.

And basically, they're drawing on talent that already is known for kind of being part of a prestige group in Hollywood. And I think they're trying to use that to differentiate themselves from the other large IP franchises in the market. You could make comparisons to Black Panther or one of the earlier Spider-Man films from the Marvel collaboration, not the Tobey Maguire Spider-Man, in terms of engaging with the genre at a film craft level instead of just a bankable box office cookie cutter. but again we're going to have to wait and see the one thing i will note is that it's also really going to depend on how this translates to not just their film sales but their at-home streaming sales what kind of money they're going to make when it crosses platforms and how much they're able to again drive that child demo whether it's apps on their screens or toys that they're buying at the store. Marketing to children now is really different than marketing to children when

we were the consumers. They focus mainly on screens now and not the toy box. So we may have gone to movies because we had Barbie in our toy boxes. In 20 years, there will probably be another Barbie media production out there. And the adults who bring their kids to that are going to bring them to those releases based on their engagement with the film or apps, anything that's on the screen. You mentioned the Transformers franchise. Mattel is not the first company to wade into this toy-to-movie pipeline. Hasbro was behind partnering with Paramount to bring Transformers to the big screen in the 2000s. That was a success. There were seven films that collectively brought in over $5 billion. What's the history of toys

serving as the foundation for movie plots. We could be here all day if you wanted to talk specifically about that. I would say the 1980s were a really pivotal moment for this in the industry. We have a couple of things going on around that time. One is we have a lot of film producers and studios realizing that the film doesn't stop at the credits. It stops at the toy store. You have people, George Lucas, infamously making creative decisions about films based on the merchandising capability of those franchises. You have that being driven by the studios on the one side. On the flip side, you have a lot of manufacturers out there who are starting to think in a more cross-media, cross-platform way. You have franchises like He-Man and Masters of the

Universe, Rainbow Bright, where they were always intended to be both on-screen and toys. They were spinning up television series and comic books in addition to the action figures. So the 1980s is really when this started, and we've really just been renegotiating that relationship ever since. So we've seen that pattern kind of cross over through decades with toys being fodder for movie plots. But this kind of feels like it's maybe a moment where toys are overtaking superheroes as a potential foundation for the next cinematic universe. We had the Nintendo make a movie about Super Mario in spring, which is the only movie I think thus far this year to gross over a billion dollars. And then you have the Barbie movie. You have all these different Mattel films that are in

production or in development that we talked about earlier. So what's the history of different movie cycles look like? Are we out of this superhero era, which it seems like was dominant for the past decade and entering into something new? What did the past of that look like as well? Really great question. And I love it because 2023 is really the year when all of the film critics, all the culture critics really want to eulogize superhero movies and say they are over. We are marking this point in time. We're going to have to actually see if that's true. But it does seem to be in the cultural conversation right now. There are a number of industry constraints at the moment that are affecting sort of the potential fall of superhero films from just a

workforce and union perspective. The visual effects industry in particular has been pivotal to the growth of the superhero genre and they have not been unionized to date and they are working towards it now. So we're getting a little bit of industry pinch there, but it's also, it's been 20 years. So maybe it's time for the genre to kind of sunset for a little while. It would not be the first time that that's happened. We have seen this happen off and on for decades. We definitely saw this in the 60s and 70s in Hollywood. Audiences were deeply oversaturated by musicals and epic films. Think Sound of Music, My Fair Lady, all of these big budget films that as a child, I grew up on not realizing that contemporary audiences were rolling their eyes

at them. And they really withdrew from the box office. A lot of those were loss leaders for the studios at the time. And instead, audiences really pivoted towards gritty and more realistic cinema, and then also to the rising popularity of television. So, this is not the first time a cycle like this has happened in the industry. You mentioned eulogizing the superhero era and how that's been like a popular take for critics to have. About a month ago, we saw a lot of eulogies about Pixar, more or less, because there was just not that much track. Their original animated film, Elemental, had not really gained the traction that Pixar is pretty notorious for. So, compare Elemental's box office with what we saw with Nintendo's Super Mario,

which obviously has so much pre-awareness. Is there still money to be made from original content, or are we entering an age where all movies need to have recognition from the audience before they actually hit the theater? That's a good question. I have a little bit of a hot take on it. I would argue that Elemental from Pixar was not really all that quote-unquote original, and that was part of the problem. Sure, it was a new narrative, it was new characters, but in content, it is fairly derivative of the type of film that we have come to know Pixar puts out over the last decade. If I'm looking at a cage match between that and a movie adaptation of a heavyweight brand and franchise that's built that relationship since the 80s, Mario, no contest.

I'm betting on the latter. The cookie cutter Pixar, I think, is something that's a little overdone in the industry at the moment. That being said, though, I don't think we need that pre-recognition that you get with Mario, for example, for a movie to be accessible. If you take a look at something like Everything, Everywhere, All at Once, arguably the most original film we've seen in, I would argue, decades. It brought me back to Fight Club in terms of really, you know, shaking up what we saw on the big screen. And then meanwhile, you have movies like The Flash, as you mentioned. It was a flop. It brought back not one, not two, but three big screen Batmans for that adaptation, and it still flopped. So, I don't necessarily think that recognition

is important. Originality and execution seem to be more important if I were to try and draw that trend out. And I think this goes back to sort of what we were talking about before, if there is a contraction happening. People are less willing to pay for box office bloat when they can get junk food at home. They're kind of slimming their media diets. And we've seen this in the 70s. We also saw it a bit in the 90s. They kind of go towards a more minimal palette for a little while before we have another surge at big, epic box office swings again. We love hot takes on Motley full money. So I'll push you for another one. Barbie comes out on July 21st, which is the same day that Chris Nolan's Oppenheimer comes out. If you were a betting woman, which do you have

your money on to top the box office? Oh, I am a house divided right now because I'm looking at both. I would say if we're looking at bottom line, Barbie's going to win the box office. It's just going to bring in a larger a swath of age demographics. You get your kids, you get your older adults. I don't think a lot of people are going to be bringing their eight-year-old to a movie about the atomic bomb. I don't think that's going to happen. In terms of what gets more critical appeal, I think that could be more of a toss-up. Who knows? Maybe both get Oscar nods at this point. It's a little unclear. We'll have to see. We'll see which one has legs. I'm uncertain.

But it sounds like you will be attending the Barbenheimer double feature that day. Oh, I am all about it. I especially am about the, uh, the Barbenheimer run, uh, red carpet, the hot pink pinstripe suits, suits showing up at the red carpet are on point. Yeah. Talk about marketing, just making waves across every medium. Absolutely. Awesome. Katie. Well, we'll stay tuned and we can do a follow-up, um, to see if your, if your predictions about box office numbers holds true. Thanks so much for the time. Fun chatting with you today. Thank you. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal

recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening! We'll be back tomorrow.