Yet Another Value Podcast - Chris DeMuth's State of the Markets for April 2023

Episode Date: May 2, 2023

It's time to welcome back Chris DeMuth for his monthly state of the markets. For this April 2023 edition, Chris shares his thoughts on the Spectrum Brands antitrust lawsuit, thoughts on Activision Microsoft following the CMA unexpectedly ruled against the deal, and the Wells Notice sent to Coinbase. For more information about Rangeley Capital, please visit: http://www.rangeleycapital.com/ Chapters: [0:00] Introduction + Episode sponsor: Stream by Alphasense [1:36] What's on Chris' mind for April 2023: AMC, Coinbase, Spectrum Brands, Greyscale Trust [2:33] Spectrum Brands antitrust lawsuit [15:36] Understanding the value on Spectrum Brands if they win or lose the case [23:27] The politics behind the Spectrum Brands case [28:27] Thoughts on Activision Microsoft following the CMA unexpectedly ruled against the deal [34:40] Does Activision want extend the walk date? [37:09] What is a Wells Notice, the Wells Notice sent to Coinbase, their response to the Wells Notice [42:44] What is the timeline and enforcement process now after sending the Wells Notice to Coinbase [46:33] Politics on both sides of the Coinbase argument Today's episode is sponsored by: Stream by Alphasense Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts, powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have an experienced buy-side analyst conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts 1-on-1 and get your calls transcribed free-of-charge—all for 40% less than you would pay for 20 calls in a traditional expert network model. So, if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening, and we'll catch you next time. For more information: https://www.streamrg.com/

Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are, and you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology. Plus, they provide competitive rates on expert call services, and you can even have and experienced byside analysts conduct the calls for you. But that's not all. Stream also provides

the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrg.com to learn more. Thanks for listening and we'll catch you next time. All right. Hello. Welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, would mean a lot. If you could follow, rate, subscribe, review all that jazz, wherever you're watching

or listening to it. With me today, I'm happy to have my friend and the founder of Capital, Chris the Muth. Chris, how's it going? It's going well. Thanks for having me on, Andrew. Thanks for coming on. Let me start this podcast the way to do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing in advice. That's always true, but particularly true today. We're going to go through. We've got a lot of stocks in situations to talk about. All of them have some type of legal situation involved, and we don't want to get involved

in a legal situation ourselves. So everybody should just remember not investing advice. Please do your own work, consults financial advisor, everything like that. And we are talking today, what is it, Friday, April 28th. Is it April 28th? I always lose track of it. Friday, April 28th, end of the April. It's been a kind of interesting month, strange month on the heels of all the banks failing in March and everything. But I just want to turn it over today. What's on your mind? Well, the literal answer of what's on my mind this week is Spectrum Brands because they are in court. I have been listening in every day and trying to kind of glean anything I can from

their antitrust suit. They were sued by the Department of Justice. They are in court this week. And so that's been probably my primary focus. Out of the corner of my eye, I've been thinking about AMC, out of the corner of my eye, I've been thinking about Coinbase and grayscale trust and a few other things, but kind of time-wise and focus-wise, mostly spectrum brands. Yeah, so let's just start spectrum bands. For people, we've talked about it several times on the monthly pod, for people who need a refresher, spectrum brands, about a year, maybe a little bit more than a year ago at this point, entered a deal to sell their hardware business to Asa Abloy, if I remember correctly.

And the DOJ opposed this deal. The reason they opposed it was part of the business they were selling was very high-end locks. Asa Abloy had very high-end locks. They were saying that this is going to be a monopoly if you guys combine the two high-end locks business. Asa-abloy and Spectrum said, hey, we'll sell the high-end locks business. Don't worry about it. It's a kind of small piece of their overall deal. Entered a deal to sell the high-end locks business to fortune.

And the DOJ, for reasons that are kind of unclear to me, said no. Not that they didn't necessarily approve of the divestures. They said the divester can't even count in this suit. like we're suing to block even though you have a divest we're not even considering the divest you're in the suing to block so they're in court uh the court date rites up today i know you've got a hard stop in about an hour to go listen to the court date some more so that's the overall thing you've had four of the five days i'll just turn over to you what your thought on how the trial is going the antitrust case all of that if you didn't want to spend your week in excruciating minutia around door locks i would sympathize and drum roll I feel like we're about where we were at the beginning. You know, if you look at it trading off this week, I mean, part of that is we simply didn't have a settlement ahead of time. I didn't predict a settlement, but you own some optionality. I think there was literally no chance the companies were just kind of shrug and

give up before court. But there was some chance, even a five or 10 percent chance that the companies could accept a settlement from the government on something that subsequently should be settleable. That went away. So you kind of had an embedded call option. that expired worthless as the court began Monday 10 a.m. were in court. I would say that as everybody started, the sincerity of everybody's view was reinforced and the seriousness of these people. There's nobody who's obviously stupid once you get to kind of this level. So I find that in almost every case and Twitter, a much more entertaining counter example, was one of the very few times that I was not convinced at least while they were speaking about their own side.

