Power Lunch - Breaking News: The FTC sues to block Microsoft’s acquisition of Activision 12/7/22

Episode Date: December 8, 2022

The FTC sues to block Microsoft’s acquisition of Activision. Reaction and analysis from a former FTC Chairman and what the decision means for other deals hanging in the balance. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

And welcome to Power Lunch. I'm Aiman Jabbers in today for Tyler Matheson. Here's what's ahead. Peak rates, treasury yields falling from their recent highs despite the Fed signaling there are more hikes ahead. Inflation fear is replaced by recession concerns. We'll look at the impact on your investments. Plus, a veteran real estate investor is starting to buy again, targeting distressed properties in key markets. He'll tell us what he's seeing as the commercial and residential markets come under pressure. Kelly, over to you. Amen, thank you. Hi, everybody. The Dow had been up 301 at the session highs, and we're climbing a little bit back up there, up 2.10 for the moment, with all the major averages in the green. This S&P, by the way, is higher for the first time in six sessions, so it's really been a struggle for us to get some rally power. Tesla shares are moving on reports at shortening production shifts in China. There are also reports that Elon Musk's bankers are considering new Tesla loans to replace high interest Twitter debt.

Tesla's down about 1% today. And the chip stocks are some of the biggest gainers this afternoon. helping the NASDAQ, NXPI, Micron, all up 3 to almost 5%. And Activision dipping lower on a report the FTC could sue Microsoft over that Activision deal as soon as today. Activision Blizzard, down 2%. We'll have more on that in a moment, Amen. And we begin in the bond market today. And the dramatic move in treasury yields, the 10-year yield started the year at 1.5%.

It hit a recent high of 4.34 in October, mainly on those inflation fears. Now, today, the yield sits at 3.4, as the concern has now turned back to recession risk. So is it possible that rates have now peaked? And what does that mean for your investments? Rick Santelli walks us through the inverted yield curve and the three-month 10-year spread that's at its lowest level since 2001. Bob Pisani is here on what it means for market valuations, and Diana Ollick joins us on the mortgage impact that might impact that house that you want to buy.

But, Rick, let's start with you. Yes, you know, the inverse. Let's stick with what is happening, the dynamics of what is causing this. We have a Federal Reserve and Central Banks worldwide trying to push up rates. They left them too low for too long. COVID money stoked inflation, and here we sit. But as they lift and talk so aggressively about short rates, they have some control over. The long end of the market seems to have an opinion of its own.

And that opinion is everything the Fed's doing and some of the hangover from COVID is going to cause a recession. Three months versus 10, yesterday closed it. minus 87, a 22-year inversion. Tuesdays to tens today are hovering among minus 83. Yesterday's minus 84 was the most inverted since CEP of 81. Hey, what is the lowest yield on the whole curve today? 30-year bonds, the longest maturity, has the lowest yield. So to that end, let's look at tens to 30s.

The knob, it's now at minus 03, which means first inverted close, probably since October 20th. Finally, twos to 30s now at minus 87 is guns hot, meaning right now at minus 87, that would be the most inverted in 41 years. Back to you. Wow, Rick, thank you. Let's get to Bob Bassani on some of the implications for stock valuations, Bob. And, Kelly, it's been a strange month for the stock market. Let me show you this chart. Stocks are essentially sideways. The S&P 500 is essentially sideways this month. at a time when bond yields, a 10-year you're looking at there, has been moving down. Now, normally declining bond yields is actually good for the stock market. However, the market is changing its obsession with, in the obsession with inflation in 2022, to an obsession with recession.

So generally, bond yields declining when there's worries about inflation is good for stocks. But when you shift the obsession, as Rick was talking about, to recession, bond yields declining are bad because it indicates that the market's overall expecting a more severe recession. So that's going to be a bit of an issue. The market's been holding up very well, though, given these worries about recession, you saw the blather the market got itself into about the Goldman Sachs Financial Services Conference this week. We saw bank stocks down 8, 9, 10, 11%. Look at this. M&T, Bank of America's this week. All of these executives, it looked like they were very concerned.

Most of them were cautious, but not gloomy. the market just extrapolated some of those worries overall. I think, Amy, we're going to get CPI data on Tuesday. I think that'll have another data point on the inflation front. We're expecting, I think, 7.3% from 7.7 last month, and that'll be a big impact on the markets next week other than the Fed meeting. So keep an eye on that data. Thanks, Bob.

Now over to Diana and the impact on the mortgage market and home affordability. Hey there, Diana. Hey, Amen. Yeah, mortgage rates have come down sharply from their recent. high's still TBD if they're going to stay here. The average rate on the 30-year fix last peaked in October at 7.37 percent, which crushed home affordability. Then it fell sharply on November 10th when the last CPI report hit, which suggested that inflation was easing. It then fell further on remarks from Fed Chair Powell about moderating rate increases. Now, in November,

with lower rates, Fannie Mae reporting that housing sentiment among buyers and sellers actually ticked up very slightly off of its record lows. And then Tolbrother CEO, Doug Yearly said on the earnings call yesterday that, quote, there are some very, very modest green shoots over the last few weeks as rates have come down. But he said he wasn't feeling quite as good as he was in August before rates went over 7%. So we are, as everyone says, waiting on the next week's CPI release to see if mortgage rates are going to stay in the current range for a while or shoot back up again. It's all about that data, Dana. Thank you so much. We've got a market flash. Now, a news alert, I should say, on Microsoft. Steve Kovac has the detail.

Steve. Yeah, Amin, the FTC is suing Microsoft over its $69 billion proposed acquisition of Activision. This lawsuit, based on this release, we're just getting now, Amin, it's saying, mostly focusing on competition and saying Microsoft has a pattern of acquiring game studios to snuff out competition in the console market. They point to the acquisition of Zenimax, which owns Bethesda software, which, they're using to make exclusive titles on here. No word on this lawsuit yet from Microsoft, but what they have said all along is, look,

they are willing to, a lot of this hinges on the Call of Duty game, which is Activision's chief moneymaker. Sony and some other rivals have complained that allowing this to go through would give Microsoft an unfair advantage by making those titles exclusive to Microsoft platforms, but Microsoft is also offering that they would make Call of Duty available on other platforms for at least 10 years. They say they've offered Sony that 10 years,

deal and just yesterday they put out a joint announcement with Nintendo saying Nintendo agreed to that. So nothing from Microsoft yet on their side of this, but they are willing, from what I understand, speaking to people on that side of their argument here, they are willing to fight this all the way through. Now, the deal originally wasn't supposed to be closed until June of next year, Amon, but this could delay it even more. Steve, a lot of people have been waiting for a big antitrust crackdown from the Biden administration since Lena Khan took office. And I wonder what you think the impact here is on Microsoft if they're forced to unwind this deal? And then I want to step back after you answer that question and hit you with another one. I know this is breaking news.

It's all on the fly. But hit you with a second question about the tech industry more broadly. What does this symbolize for the whole industry? But first of all, for Microsoft, what do you think the impact is here? Yeah, for Microsoft. So it was unfortunate timing, I guess, that Microsoft this past January announced this deal on the same day that Lena Kahn said, look, we're exploring, snuffing out these kind of deals. We don't want big companies to get bigger. And, you know, in the future, put themselves into a position where they have monopolistic power. They always point to, you know, Facebook's acquisition of Instagram, which was at the time just kind of skated through regulators. And now they think there were problems with that.

So they're trying to get ahead of transactions like that. This is exactly the kind of deal that Lena Kahn's FTC wants to block. And look, if we see a change in power aim in in the White House and Lena Kahn is no longer the chair in two or three years, this seems to be her only chance to make a mark and make a, for her legacy as the chair. So is it, Steve, a done deal then? What is the message to other kind of tech rivals of Microsoft and those looking at similar kinds of acquisitions that, you know, every day we see a large company looking to bolt on, you know, plays that might help them in their future? If this one is going to be the one that, you know, they give the red light, they say it can't go forward, what are the larger implications of that? Yeah, it puts, it's

already, Kelly, putting a chill on acquisitions. And every time we talk about, you know, is Apple going to buy Disney? Is Facebook going to buy this company? We say, well, look, regulators like Lena Khan, I mean, President Biden specifically appointed people like her to take a tougher look at these kinds of M&A transactions. So it does put a chilling effect on that kind of stuff. Right now, the FTC is in a lawsuit with META because META wants to buy a really tiny virtual reality fitness company, which, you know, on the surface sounds like it would be nothing.

but they're making a similar argument in that case, Kelly, saying, look, if the metaverse and VR turns into a big thing, you know, this could look like the Instagram situation we were in with before. So what this could do, and it already is doing, frankly, is putting a chilling effect on all big tech M&A deals. Steve, one last question. I know this news is just crossing the wire, just breaking in real time. But you mentioned meta, and I wonder about Activision,

not a company that I know necessarily very well. Obviously, Call of Duty is the big product there. That's sort of a legacy video game. And I wonder what the impact of this is on the future of video games and gaming, particularly in the metaverse, right? And whether you think that that has any implications on how that entire industry is going to shake out now that we see this shot across the ballot from the Biden administration. Yeah, and believe it or not, this also plays into mobile more than anything. Right now they're talking about consoles. But the main reason Microsoft wants to buy this company is because of this mobile business that keeps growing like crazy.

That's why most people play video games. And when you get involved in that, Amen, then you start talking about the platforms. You start talking about Apple and their blocking of other app stores. Microsoft would love to put an Xbox app store on the iPhone and have a separate app store with their own games, including Activision IP. So, you know, when we get into a broader conversation about what this means, you start getting Google involved. You start getting Apple involved. You start, and now Microsoft and Activision are involved. It's also going to be interesting to see how Sony reacts to this because they've been the chief complaint throughout this entire process.

And even though they're the market leader, they don't want this deal to go through because anything that's good for Microsoft is going to be bad for them, Aman. So fascinating, all these downstream effects from this major news out of Washington right now. Yeah, I'm making calls right after this. Oh, Steve, we appreciate our Steve Kovac. Let's turn back to our reporters now as we again reflect on some of the major market developments we've seen here and whether we've hit. peak rates. Rick, I guess the question about peak rates, if we want to kind of focus on the tenure in particular, is is it definitely the case that 3.5% where we are here is going to be even here a high watermark or over 4%. And what can you think of that might not still make that

the case as we look into early next year? Well, the latter is a very easy answer, and that's quantitative tightening. Quantitative tightening is in the early chapters. It's something we've never done. We've never seen central banks with balance sheets like they have. They've never had rates as low for as long as they have. And all this, of course, is going to explode with regard to who's going to buy all the debt that needs to be issued to pay for all the spending and all the money that we created during COVID. Now, as far as the rest of the curve, I can't look the camera in the eye and say, listen, that's it. The highest rates are behind us, even though I believe it. Investors seem to believe it. Would you lend your money to Uncle Sam for