I mean, once you get into this scale, I have to kind of balance both arguments and then I'll have my view. Maybe my view is 90-10. It might be very one-sided, but at least while they're speaking, I'm like, you know, that's, that's, that's, that's, that's, that's, that's, smarter than just the average kind of conversation you hear in an elevator. Like, these are serious people. They spend a lot of time getting ready. We're back in the world of serious people who've thought through this. The government was really influenced by the fact that the DOJ, A.A.G had a big speech anti this type of divestiture in the middle of this review. So there was kind of a political, you know, if you look at the kind of thin political level of the government, a DOJ, an aggressive, progressive, progressive.

of antitrust enforcer who's kind of playing catch up with an FTC that right now is not only a 100% Democrat, it's 100% Yale Law School Democrat, three people who are, and I'm trying to get through the sentence without too many pejoratives. They're one thing, and they're that thing very much, and he's trying to play catch up. And so the people working on this case kind of had a political incentive right in the middle of the decision on whether or not to accept a settlement that sure seemed almost comprehensive. And then the issue is whether or not the foreign bits and pieces are necessary to the North American doorlock business that's being divested in whole to a single non-private equity buyer that happens to be a company that looks in size and scale

and sophistication to be at worst awash from where it came. It might be more competitive. it was in every subjective sense what the government said they wanted. It is a clean sweep. And the buyer seems happy with this deal. The seller seems happy with this deal. The original merger partners seem committed to the deal. So it seems quite good. Four days in, the tensions lie around business executives who are very happy to explain themselves in the kind of clunky process of being a witness on the stand where the government puts yes, no questions. And I think everybody's sincere, right? These are lawyers who, if you said, is statute such and such, they have a yes, no answer. These businessmen never know what's going on for sure. The market's constantly changing.

The competitors are constantly changing. What do these customers want? They don't know. They're always winging at some extent and they don't necessarily want to say that on stand. And if you give them a moment to explain things, they're very competent, smart, accomplished people. they're happy to explain it, and they just hate these binaries on things that are not susceptible to a yes, no answer. So it's kind of talking past each other in that way. The government thinks that they are Sherlock Holmes who have discovered an amazing clue when there's a hot dock, when there's some notes that seem to be saying something. But in a couple dimensions, it says far less than the government thinks.

So middle managers in some company that has a huge amount of their business in the U.S. Has a lot of kind of corporate kind of Harvard Business School McKinsey speak about globalism. I mean, it's just kind of the kind of thing you say if you're at some conference and you're talking to your Vietnamese distributors. And so they'll kind of do this litany of the need and benefits of globalization. And some of these countries, they'll tick off on the list, have like zero sales as like no part of what they have. actually do. But they're not the kind of people whose vernacular would be, you know, screw them foreigners. Let's just focus on where we're getting the money. Like, it's not how they talk. They talk about, you know, kind of, but it's, but it's poetical. And they say this poetical

language. And then the government says, ha ha, gotcha. You need globalization to sell a lock in New Jersey. They don't. And they don't think they do. And they're happy to explain it. but they're both put into this yes, no, kind of stilted formulation in trial, and they use poetry about globalization, and the combination makes the government think they really are on to something here, and they're just not. And the judge will see through that or she won't. Let me ask you quick. So I think the one thing that you have listened to way more of the trial than I, but the one thing that I think jumped out to me. I can't remember exactly when, but I think the judge said something along the lines of, hey, government, like, I understand the precedent that

you're trying to set here, but I'm not sure this is the case you want to set that precedent on. And to me, I heard that and I just heard the judge saying like, hey, government, I understand what you're trying to do, but this case isn't, this isn't the case for that. And if you, like, make me rule on this case, it's going to set a bad precedent for you. Was I reading too much into that? Was I just remembering it? You weren't, but there's two things about, let me just focus on the judge for a second. There's two things that I need, one clarification I need to make and then a positive, negative and positive. Clarification.

There was an earlier judge. They switched. The earlier judge had some very promising language indicating how novel the government's case would be. We got further with the earlier judge on something that I thought was very promising for the companies. And then the judge changed up. So my recollection was that we got farther

with the line of thinking of how unusual siding with the government would be with the earlier judge in the kind of preliminaries leading up to the trial. In trial, the biggest negative would be this is a judge who I think by background and writing would be fair to describe the left of center, certainly a Democrat and progressive Democrat, not in ways they think are that applicable to this case, I mean, but takes the government very seriously. Has made numerous comments about how she, like the government lawyers, make a lot less money than the private sector lawyers.

So there's a certain kind of camaraderie, more plural pronouns talking about her and the litigators for the DOJ. And she's very new as a judge and her history is as a litigator. So she intervenes in the questioning more than any judge I've ever heard in kind of charming, quirky ways.

I mean, she's the only kind of comic relief fun part of this trial. In one of the trial talks she had, like, we're delaying the trial by a couple hours, or by a week or something and there was a line like and the government shall provide uh shall provide the company two staplers to like make up for the delay and i remember saying you need was like was this a joke like who who put this in is this a sign i've never is she making fun of someone i've never seen this before she's fun and she's funny she's clearly extroverted it's a little

awkward when you're a lawyer in such a case because she's the decision maker right so she can be as loose about language as she wants and then they have to kind of decide how much they want to participate in that. As a litigator, she was somebody who really indulged in being part of the bar socially, like always wanted to, like, interact with the people on the other side outside of trial. I mean, I think she was, I think she had a lot of fun as a litigator. And I think as her role changes, I think she's kind of catching up to it being a different role. I mean, nothing I think is inappropriate anyway, but very busy with the hot takes.