30 years, cheaper than any other maturity on the curve? That's a question that you need to answer. And I think that the tenure at 3.5% now is what? Three quarters of point from the high close, which was just below 4. 1⁄4. That's a big enough cushion to give investors some aggressive trading tendencies to go against the tough talk of the Fed and to trade on what they believe, because forecasting by investors and markets is a whole lot better than the history and track record of Central

banked and predicting pricing pressures. Diana, I wonder what you're seeing in the mortgage market right now, because with these rates where they are, I'm wondering what the impact is on supply of new homes and previously owned homes coming to the market. I'm a lurker on Zillow and some of these other real estate apps, and it feels like supply is just draining out of the market right now, but that's just maybe me looking at the apps. What are you seeing in the real world? Well, it is definitely draining out of the market.

And you would think there would be more supply given that sales have dropped so much. problem is that if you're sitting there with a 3% rate on the 30-year fixed on a house, and even if you want to move to another one, you don't want to give up that rate for a six and a half percent rate. So sellers are basically sitting on the sidelines. You have builders pulling back because they're not seeing that kind of demand coming through the door. And when you look at the mortgage volume, the applications, you would have thought that lower rates over the last month would maybe bump up some of those applications for refinances and for home purchase applications. We're just not seeing that. We're down over 80 percent on

refis. No shock there. but we're down over 40% on purchase applications, which just means that these potential buyers are sitting on the sidelines. Not only can they not afford the home still at high prices, but remember, at higher rates, a lot of folks no longer qualify for the mortgage. Amen. And Bob, finally, this all is probably the biggest question hanging over the stock market.

Yeah, and so it all depends on what side of the recession debate are you on. If you believe modest, very mild recession or soft landing, then you're okay. Right now you're going to be thinking earnings are going to be flat in 2023. That's a good thing. If you are thinking more severe recession, you're thinking earnings may decline 20% or more, and then the market's got a bigger problem because it's not priced in for that. Here's the problem right now, Kelly. Even if you assume a very mild recession or a soft landing, stocks are fairly priced.

Just that flat earnings going nowhere in 2023. We're trading it 17 times forward numbers. That's the historic average. So to expand that, if you think earnings are going to be flat, you need to go to 19 or 20. You need to make an argument the economy's going to do darn well. And that's a minority position right now. That's the problem. How do you push the market up?

You've got to really believe the economy's going to do well. But there's substantial group to think it's going to be much, much lower and earnings are going to be lower. That's the funk. The stock market's in right now. Well said. Bob, everybody. Thank you very much, Bob, Diana, and Rick. Our next guest says rates have not yet peaked, and that's still a problem for the Fed and the economy.

So how do you invest? David Traynor is CEO of new constructs and investment research firm. David, what gives you the confidence to say rates haven't peaked? Welcome. Thank you for having me. Yeah, I think that it's hard to say, but look, until we have as an economy gotten smarter about how we allocate capital, we're not going to really see inflation get under control. There's 20 years of malinvestment that we've incurred over the last few years as represented in. the zombie stocks and other businesses like Carvana that have had huge market caps and we've seen collapse. I think that's at the core of what's going on. And as long as we've got bad or good capital chasing bad investments, we're going to have a problem with inflation. And the only way to really slow that down to put the brakes on that activity is for the

Fed to keep raising rates and to quantitatively tighten. But even if the Fed keeps raising rates, we could see the 10-year drop, right? That's what we're seeing already. The market is interpreting their hawkish as a negative in the near future. So why wouldn't that send rates even lower potentially? You know, I think, look, we've got an inverted yield curve, and that's never a good sign. I think that reflects the fact that interest rates are still outpacing, I'm sorry, that inflation is outplacing inflation. So inflation is outpacing interest rates. And so as long as that's the case, we're going to still have an inflation problem. I do think the market is more forward-looking

than it's kind of ever been, and it's already looking past the rate rise events. You know, in the in the 10 and the 30. But, you know, I don't think that means that we're out of the woods yet. I think the markets are forward-looking and optimistic, but in the near term, we are not yet out of the woods. And I think rates do have to inch up a little bit more before we find our way out of the woods. Yeah. So what does that mean for your view on the stock market? Where do you think you differ most from the consensus right now? I think we differ most in just a real focus on underlying value and intelligent capital allocation. I think we've gotten away from that in many ways. in our markets and in our economy, too much FOMO, too much YOLO, too much chasing crypto or

hot IPOs. And we really advocate for folks to get back to intelligent capital allocation, value investing, if you will, but it's really more about just making sure you're buying assets at the right price, that you're buying businesses that actually generate real returns on invested capital, real cash flows. And if you can, focus those investments on the companies with the highest returns on invested capital and highest cash flows because those are the underlying entities that can create value for you over medium to long periods. Would you change your tune on all of this if you start thinking, you know what, maybe rates have peaked? I would not. I think that's one of the benefits of focusing on intelligent capital allocation

is that you keep the same theme all the time. Your strategy doesn't change. It doesn't whipsaw with the markets or interest rates or fads. You focus on really, doing your diligence. You focus on fundamentals to understand profitability and valuation. It's not a dissimilar message from what Warren Buffett or all the sort of wise investors over the years have said, because at the end of the day, that's what the stock market Kelly is all about. It's about intelligent capital allocation. And if your strategy is focused on that, then you really have something you can rely on through good times and bad. All right. David, thanks for your time today. Thank you. David Traynor.