The most amusing part of the whole trial so far is because this is her first big trial, her mom's listening in, and during breaks, offers commentary that she'll sometimes mention. You know, if somebody's talking, she, her mom started, the trial was saying, you know, you're talking too fast and you're interrupting too much. And if somebody sounds like, oh, he sounds really Ivy League, or he's not letting the stenographer catch up. And so she kind of mentions her mom's commentary, which is fun. But also, odd. And so, So if I was going to parse where things stand in terms of her behavior, I think the parsimonious explanation is she will ultimately allow a divestiture and that divestiture might have some probably immaterial tweaks from how it was negotiated. She's asked a lot of questions about her role and whether she can change that contract. And she's asked extremely probing questions about the nature of the divestiture package. that were not on point to the acceptability or unacceptability aspects that the government wanted to talk about. And so it would be kind of perhaps strange. I might be overly or misinterpreting

this to be so curious about every nook and cranny of a contract, if she's just going to shrug and say, nope, no, you can't do that. The buyer wants it, the seller wants it. The government has a theory about why it's unacceptable, but she is probing, she's probing about everything, but probing and a very specific in a way that looks like a divestiture is part of the decision that she has the job of writing. The part of the trial that went maybe least well, from the beginning, we kind of started with government witnesses, with government questions. And it's an adversarial process, right? They can make their case look as good as possible, and then the companies undermine it.

I think it's on track. I think the companies will win, but I don't think it is obviously or necessarily so. And now, a quick word from our sponsor. Are traditional expert calls in the investment world becoming obsolete? According to Stream, they are. And you can access primary research easily and efficiently through their platform. With Stream, you'll have the right insights at your fingertips to make the best investment decisions. They offer a vast library of over 26,000 expert transcripts powered by AI search technology.

Plus, they provide competitive rates on expert call services, and you can even have an experienced by-side analysts conduct the calls for you. But that's not all. Stream also provides the ability to engage with experts one-on-one and get your calls transcribed free of charge, all for 40% less than you would pay for 20 calls in a traditional expert network model. So if you're looking to optimize your research process and increase ROI on investment research spend, Stream has the solution for you. Head over to their website at streamrrg.com to learn more. Thanks for listening and we'll catch you next time.

Let me ask two more quick questions here. Sure. So the first and just so this has been kind of my theory and I don't know if it's right or wrong, but generally when we talk about a case like this, right, a divesture case, you're talking about a merger going through, right? Twitter wasn't an investor case,

but you're talking something like Twitter versus Elon Musk, right? If your side wins, you get cashed out, basically, right? Twitter wins. They're going to get $54.20 per share, and the deal is over. If they lose, then it becomes a standalone company, and then you have to figure out fair value and everything. And there were lots of debates around Twitter's fair value. But on a win, you just get cashed out, and that's what you're playing for. One of the interesting things here is, you know, Spectrum brands, as we're talking about a $65 share price, just under $6 billion enterprise value, if they win this case and get to sell HHS, they'll get about $3.5 billion in proceeds.

So that is a massive, massive amount versus their enterprise value, right? More than 50% of their enterprise value. But it's not win and you get a flat cash number, right? If they win, you've got to figure out what the value of the remaining business is. And, you know, is the remaining business worth $2 billion, $1 billion, $6 billion? No one knows, right? But what I'm trying to say is I think one of the things, one of the reasons there might be opportunity here is because the typical arbitrages, there's not like a number for the

upside to plug in, right? that number kind of changes every day based on the value of the Remain Co and everything. There's not one number on the upside. So I think it attracts maybe less eyeballs or, you know, it's a little harder to hedge or think about, am I thinking about that incorrectly or what do you think? No, I agree 100%. And, you know, I had a stint before managing capital of being kind of a consultant to ARB funds. And it was interesting to watch the focus different between.

focus difference between prop desks at the time, kind of ARB specialists and so forth, and mandates are a big part of the industry and what creates supply and demand in individual securities. And there were, you know, fundamental people who think about a given industry who have no interest or curiosity in ARB. And there's ARBs that part of their mandate have to be kind of meticulously hedged, kind of arithmetically hedged in ways that this does not allow. So this kind of has some shot at slipping through mandates a little bit. And then prop desk can always call in more capital so it can be very indifferent on IRAs as long as they're very, very confident of the conclusion. Right. So this doesn't fit tidily into any of those

buckets. You know, it's more process than most industry specialists would be interested in. It's more fundamental noise than most ARBs would be interested in. You can make some suppositions. I think winning the case would be good. I think losing the case would be bad. And you can kind of start to put, kind of build a constructive numbers on those. But all the numbers I could come up with, you'd have to then say,

give or take $10, right? Like, it's not, it's not something that should be subject to any false precision. I was going to, that was the next place I was going to go. So, yeah, I have been running and, again, reasonable people could add or subtract $10 to either of these numbers. And I don't know if I have a lot to push back on, but I've been running, if the company wins, the stock kind of trades to 80.