rising slightly today despite looming bankruptcy concerns. That's got us thinking about other credit risks out there in the market. A veteran strategist tells us which parts of the market he's avoiding right now. Plus, stocks that are still cheap, even if a recession cuts into earnings. We're trading Ford, Conoco, and Expedia in today's three stock, not three martini lunch. And as we had to break, let's look at some of the names hitting new 52-week highs, including Las Vegas Sands, Vertex Farma, and Hershey. Isn't that? And welcome back to Power Lunch. Shares of Carvana are making a comeback today. Up a little bit after bankruptcy fears drove the stock to an all-time low yesterday.

Now, if Carvana files for Chapter 11, it would add to a long list of 2022 bankruptcies, which includes notable names like Revlon, BlockFi, of course, FTX, and Cineworld. And according to new data from Epic, commercial Chapter 11 filings were up 74% in November from the year prior. Now, that number is largely due to the crypto collapse that we saw and the FTX fallout, but if economic conditions worsen, could more bankruptcies be on the horizon? So let's bring in Brian Reynolds. He's chief market strategist at Reynolds Strategy. Brian, it feels bad when you look at that data coming from November to November last year.

Is it going to get worse if we look at the December to December data going back last year? No. If you look at the credit market, it's actually pricing in less worrisome trends in bankrupt. spreads, credit spreads in the junk market. They're a fraction of what they were during other panics in the last decade, like 2011, when the US lost its AAA rating and when oil prices collapsed in 15 and 16. So if you're looking at the broad market itself, I don't think bankruptcies are going to be a big issue. The big issue, I think, is going to be the transition towards lower inflation, which is what

the bond market's predicting. And Carvana's problem was that pandemics create shortages and gluts. So when there was a shortage of cars, they had to pay a lot to get the inventory they had. And now the auto prices are coming down in the youth sector. That's a problem for them. So if you look at people always talk about bankruptcy as sort of being like a forest fire. You know, it clears out the underbrush when you have one of these pullbacks. And that can be a healthy thing for the overall ecosystem.

If you think of that happening again now, what sectors are you looking at for more bankruptcies? If you're thinking overall the trends are relatively good, we're still going to see some pain here someplace, right? We are because, as I've said in the last couple of years on your show, pandemic creates shortages and gluts. So when there's a shortage, people over-order their inventories, and you're seeing that at retailers right now. So I would avoid retailers that don't have a handle on their inventory, because that's going to put downward pressure on pricing. In the auto sector, as I just said, I think those prices are going to come down as well. How do you know, as an regular everyday investors sitting in front of your laptop, how do you know whether a company has a handle on its inventory? What do you look at?

Well, you look at their balance sheet. And on the balance sheet, they have the inventories there. Carvonne's inventories tripled over a year. And so since the spring, Carvana's debt has been trading at distress levels. That is the clue when your inventories are out of control. And then the prices on those inventories are coming down. That's a real negative for the bottom line. And so I think a lot of retailers are going to be struggling with these.

I think the carmakers are going to be in trouble next year. Not bad trouble, but they're going to have to climb. prices next year because they've overordered. Chips were in short supply. Now we have a glut of chips, which means that next spring and summer, we're probably going to have a glut of cars. And this is normal for a pandemic with prices going up and down as these shortages and gluts work their way through the economy.

Brian, it's Kelly. It's great to see you again. And would you say that you're basically bearish on some specific parts where we could see gluts or even I thought it was interesting, the oil market, if prices remain below 75? But would you say you're bearish on specific parts of the credit or stock markets, but more bullish overall? Or are the distresses we're seeing in these subsectors signs that a larger problem is brewing? This is the most complex investment environment in most investors' lifetimes.

And so there's a lot of moving parts. There's going to be a lot of volatility. I think over time stock prices will go up, but certain sectors are going to get into trouble like oil again. I was on your show 10 years ago when oil was well above 75. And I said, if that threshold gets broken, that's a negative for oil. I remember. Because people have to unwind their trades. And now we're doing it again.

We're at the exact same spot. When we've gone from below zero, two and a half years ago on oil futures, to a record 135 and now back down to 75. That is not normal, but that's typical for a pandemic. So what that means that, okay, so if we say, if I'm an investor, maybe I want to think twice about some parts of retail, like you said, some parts of the auto industry, some parts of the energy market, depending on where oil goes from here. But when people come on, and as they have this weekend, recommend exposure to credits that might be offering you mid-teen's yields, would you think that, yeah, there is a pretty good chance

that a lot of these companies aren't going to be bankruptcy candidates and will be able to deliver those pretty eye-watering returns? I shy away from companies whose debt yielding 15% or more because that, to me, is a sign of trouble, and that's a risky speculative bet. I'd rather be like the guest you just had on who go for companies that are generating good cash flows and have their inventories in hand. Yeah, absolutely. A complex environment.

It's reassuring when you say it. We all sense it. Brian, thanks for joining us. Thanks. Welcome back. Thank you, Brian Reynolds. Still to come, we have more on that bombshell FTC lawsuit against Microsoft's deal to buy Activision. It just crossed in the last 10, 15 minutes.

and Active-invision shares are sinking about 2% right now. Interestingly, Microsoft's still hanging on to a 1% gain. We'll explore the fallout. Stay with us. Welcome back to Power Lunch on Bertha Cumes. And here is your CNBC News Update for this hour. A judge has unsealed details about a dropped bomb threat case involving the suspect Colorado Gay Nightclub mass shooting.

More than a year before the Club Q shooting where five people were murdered, Anderson Lee Aldrich, was arrested on allegations of making a bomb threat that led to the evacuation of 10 homes. Some Republicans are sharply criticizing the prisoner swap that freed WNBA star Brittany Griner. House Minority Leader Kevin McCarthy says President Biden should have also won the release of Paul Whalen in exchange for Russian arms dealer Victor Boot, nicknamed the Merchant of Death. The White House says Russia refused all efforts to include Whelan's release. And for the first time ever, U.S. banknotes will carry the signatures of two women.

Treasury Secretary Janet Yellen was on hand to see the first bills roll off the presses with her name on them. The other signature on the bills is that of U.S. Treasurer Chief, Lynn Malurba, who was also the first Native American to sign our currency. Power Lunch. We'll be right back. Welcome back to Power Lunch. Stocks rising across the board right now, but all of the first. off the highs of the day. Just about 30 minutes ago, the FTC sued to block Microsoft's acquisition of Activision. Microsoft losing its gains now, though still trading higher, Activision is lower by about 2%.

We're going to have more on this story in just a moment and look at some of the other deals out there that could be at risk and what Washington is saying here when they filed this case. Meanwhile, Chinese tech stocks are rallying as China starts to loosen some of its strict COVID restrictions. tech stocks like Alibaba and PIN Duo Duo with big gains today. Among the restrictions being lifted in China, a negative COVID test is no longer required to travel within that country.

That's lifting some of the casino and travel stocks for obvious reasons. Now, we don't often talk about the real estate sector of the S&P 500, but today it's the second best performing group after technology led higher by names like Boston properties and public storage. All right. sticking with the real estate theme back in September, lending it pretty much dried up, and commercial real estate was coming to a halt. It's now so cheap, though, our next guest says that they're sitting on billions of dry powder

in their real estate fund and they're ready to invest again. With close to $8 billion in assets under management, Carroll manages more than 31,000 multifamily units across 12 states from Florida, Texas, Georgia, North Carolina, and more. Joining us is Patrick Carroll, the founder and CEO. Patrick, welcome. It's great to have you. Thank you. Great to be here. So are you primarily contingent on rents? Because which way do you think those are trending right now? And how favorable is that for your company? Well, you know, rents have

been going up so fast the past couple of years. I don't, I don't think anybody really expects them to continue to go up as fast. But we are bullish. I mean, it's a supply and demand and balance. And as it becomes harder to buy a house with interest rates where they are, people will be renting longer. So I think we're bullish on rents going up over the next three to five. years, it's probably just not going to be as high as it has been. Careful you don't cause a market selloff, Patrick, because if you're saying rents are going up, people are going to have to rethink how much disinflationary pressure there is in the economy. Maybe that's my strategy, you know?

That being the case, you guys, as I understand, are you a builder or just an investor? I mean, could you be part of the solution by expanding your portfolio and increasing the supply of multifamily homes? Yeah, I mean, that's our plan. I mean, we primarily are an investor. We've done a lot of, you know, building and development as well. But where we see the biggest opportunities is in the structured credit space. So as borrowers, as owners of properties get into trouble, we want to come there and provide rescue capital.

We want to come down, you know, provide capital for them to pay down their interest rates, continue to manage the properties. And we'll come in in a preferred position and really look for properties that we want to own long term. And in markets we're in. So we're looking for good properties with just bad financial structures, weak owners that are not in good financial positions and the markets that we, you know, are very bullish on. Patrick, I'm so curious whether you guys are coming out of the pandemic into a permanently changed real estate landscape. That is, are you seeing different trends now, is it whether it's regionally or in terms of ex-erbs versus suburbs versus downtowns that we didn't see before the pandemic? Is there a lasting impact from what we've all been through over the past couple of years?

I mean, I think the lasting impact is people are now aware of the Sun Belt. You know, we've been investing in the Sun Belt since 2004, and we still see that as a very attractive option as people continue to do it. You know, companies are moving to the southeast and to Texas and to Arizona, and, you know, which brings employees. And once people are here, they don't really want to leave. The cost of living is better. It's a higher quality of life. And it's frankly a lot easier to operate a business in these markets. So like I said, we've been bullish on these markets for a long time.

I think what the pandemic did is really bring awareness to the international scene of how attractive the Sun Belt markets are. But that said, you still think Austin, Phoenix, Miami that these are overvalued markets? You know, they're overvalued because where the interest rates are. You know, as interest rates go up, the value of commercial real estate goes down. You know, these properties are still performing just like they were. But as, you know, the 10-year goes up, cap rates go, you know, cap rates go, you know, cap rates have to go up. So that drives down the value of the properties. This is all capital markets. It's not, it has nothing to do with the fundamentals of multifamily business. You know,

if you look at an office building, you know, especially with all these layoffs, that really is a deterrent to the value. And the multifamily business, it's really capital markets. So as interest rates go up, values go down. Yeah. Well, you sound confident that you can navigate this cycle. Patrick, thanks for joining us. It's good to have your insight. Thank you. Thank you. Good to have dry powder in this economy, right? It's always good to have drive out. That's right. Having none, I would say, it's good.