If they lose, they kind of trade to 45. If I put those numbers into my formula versus today's stock price of about 65, that says the market is pricing this at a spectrum at just under 60% to win. What are based, again, we're four days, we're four days into a five-day trial. So you've got one day left. But where are you kind of plugging the odds of the company winning at? And by the way, we have separately, without coordinating assumptions, come to virtually identical answer. I think I think 80 is a very reasonable upside.

It could eventually be more. I think 45 is a very reasonable downside. And the way I'd say it is, you could probably sell it for 40 at the worst possible our puke moment. And it probably settles out closer to 50. So, yeah, 45, it's really, really good. but I'm at 80. I've been at 80 kind of, and I don't want to be stale here. I've kind of been at 80.

You know, when it was trading in the 40s, I was at 80. It's tough because, like, you look at this, the Remainco, if they win, they get three and a half billion of proceeds. So the Remainco is trading for $2.2 billion. Yep. The Remainco did $274 million in EBITDA, but they said, hey, look at 2021. Our go forward earning, in 2021, they almost said 400 million in EBDA. They've said, hey, we think, you know, 18, two years out, we could get.

to over 400, like what type of global pet care, home consumables, like, those don't trade for 400, even out. This would be under six times. Those don't trade for six. They trade for like, you would think 10. So do you believe the 400, even if you believe the 300, 10? Like, there could be a lot of upside there. You know, you could talk yourself into a lot of upside. Yeah. And then the two ways I'm soft on this are one, a management team is the management team that got you into this situation. So when they're talking about solving problems, their kind of behavior is going to correlate with what they've done in the past more than optimal. And we're not getting the money, right? I'd feel much better if you got a check for 80 than if you got whatever this hodgepodge

would be that I otherwise would have no particular interest in other than the discount that was created because of the antitrust uncertainty. Like, I'm here for the discount. I'm not really here for what's discounted otherwise necessarily. And these guys probably deserve some discount, given they're the people who got themselves into the situation that needs to be clawed out of, that discount shouldn't correctly be zero, even as these problems go away, because that's probably have some other damn problem. So I don't think these are A plus players with an A plus business model that was something we would otherwise gravitate to own. Like, say it goes to 100, I don't think you and I would be excited to own it from 90 to 100, like,

based on what might drive it upward. So it's kind of, it's a little bit noisy in that respect. And then the other way, just back to the event for a second that's noisy, to be super clear about, I believe based on what I know that the deal should go through, based on my understanding of the antitrust law and this deal, I think the chance is closer to 100%. The discount isn't really, because I'm confused about the law or the facts. I think the facts are pretty clear. The law is pretty clear. In trial, we're seeing some things in the category of hot docs, but they're not really dock. They're kind of warm post-it notes more than hot docks, but what the government would perceive as hot-docks. So I know what they're fired up about is the combination of they see what they think they're looking for with the Henry the second, you know, well, no one read me of this turbulent priest kind of line of the boss has conveyed his desire for you to do this thing. So the political advantage lined up with the evidence they thought they were looking at.

Okay, fine. So why am I 80 and not saying 100 or 995 even? And the answer is a judge who's been on the job for a few months. Like, I have no priors on her. I happen to be in almost every particular looking at a decision maker who's different than me in almost every respect you could imagine. I find her likable and quirky and like I'm not, I don't mean this in an antagonistic way.

my view of the antitrust law is probably not that salient a predictor of what she will say and do, if that makes sense. We just don't know. And so that's why I want to leave lots of space for me to simply be wrong in what happens here. An interesting way I was kind of thinking about it was I think historically, if you look at the government bringing a case, the government's like about 60 to 65 percent likely to win a case that they bring because the government does not want to.

to get into the business of bringing losing cases, you know, if you think about the individual incentive at the, at the department, it destroys your career, it destroys it doesn't destroy, but it's a bad mark. It's going to be a limiting factor in your career politically. It's bad every which way. Sets bad precedent for cases. So they tend to bring cases they're more likely than not to win. But I do think there's two things. A, you can read the facts of the case and see that they're really in favor. And B, like, I do think over the past couple years, the DOJ and FTC has got more into, hey, let's bring cases that even if they're not winners just make a political statement by bringing them. And I was thinking about that. I was like,

look, this would probably, this is trading, let's just call it 50-50. And it's probably trading 50-50 because people are anchoring to that base case and they like don't want to step out on a ledge even if you read the cold hard facts and look at this and say, hey, you know, this is a great case once you get the divesture. And it kind of reminds me to Twitter a little bit, right? Where the market was almost always pricing it at 50-50 and we were going crazy to be like, read the dogs. Like you can't know everything in a case, but my God, Twitter is just smashing, Elon, like, generously, I think Twitter is 95% to win this. And that's like being generous of the unknown unknowns, but you read these docs, just, you've got a haircut for, there are docs we're not going to see. We haven't had lots

of rulings from this judge, but, you know, it does seem like overwhelmingly likely that spectrum's going to win this. My caveat to the caveat is, although she is a very, she's far enough from me politically background and so forth that I'm more humble than usual about, oh, why don't I just, why don't I just come to a reasonable conclusion and then guess that she'll correlate? It's not a political case. I mean, it's about the least ideological thing. I mean, I keep thinking, oh, my gosh, does anybody really care if rich people play slightly more for fancy locks? And one of the things that's slightly awkward on the stand is it's very clear once the topic of luxury comes up in a topic where the standard thing, like the best

basic lock you could get would be the kind of lock you'd get inexpensively on a bodega or something. It's actually the commercial designation, slightly more durable than the residential. Fine. Then they have to dream up, hey, rich people have all this money. How can we get it? Let's just kind of come up with new stuff. The stuff doesn't matter. The rich people don't matter. Their money doesn't. It's all just kind of the idea of luxury is this artifice. And then the government's swooping in to defend them on something that seems to be trivial, kind of like several orders of several layers of trivial. And of course, the management doesn't want to say this, right? So they have to kind of be solemn about it. But the extremity of the inconsequentialness

of this is funny. And it's like, is this what they care about? So the fact that, I mean, she is a Democrat and appeared to be picked on two or three or four criteria as kind of a, she is a gold star DEI higher. And I have to say, respectfully of her, like she also seems like she happens to be a smart lady. So she doesn't only have the DEI stuff, but she has every DEI thing you could imagine.

That doesn't seem to be salient here. So the fact that, let me just pull it one tiny straw. if there was any aspect of a progressive Democrat woman, immigrant background, lesbian, and she kind of talks about all these. I mean, her identity, she really brings her whole self to work in terms of inserting who she is into her courtroom. if that had any salience on this case at all, I think it basically doesn't, but a big part of the

government's cases, can these people at the divestiture buyer handle this market? And a key, several of the key, but a key executive is a woman who I found highly credible and can totally handle this. So it's like, can this lady handle selling locks in America? It's like, yeah, sure she can. She thinks they can. They're paying the price they can. They think it's a good buy. like there's no reason to think it wouldn't work and it seemed just just a molecule of heavy handedness on a on a impressive female executive and her capability of handling jumping over what seems to me like a kind of low bar might factor in a little bit maybe in favor of the deal even but that's the only one I can come up with yeah I don't know I just I do I have thought it was

funny the whole time imagining like Bernie Sanders on the campaign trail being like We need to protect the rich homeowners from corporate monopolies in high-end doorlocks. Like that is what this, it's just, it's really funny to me. Let me move on quickly to Activision Microsoft. We've talked about just about every, every podcast we've done. Might not be talking about it anymore going forward, but, you know, that's because earlier this week, the UKCMA, I think kind of unexpectedly ruled against my, against the Microsoft Activision deal, sending the deal into complete limbo. I say unexpectedly because a few months ago, the CMA had really changed their views on the merger review. They were limited only to cloud gaming, if I remember correctly.

And people thought that was a sign that they were going to, Microsoft had made enough concessions that they were going to allow this through. No, they said, hey, this will limit competition in cloud gaming. We're not going to allow this to go through. The stock, you know, it's funny because a lot of people had said Activision was performing really well. The downside had come up a lot. And I think that's right because when we started talking about this, the stock was 75 on the, hopes that this deal would go through at 95. Right now, the stock is just a hair under 80, and nobody thinks the deal is going through

anymore. So obviously, the downside did come up a lot. I just want to get your thoughts. Microsoft and Activision have both said, hey, this ruling is wrong. I think there's been a lot of press. Maybe you and I follow more like let the deals go through press than normal, but I think there's been a lot of press that says the CMA, they kind of embarrass themselves with this ruling. There's not a lot of logic behind it.

Both Microsoft and Activision have said they're going to try and fight this. and get it through. The history says it's really tough to overturn the CMA. I think that's what we always said, was our big concern with this, not the U.S. court case that if CMA ruled against them, they just wasn't going back. So I've ran about a lot. I just want to ask you, what are your thoughts on Activision Microsoft at this point? I think that the CMA appeal process is about the most procedurally implausible of any

of the reviews we look at. It's a big difference. You know, we're in some ways similar to Europe, some ways different. And in one way, the government comes after you in America and you take it in front of the judge. And I think the government deserves no deference. They have to be right. And if they're right, then they should win. And if they're wrong, they should lose.

And in Europe, these guys are the representatives of the king. And when they say, off with your head, your head comes off. And you say, okay, who do I talk to now? It's like, your head has come off. There is no talking. Yeah. And so it's 99.99% that. And the appeals process is not a do-of, right?

It's like, is this plausible? Is this, was this handled the correct way? It's basically appealing like, hey, was there political corruption? Or, you know, did the judge go out drinking and write this while he was drunk? It's not like, was this a bad decision? It's was this, was there active malfeasance, I want to say? Yeah, it might be the word. Yeah.