Up next, the FTC is suing Microsoft over that deal with Activision. What other deals could be at risk going forward. We'll bring that to you. All right, let's get back to the breaking news. We brought you earlier this hour. The FTC suing Microsoft over its proposed buyout of Activision. Let's bring back Steve Kovac now. Steve, you've got a statement now from Microsoft.

What are they saying? Yeah, this comes from Microsoft President Brad Smith, who has been behind this deal the whole way. let me read you what he said, quote, we have been committed since day one to addressing competition concerns, including by offering earlier this week proposed concessions to the FDC.

While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court. So those concessions, amen, like I was saying earlier this hour, the main one they're saying is, we'll give call of duty to all these other platforms on day one. We'll let it launch a day. We'll let the competition run a big game.

Sony can have the biggest Activision game right on day one. Nintendo already agreed to this 10-year agreement, by the way, as did Steam, which is a app store for games on PCs. The language there is so interesting. He says, give peace a chance, which implies that they're now going to war. Exactly. And everything I've been hearing from the Microsoft side of this, from day one when they announced this, they're willing to go to war if that's what it means. They really want to get this deal done. Keep on, this is the biggest acquisition they've ever done, $69 billion.

One of the biggest deals of all time. Period. Period. Exactly, that's true. And so, Sotia Nadella really wants this to happen. He's been acquiring games for so long. What I found interesting in this release from the FTC also was they talk about this pattern of Microsoft's acquisition. They're really pointing to that saying, look, they bought Zeni Max and they're making those

games exclusive. That's a video game studio. They bought a couple years ago. They didn't mention Minecraft, but about eight or nine years ago, they bought the company behind Minecraft too. So they've been building this portfolio of game studios for the better part of the last decade, and now with this huge acquisition, we see the FTC really going after him. Their charm offensive earlier this week didn't work. The FTC voted still to pursue this case.

And Brad Smith had an op-ed recently in the journal where he really talks about the weaknesses that Microsoft has in gaming, saying, our Xbox remains in third place, stuck behind Sony and Nintendo. We have no meaningful presence in the mobile game industry. You know, a significant portion that goes to Google and Apple through their app store fees. You know, that's the fastest-growing segment and that's not something that we're capturing. Isn't it adorable when these huge trillion dollar companies pretend they're just really small businesses? I'd like to put that statement up against their annual report. Exactly. Right. They're telling shareholders the same thing. This is a company with a two trillion dollar market cap pretending they're small. But they are, they are right.

And just specific to gaming, they are the third behind Sony Nintendo. Sony, the chief company complaining about this deal is the market leader. And you know what? They're the market leader because they have exclusive titles just like they're complaining about here. They're saying, oh, no, they're going to make Call of Duty exclusive. There's a pattern of exclusivity. They're a pattern of these acquisitions. Sony is complaining about this stuff. There's a reason why Sony is number ones because they make amazing games that they only sell on their own platforms.

The move would be for a big tech rival to buy Sony. It will never happen. But they're making a strong case for why they've been so successful. Steve, stay right there because we want to bring in Julia Borson as well here, Julia. It's not just these big deals with big brand names. The FTC, they've already, I think, sued to block eight. deals, maybe eight more the DOJ has sued to block. And some pretty small ones as well. Well, yeah, there's one that we're watching right now. There's a hearing going on right now in California

over Mehta's attempted acquisition of a VR startup called Within. This is a roughly $300 million deal. But what's so interesting is that the FDC is saying that meta is going to have too much of a dominance in this VR space, which is still, of course, very nascent. And within is a fitness app. So sort of showing how through this acquisition, meta would have too much dominance of this particular space. And what's so interesting here is this is a much, much smaller deal. But the FTC is going after many different companies on many different fronts. And I think this FTC versus meta situation in particular will be closely watched because it could have major implications, not just for this acquisition,

but for whether or not meta can make other acquisitions. And I know even here in Hollywood, all of these different cases are being closely watched as indications, of what kind of MNA is going to be allowed in the future. All right, well, let's bring in Bill Kovacek. He's a former FTC member, former chair of the FTC, and currently a professor at George Washington University Law School. Bill, I'm just looking here, as you join us on the phone, just looking here at a story from two days ago in Market Watch

in which Lena Kahn said that they are taking their time to put together enforcement cases. She said, we want to make sure that we're doing our due diligence. But she added, a heavy docket, and I think we're going to continue to see more in that direction. That sounds like what we're seeing today, is that right? This is the boldest move that the Biden administration antitrust agencies have taken to police mergers, and it certainly does signal a continuing intense commitment to look at a wide variety

of the deals more scrutiny more carefully and to go into court to block them. Bill, if Microsoft says it's going to fight this, take it to court, what are their odds of winning and what does the precedent tell us about pursuing it like this? The precedent tends in the modern era to be sympathetic to a number of the arguments that they've been making. There have been hints in the courts recently that courts are going to be willing to listen to their arguments about the effectiveness of the proposed solutions that they offered. this is going to be a hotly contested matter in which they have a reasonable prospect of success. But the FTC recently has been saying, we don't care if we lose a greater number of cases. We have a greater appetite for risk.

So this is part of our larger commitment to be in the courtroom to challenge deals that the agencies might have settled in the past. Bill, talk about that larger commitment for a second because we saw these comments, from Lena Khan earlier in the week where she said, they're outgunned at the FTC. In terms of staffing, she said in a case against META, they're outgunned 10 to 1 in terms of staffing at the 1,100 person agency. I wonder if you feel like they have the staff

to go toe to toe with all these tech giants as they are staffed right now. I think they don't. They don't. I think unmistakably they don't have the capacity. And Biden's asked for more money, but that money might not be coming anytime soon. He's asked for more money, and Congress for over two years has been talking about getting more money,

but we're much more interested in what people actually do than what they say they're going to do, and so far Congress hasn't given them an additional dime. And Steve, again, let's turn to the broader implications here for the rest of the tech space. I mean, this is a pretty unique deal because of its size and because it's a big tech company and a big video gaming one. But we aren't going to know for some time whether Microsoft is successful here. So in the meantime, the fact that the FTC is pursuing this, like you said, it's likely to persist in this chilled environment. Yeah, and it's just going to delay things, too, because Microsoft figured they're going to be under intense scrutiny, just given the environment they announced this deal into, right? There was already so much scrutiny over big tech acquisitions.

And, you know, they did, they crossed all their eyes and dotted all their T's and they're willing to, they said from the day one, we're willing to go 18 months to make sure everyone is happy. They've already made concessions, like they've said, or offered concessions, whether they get. accepted or not, we'll find out. But, you know, does that 18 months turn into two years? It reminds me the AT&T Time Warner thing. When DOJ got involved, what was supposed to be, I don't know, a year process turned into over two. Sure. So this could happen again. The break fee, by the way, is about $3 billion. So if Microsoft does get tired of it, that's what they have to pay Activision. Let's step back for a second to look at the history here, right? Because this is not the first time that Microsoft, of all companies, has been in Washington fighting on antitrust.

Brad Smith especially. He's heading this deal. Yeah. This is a company that knows Washington antitrust battles better than maybe any company in the world. I wonder how that experience last time when Microsoft faced a lot of blowback for the way they conducted themselves. I wonder how that experience is going to play out this time. Might be too early to say, but they certainly got the experience. Yeah, and that's exactly why Brad Smith is running the show here. I spoke to him on our air, I believe it was back in April and asked about this and I was chatting with him off camera. He knows so much about video games. He knows so much about this space. He's done his homework. He is ready to make this fight. And again, like you said, what they went through in the late 90s and

early 2000s, they have the experience, they know how the system works and they know how to fight it. Bill, how much better are Microsoft's chances here because Lena Khan is pursuing a novel strategy in trying to block these mergers from taking place? There are prospects of success increase. For first, the reason you mentioned before, which is that the FTC has already stretched. They already have a number of big litigation bets running right now. And there's just a limit to the number of first-rate litigation teams they can assemble to take on the deal. Second, the point you've just been discussing, Microsoft is well prepared for this. They've taken a different approach to Washington ever since the monopolization case with the Justice Department was spot out in the late 90s and early 2000s.

They've taken a much more conciliatory approach compared to the rest of tech. They probably have the best approach to dealing with Washington. than any of the major enterprise. And I think they've been thinking about the litigation possibilities from the very start so that they've been crafting their entire effort with the expectation that at some point we might be in a courtroom having to defend the transaction. That means they are very well prepared for this contest, and the FTC is going to face for a variety of reasons

an enormously demanding challenge trying to make this work. and the FTC is not worried about losing. Again, the federal agencies are saying, we're willing to lose more cases for the sake of making the point about our commitment. And, Julia, make no mistake here, this is a shot across the bow, not only to this company, but to so many others that are out there considering acquisitions. What do you think the chilling effect is going to be, if any, in C-sweets across industry? As people look at this and say, wait a second,

at least for the next couple of years, we've got a very aggressive FTC. Washington, D.C. Well, look, if you look at the decline and the value of the market cap of some of the media giants, and you think about how there could be potential matchups between tech companies who might be interested in buying media companies. I'm not talking about video games. I'm talking about that speculation that Apple could be an interesting buyer for a Disney or that Netflix could be a pair for some of these other media companies. I hear so much speculation about what kind of consolidation needs to happen here in Hollywood. I'm hearing this from senior executives across the industry and this idea that there could be some smart pairings of tech and

media giants, but that will not be allowed under this kind of regulatory environment. So I think this is all being watched very closely. The fact that Amazon's acquisition of MGM was so scrutinized did ultimately go through, but the fact that it was scrutinized did raise a lot of concerns. And I think this is going to be fascinating to see the implications across so many different industries, especially as these industries and companies come under pressure, the need for scale becomes even greater. And we've just gotten word from Activision, the CEO saying, while the FTC will be filing this lawsuit, quote, this sounds alarming, so I want to reinforce my confidence that this deal will close. The allegation that this deal is anti-competitive doesn't align with the facts, and we believe

will win this challenge. Steve. That sound you hear is thousands of corporate lawyers all picking up the phone, call each other and their bosses at the same time. So play this forward from Activision's perspective. They're giving at least a note of confidence here. Right. And by the way, that's from Bobby Kodick, the CEO, who it behooves him for this deal to go through, given all the cultural problems they had that sent their stock down anyway, and that caused Microsoft to say, oh, this is an attractive company to buy all this position. And Berkshire, by the way, said the same thing, and that's why they invested as well. So he, it really behooves him.