An analogous process in a different country where somebody's like literally handled stacks of currency in a manila envelope. Like, that would be something you'd appeal. And you'd mention, like, here's the photograph of the manila envelope filled with currency that the guy took. Like, you could bring that up. But, like, I really don't like the decision. I think it was dumb. I don't think it's what antitrust is for. This isn't the right market definition. No, that doesn't work in C-A. So it's interesting to see if this was an example of coordination where the U.S. wanted to stop this. The Europeans had the tools. And so the U.S. U.S. administration used a foreign government to act against American citizens and American

businesses to stop something they wanted to do. I think that was the risk with this deal. And it happened. The executives involved on both sides, especially the Microsoft side, I think we're really confident. And they gave a few winks and nods. I'm impressed. I am a fan of their senior management. I think that Microsoft is an impressive company with an impressive CEO. with an impressive head of this business for them. I just really like these guys. And they went beyond kind of boilerplate. We're going to give this a try to a little winks and nods

that they kind of, they got this one. And guys that really generally are correct. And guys, and I noticed this about their gaming, the guy who's had their gaming stuff, you know, I just followed every word he said during this deal about him very impressive. He was more casual with statements against interest than most upper management guys are like when they make goofs. Now, partly I feel like he has kind of a spokesman role basing the gaming community. But he has a very, I find impressively, I mean,

one of the things I always look for when I'm listening to when I'm trying to judge statements is like, how many statements against interest can you find so they're not just bullshitters who say good things all the time. And this guy gets really high marks for, like, having a distribution of his commentary that sort of over time matches the distribution of what happens, even though he gets things right or wrong. So I think they thought they could get this and they couldn't. And it was an example of something I think the target business improved throughout the course of the deal. And it should probably trade out our pants into fundamental holders. Is there some chance that there's a political solution with the UK because Microsoft is such an important company?

I don't think so. I don't think Microsoft is big enough and the UK is small enough that the political level can say, hey, I know we have this process and we have these regulators. We can't handle that. There's some precedent for a total regulatory block becoming redeemable just when the deal and the parties are so important relative to the size of the economy and the kind of counterfactual need for spending outside of the deals they're trying to do. And I just don't see it here. So I think it's pretty dead. I think that the company's kind of ineffectual spatting publicly

against the UK's actions looks like weakness, not strength to me. So yeah, dead deal, valuable target, moving on. Yeah, I just, so both like, this. The CEO of Activision said in an interview I saw like two days ago that they're, they're ready to fight this. They're gearing up to fight this. Microsoft has said they're ready to fight this. The two questions I just, as you went through, I don't know how they fight this. And then the second question I have, I believe the merger outside date, it's either,

I think it's July, it might be June. I might be getting my months confused, my month starting with the J confused. But, you know, the merger outside date, both, it can be extended, right? If both parties say, hey, we want to extend this, we can. but any review of the CMA would have to go past the outside date. And I just wonder at this point for Activision, it's been 18 months, their business is performing well. Like, do Microsoft might want to extend this because this is really strategic for them. Even though it's a big deal, it's kind of a rounding error for them.

It's very strategic. It's, you know, it's a great target. They probably don't want the precedent of, hey, governments can block a kind of vertical integration deal set for them. But if I'm Activision, do I want to extend this another, you know, as you said, it's probably dead. It's 95% plus dead. We have to take a long shot appeal. Do I want to extend it? Keep my company frozen in a merger limbo? Probably not. So I have more. Like, does Activision just walk and take that $3 billion break fee? Or is there a chance of Activision goes to Microsoft be like, hey, you want to extend it? Great. But we need more, right? We need you to bump it from

we need you to let us pay our shareholders a $5 dividend right now that you're going to fund or something along those lines to account for time, value of money, uncertainty, unlikelyhood, all that sort of stuff. I do wonder if some type of bump or something is in play or if Activision just times this out and at the end of July says, all right, we're walking. Thanks for playing, but we've got to go. It'll be interesting to see. I mean, I think the sensitivities right now are everybody making sure that they're meticulous about living up to their agreement duties. So a lot of the behavior at this point is let's be perfectionist between now and the walk date so that there can't be any question that we've done everything we can to get it done, even if it's one in 100.

Secondly, there's probably some sensitivities on the Activision side about management going forward and kind of what their plans are in terms of leadership if it's not part of Microsoft overall, especially given the fact that I think it really was sincere recently that they thought that they could get this done. So that might be a little bit of a pivot. I mean, big companies, they always plan for everything you'd think, but that kind of adjusting to standalone business. Secondly, there's one more.

situation I want to cover and then I know you've got a hot to the spectrum trial that we've been talking about. But you know, the one thing I think, I don't know if we have time to talk AMC8 because that is a wild situation there. But the one thing I know you and I've been looking at, not really doing too much with, but just thinking about has been Coinbase. I think you've also been doing a little bit of thinking around GPTC, very scale Bitcoin trust, but, you know, especially Coinbase, just for people who have them, I'm sure everybody knows who Coinbase is, right? It's a large company. But they got a Wells notice. about a month, month and a half ago, their response to the Wells notice has been very strange.

The stock is down at this point, it's really been cracking this week, I think in part because their response continues to be strange, but it's still a large company. It's still got a decent size market cap. The stock is down despite Bitcoin screaming kind of higher over the past month. I've rambled a lot. For people who are listening, you know, maybe describe what a Wells notice is and how serious this is and why we're both, I think we look at this and say, hey, we're coming into this. maybe not being like full experts on the business, all dynamics, but we know what a Wells

notice is. And generally, stocks that gets Wells notice, you know, they're not down nine. They're down 90. Wells notice is notification to a target of prospective regulatory actions. So they intend to bring an action against the company. You're kind of a little bit no man's land because it's certainly. certainly material. It's been disclosed, but we don't know the substance of it. But we kind of do because the SEC chairman has focused on crypto. He has, I don't, you could say all sorts of

things about him, but I don't think you could say that he blindsided anybody if he comes after Coinbase right now, right? You can look this month at his charges against BetterX, and I think you could hit Find and Replace in Word and set that off to Coinbase. Pretty devastating. And then when I was in D.C. and I was kind of thinking about regulatory risk for others, I was very, very focused on personnel. One of the the things that you could track based on public information is that some people are basically litigators, some people are basically settlers, and you could get a lot of a sense of where things were going by who is working on. When Gary Gensler thanks people for their help with

crypto enforcement, it is a long list, it is an aggressive list, it is packed with the sharkiest of litigators. These are law enforcers. These are not the kind of nice people who kind of sort things out if you have a problem. These are killers. He has a long list of killers that he thanks for their support. And a misperception sometimes when somebody's in this situation and often wants to justify themselves and pick back is you can pretty much respond. You can kind of bring your war counsel or your peace counsel, but the government doesn't really do both at the same time. And so the SEC is giving every possible indication that this, is gearing up for a big fight, they're noticing, they're acting, and they're coming for them.

And then the company's response is unlike anything I've ever seen in terms of managing this situation. I mean, if they want to go to war, fine. But they're like, maybe we'll leave America or maybe we'll, maybe, you know, we're warning the SEC. Ooh, okay. I didn't know we did that, but we're warning the SEC down. So they're warned results TBD, but it's not, it's not the task.

I would take. You know, it's April, it's tax month. We just paid our taxes. And I'm warning the government. If they try and take this much money from me again, I'm putting in a lot warning. I mean, there are a couple cases. I mean, that's what, there are couple cases. Elon Musk warns the government. Mark Cuban warns the government. When they come after him, he wants to. But you got to be really, really rich. And you have to have really thick skin, have almost infinite reputational costs. insensitivity, but also either really control the public company, have a fan base that is willing to accept it. But there's very few managers of a public company whose audience can tolerate that. And now, a quick word from our sponsor. Are traditional expert calls in the

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research process and increase ROI on investment research spend, stream has the solution for you. Head over to their website at streamrrg.com to learn more. Thanks for listening and we'll catch you next time. If this was like early 2022, right, before we had all the crypto blowups, like maybe you would have the political support to, you know, I could imagine a lot of a lot of people, maybe on both sides, probably on one side more than the other, but I could imagine a lot of people reach out being like, hey, you know, free market, this company, this is the government. cracking down, like you could find thousands and thousands of retail people who were trading on crypto, who were making a lot of money trading crypto, who coinbase could round up and they

could settle under. But, you know, in the wake of FTX and all these blowups and crypto going from 60 to 15th, like all these coins that rug pulled, like rug pulled literally, hey, it was a Ponzi scheme and they pulled it out from under us. It's a thing in crypto. Like, it's hard for me to imagine there's going to be a lot of political support for a single company pushing back on the SEC for enforcing laws. It's surprising. So I guess the one question that I have, again, this is still a work in progress. We're still thinking through it.

The company literally yesterday responded to the SEC with this, hey, we're assuming the SEC, we're going to come for you. But, you know, Coinbase, right, they got the Wells notice. I think it was five or six weeks ago. What is the enforcement process? So the Wells knows who says, hey, we think you're trading securities and you're not a registered broker dealer. It's basically we're going to shut you down and we might find you.

What does the timeline look like in what? would the SEC do? I think BetterX Global is kind of the model. So there'll be a complaint. It'll be filed in the next month. It'll come from the SEC. It's going to look real serious.

And they take them to court. And the total lack of contrition or deference from the company means that this is going to be war. They're not going to really be. looking to save them. I think tips to the public and kind of breadcrumbs to say these are the security these are these are the uh these are the crypto assets that will be considered securities these are crypto assets that will be considered commodities will guide them to not have as gentle

a crash as possible from day one to the complaint because I don't think they really necessarily want endless number of kind of mom and pop. Hey, Penny. Uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, uh, a mom and pop destruction the day they file this thing. You say that, but tell me if I'm wrong, I think they're pretty clear Bitcoin commodity. Yes. Maybe Ethereum commodity.

I'm not sure on Ethereum, but everything else is a security. You say mom and pop, but I mean, I don't know many mom and pops that are Bitcoin, but outside of Bitcoin, like how many mom and pops are trading doge coin or some of the ones to,

this is a family podcast. I'm not even sure if I can say their names. I probably can. But, you know, how many mom and pops are in something more exotic than Bitcoin. I can't imagine that many mom-pops are even in Bitcoin. Yeah, no, I think the government feels great. You know, you look at the FDA, and there was a case around phytomide that they coasted on regulating, maybe over-regulating for decades and decades and decades. And there's

always this one, like, here's what happened when the regulator leaves the free market alone for five hot minutes. And it is death and destruction. Therefore, I mean, that was a cudgel for decades and decades with the FDA. FTX is that this is what happens if you leave the free market alone. That's FTX and they're going to have decade. I mean, we are, we are months into something that they're going to run on for decades in terms of their need to manage everything. It's a commodity. It's run by the CFTC. It is a security. It is run by the SEC. And everything gets in line. And they, you may agree or disagree, but I can tell you, it's sincere. And they're going to act that and they feel every political wind at their back because of FTX.