I mean, I'm sure he'd be happy to take that $3 billion break fee. That's free money effectively. But, you know, he'll be out of the job after this, if this deal goes through. And I think that's what he would prefer, just given all the problems they've had internally over the last few years. Can we talk about video games for a minute? I would love to talk video games. I'm bad at playing them.

Love to talk about them. But it feels like video games are a huge sector of the economy that gets sort of overlooked. Like compared to Hollywood or other entertainment, we don't talk enough about the power of this sector and the size of it. Give us a sense of just the size of the landscape that we're looking at here. And also sort of what the other acquisition targets and what the other mergers just in video games might be on the horizon. Yeah. So this is exactly why Microsoft wants to buy this now. They see approaching half of the world's population,

that's close to 4 billion people, 3 billion something, play video games every day. Most of it is done on your phone, and that is where Activision's just a huge growth area for Activision is done on mobile. That's why this was so attractive for them. So there's the mobile gaming that's just growing like crazy. Console gaming is, you know, it's big.

It's a huge business globally, but it's the mobile gaming that really is attracting people. It's nothing to do with the metaverse, has nothing to do with any of that kind of stuff. It's really the growth in mobile and then just the strength of these cloud services. Keep in mind a big part of this is Microsoft needs a library of amazing games because they have what I call the Netflix of gaming, which instead of buying individual games, you pay 20 bucks a month or however much it costs, and you stream them to not just an Xbox, you can stream them to anything that has an internet connection.

And that's their vision. So that boosts their cloud business. That boosts their gaming business. It gives them a leg up over the competition what Sony offers. That's why Sony doesn't want this deal to happen. So that's the vision Microsoft sees just holistically about gaming. Then you talk about other game. Who else could be on the chopping block here or an M&A target?

There's Ubisoft. There's EA, which reportedly our own company, parent company, was looking at merging NBC Universal for. So there are a lot more, and there are a bunch of indie developers, too, floating around out there that might be wanted, that someone would want to snap up as well. And I'm fascinated, Julia, by the confidence that both Microsoft and Activision are responding to this action with the

sound almost convinced that they are going to prevail over time. Well, they're certainly projecting confidence, but I also think the other question here is looking at the video game industry, which grew so rapidly during the pandemic. If you look at that, the question is how much of that was a pull forward? How sustainable is that growth? And Steve, I know this is something you and I have talked about a lot offline, but I do think going forward there is this question about how consumers are going to be spending

their money and whether that's spending shifts, especially if consumers are more strapped for cash. and maybe they already made a lot of investments in video games. So this holiday season will be essential to get a good read on what the video game industry retail sales look like post-pandemic. And Bill, let's go back to you. You've been at the table for these kinds of moments inside the FTC. And I wonder what the FTC's reaction is. When they see these sort of, you know, you could almost call them chest thumping statements from the two companies here,

predicting that they're going to win, they're going to prevail here over time. Does the FTC react to the tone of those statements that come out in the first. couple of minutes here or is this thing war-gamed all the way out to the next couple of months? They don't react very much. They've heard this many times before. Their whole view is, ultimately, we'll see how your arguments work in court. This doesn't put them off at all. So what would put them off? If you're advising the companies right now to flip sides here, what would you tell the companies to do to sort of push back on the FTC in a way that's going to make the FTC sit up and take notice? First and foremost is to see how this case turns out.

That is the only way to make the enforcement policy stick and to effectively deter similar deals is to win in the courtroom. So I suspect I had a supervisor want to put things in three baskets. The good, the bad, and the don't overreact. In a way, the don't overreact impulse here would be to say, let's see if they can win the case. Ultimately, you can't move the force of the defense. of enforcement unless you win cases.

I think what I'd be telling my clients is, let's see how this goes. There's going to be some uncertainty until we get some answers there. But if they don't prevail in court, well, they're not going to be able to win the next one or the one after that. Bill, thank you. Fascinating advice from

formally inside the FDC. Thanks also to Julia and Steve. Great insights here. Both of you guys. Thank you for being here on this breaking news. And Kelly, what a fascinating moment. You know, Washington going to war again. Sure. And this Stock prices are telling you a lot right now. They are basically unchanged.

In fact, Activision, after selling off a little bit, moving back up, maybe a decline of one and a half percent. It's almost as if investors share the confidence these executives have that this deal will ultimately get done. And if that happens, what Steve was talking about for the rest of the industry, the catalyst that that could be for a lot more video game M&A, it could go from a freeze for a while to all of a sudden a flurry of activity. Yeah, and Bill was talking about that don't overreact basket.

And it seems like investors are in that don't overreact. basket right now as you watch the changes, as you say in the stocks, but you wonder what it is that would trigger investors to say, whoa, wait a second, the FTC's got a strong hand here. I don't know what that thing is, but a lot of investors are probably looking for it right now. They're looking for it, but, you know, the stock price is going to tell you a lot. It'd be curious where Activision would trade if people suddenly thought this wasn't going through, you know, how much of a premium is priced into it right now, but this is, it's not like we're seeing a 20% drop in shares today on this news. There seems to be a lot of confidence that the FTC's case may not be that strong. And one of the

things people are going to be doing for the rest of the afternoon is probably looking through the rest of those companies, seeing how they're trading. Bingo. All right, everybody, busy hour. Amen, thanks so much. We appreciate it. Thank you. And thanks for watching, everybody.