FTX is great. But even, I mean, FTX is the main one. That's 98% of the battle logic reasoning here. I mean, there's a lot of other reasons, but that's 98% of the political push, I would say. But even something like First Republic and Silicon Valley Bank, right? Like, hey, we kind of regulated these things with a light hand and they blew up and the government had to intervene to prevent, you know, literally billions and billions of

dollars in deposits. And a lot of that was crypto deposits, but a lot of it was also. mom and pop deposits right if you had a million dollars in the bank that's over the limit you would have taken a haircut if the government hadn't stepped in it and kind of saved these guys like I do think the wins at the back of hey we need to make sure that people aren't just running completely unregulated financial exchanges handling of people's money I mean the stuff around staking and stuff I do think there are serious issues and concerns there and I think the government's going to say hey if we let staking go go like crazy yeah maybe coinbase isn't the issue but we're

going to have you said mom and pops it's more like bro and bros but we're going to have a lot of people get rug pulled and stuff and yeah let's just shut it down now and make sure we're regulating it and but just one more thing here my favorite thing was uh one of the crypto people said hey gary cancelor doesn't even trade bitcoin like how can you have somebody regulating bitcoin when they don't even trade it and lots of people said lots of things one of my favorite was like i i instantly thought of hey like nobody jumps out of an airplane without a parachute but we can still regulate, like, airplanes safely descending. My favorite was somebody said, hey, nobody at the FDA takes meth, but they can still regulate meth. It was just crazy to me. I think it's a

terrible miscalculation. I think the demographic and political ghettoization of Bitcoin hurts them, and they think it helps them. They think it's kind of self-reinforced. There's some reflexivity and the boldness of the Coinbase CEO, I think is indicative of somebody who within their echo chamber, they're like, who are these outsiders to tell us what to do? And it's like, we're smarter than they are. We're richer than they are. But I think the libertarian-ish techno people, their isolation is one, leading them to be bolder, but it's also leading the regulators to care less.

Like, there's not going to be that much collateral damage within this administration's key constituencies. And a skeptic might say before FDX, there would have been a little bit of collateral damage. But post-FTX, there's just no collateral damage from. Yeah. Yeah, I mean, FDX has already given the political donations they need to do. So there's not a lot of downside for this administration. And even the fact that Bitcoin people are so concentrated in Bitcoin, right, their economic destruction is a lot of people who's like, hey, I brought bought this, what the administration might say is pretend money. Like if I, if my wealth had gone to like a billion dollars and then back to zero, I think I'd get very little sympathy from them.

And if I hadn't done anything, it's not like my having to de-lever hurts a lot of their other economic interests. So I think I think the SEC is going to be at least as bold confronting Coinbase as Coinbase sounds confronting the SEC. Can you correct me if I'm wrong? I believe if the SEC rules that all of these securities were, all of these tokens, whatever, were securities and Coinbase was trading them like not securities. I believe since they're not registered, like one of the end results is anyone who took a loss on any of these things, the SEC could basically come back, could come at Coinbase and say, hey, you traded these, they were securities. You didn't treat them like securities. You didn't trade them with all the regulations around securities. You're responsible for any losses anyone took on these securities that they were trading on your platform. And basically, it becomes a class action. And you know, I just said any losses. So it's bankruptcy. And then, you know, everybody gets an unsecured claim on. Coinbase. Am I kind of thinking about that correctly or that might be too dramatic. Please tell me if I'm a little bit spoilt on, but I do think that's in play. It'd be short of that based on settlements that I think are off the table on both sides.

So yeah, I think it could be careening towards that kind of a conclusion. You'd kind of be looking at, hey, the SEC's holding this over you like the sort of Damocles. And then it's, hey, Coinbase settle for $4 billion and agree to all these changes, which you just absolutely. And I think Bitcoin trades up that day? I'm not in the crypto prediction business. I normally wouldn't be, but I think the impact of putting everything squarely in the securities, unregistered securities bucket is more painful than Bitcoin is a commodity.

I mean, I think that that that. It trades up on the certainty that everything else is security, but Bitcoin is commodity. So, yeah, that makes sense. Look, it's almost 10. This has been great with forward three really interesting. interesting topics. I mean, Activision Blizzard is probably done for the podcast, but I would not be surprised if next month we're talking Spectrum and Coinbase, because these are really fascinating topics. It's certainly on Coinbase. I know that's a big work in progress for us,

but Chris, I'm going to let you talk to. And maybe AMC next month. Well, you know, that's at least 60 days away. So the good news is we have time and the other good news is there's always fireworks and popcorn with AMC. So I'm going to let you hop to day five with the Spectrum trial. Chris, thanks so much for coming on and looking forward to China May. Great talking with you. Bye-bye. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.