Chris DeMuth's State of the Markets August 2023 (podcast #191)
Chris DeMuth is back for his monthly state of the markets. For this August 2023 edition, Chris provides his take on the FTC in general, Horizon/Amgen case, deep dive into CVRs and, of course, the Microsoft / Activision deal.
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Transcript begins below
Andrew Walker: All right. Hello. Welcome to the Yet Another Value podcast. I'm your host, Andrew Walker. If you like this podcast, it'd would mean a lot of you could rate, subscribe, review, wherever you're watching or listening. With me today I'm happy to have on my friend and the founder of Rangeley Capital, Chris DeMuth. Chris, how's it going?
Chris DeMuth: It's going great. Glad to be here Andrew.
Andrew: Glad to have you kind of back in action. It is August. What is the date? It is late August. I never know the exact date. August 29th. We are recording your monthly State of the Markets on August 29th. But because we're recording that, I'll start this podcast the way I do every podcast. Quick disclaimer to remind everyone, nothing on this podcast is investing advice. Always true, but particularly true today because again, it's the State of the Market. We don't know where it might go. We could talk about any stock on earth. So we'll be hitting on a couple of extra stocks. Please do your own research, consult a financial advisor. That out the way, Chris, August 29th, as you reminded me, what is on your mind in markets today?
Chris: Well, Andrew, usually not a lot happens in August. It's probably one of the slower months in the year, generally, especially with regulators. If people are not working in August, regulators are really not working. But there's been a lot of stuff happening. There's been real progress. There are regulators at work. There's stuff going on in Activision. There's stuff going on in Horizon. There are important cases and important developments in those cases. So yay for taxpayer dollars paying regulators and bureaucrats to do stuff there for better or worse doing stuff.
Andrew: It is funny. I agree with you. And it's funny, like this August, it feels like there actually was a lot happening, just off the top of my head, like AMC 8 finally closed. We could have been talking about that for almost a year. I think we had talked about it several times. There was the massifier in Hawaii, which is an absolute tragedy, but from a Hawaiian Electric, it's a hold co with a subsidiary and a bank and lots of different bonds and different boxes. Like if you're an event or a distress investor, that is a lot of work getting heaped on your plate. Every month we say it's the last month we're going to have Activision to talk about and every month we've been wrong so far. Horizon Therapeutics, actually let's start there. Over the summer, I think you and I have both talked about how this FTC has racked up, we're not the only ones who talk about it, tons of people, they've racked up a string of losses in core, right? They've brought a lot of novel suits, basically where I think a lot of the underlying thought behind it was big is bad. Our antitrust thought is big as bad. We're not going to stick by traditional horizontal merger guidelines. We're going to sue Microsoft by an Activision because it's a vertical merger and Microsoft's really big. We're going to sue in Horizon and Amgen's case, we're going to sue Amgen because we're worried about future bundling even though Amgen has no desire to do it, no history of doing it. I'm not sure if it would even make sense, but so they were going to sue. They lost against Activision, and then just last week on Friday night, kind of a dump in the court, they said, "Hey, we're not going to pursue this case. We are going to take a commission of recommendation." I think they said, "We're going to take to the commission of recommendation to settle", but I'll pause there. What do you think is going on with Horizon Therapeutics Amgen FTC?
Chris: Well, if you look at our government, you look at the three branches and this kind of fourth pseudo branch of the administrative state. There's this war going on between the judiciary, which I think of as kind of the most serious branch with the most serious people who are the most likely to stick to their jobs and the administrative state, the least, and that battle's gone all the way to the Supreme Court with decisions curtailing the power of the administrative state. And they've just been getting loss after loss after loss of the FTC DOJ, specifically on antitrust, but also on other regulatory issues where the idea is, let's not just take the full force and might of the federal government, but let's basically deputize the balance sheet of the private sector to do our bidding in areas that have nothing to do with the statutory intent or the mandate of those regulators. And some of these agencies look like they're taking the hints a little bit. Like there's kind of a range now of not just getting repeatedly punched in the face by judges, and what's interesting over this past year is it's very hard to caricature or dismiss the judges that are pushing back. These are not right-winger, federalist society, political opponents. These are old and young and men and women and Republicans and Democrats, liberals, conservatives, gay and straight, all sorts of different kinds of Americans doing their job, sticking to the facts and the law. Smashing the government's theory time after time after time, somebody's got to notice.
Andrew: Like one case that you and I are looking at, which I don't think we're going to talk about here, the judge is like a Reagan appointee. And I could see if you were like, "Hey, in one specific case, the government lost", if you're an FTC person and you say, "Hey, we lost, but the judge was a Reagan appointee." Because you synonymize with, "Hey, free markets, government deregulation." He was a Reagan appointee or he was a Bush appointee. I could see how you'd be like, "Well, you know, we got a tough draw here. Let's go to the next one and see if we can get him more." But as you said, I think Microsoft Activision was a Biden appointee, was the judge, was it Obama? It was a Biden appointee. So I do remember people said during the Microsoft Activision trial, "Hey, this is a Biden appointee." Maybe the antitrust was a leg of the Biden administration. Maybe they checked with all their judges. "Hey, are you okay if we go after people kind of on the basis, big as bad, are you going to block that?" And no, the judiciary kind of sucked to a normal, "Hey, I've seen this ruling before, here's what precedent says, here's what the law says, you guys can't go create your own theory." So yeah, they've just been getting struck down by a wide, wide array of judges on basically every new point they're trying to make. And it's calling into question, I think one of the reasons they're settling with Horizon and probably likely to settle with people going forward is when they lost that case against Microsoft Activision, Khan went in front of the House Republicans a couple of days later and they were saying, "Hey, why are you wasting shareholders' money doing this?" There were some pretty vicious, not vicious, I think fair-handed to be honest, media interviews where they were saying, "Hey, you're going after all these novel cases and losing time after time. Isn't this a waste of government resources? Isn't this a waste of your job? What are you guys doing? You're setting really bad precedent for the future." Anyway, I'm rambling. I'll turn it over to you.
Chris: Well, let me ramble a sentence or two further about what I think is happening because I've listened to almost all of these cases. I mean, one thing great about the COVID response was almost everything you can dial in remotely now. And so just the quantity of cases all the way to the Supreme Court that I've listened to, only half the cases I've listened to live in my life or in the past couple of years. And so you kind of get a sense thematically for the tone. And one of the tones I've gotten is set aside really contentious social issues where people do tend to have political views and partisan differences might make a big difference. When you're talking about antitrust and then also let's exclude customer, especially low-end customer facing businesses. It's fairly technocratic. It's kind of a serious kind of topic. And these judges, whether they're liberal or conservative, they tend to be kind of sincere, A student people who are problem solvers who other than politically contentious things kind of put their A student hat on and when you have companies willing to fully solve issues that they really understand well and then you have the government agencies half getting right even the basic facts of the industry and sounding really aggressive against parties willing to solve the problem. These judges have a side comments from the bench sometimes that really approach. What are we even talking about here? Like, "Hey guys, help me out here. I need to write a decision." The decision's probably going to be a lot of pages. I don't want to look stupid. I'm smart. So give me something. Cause you seem like you're screaming about something that they say they're just going to fix with a fix that sounds like it fixes it. How do you want me to phrase this when you seem to have kind of a political, almost religious animus and I have to write a decision about that? And so they just kind of tend to side with these companies that seem to be much more fact-based.
And so we've just seen that so many times. So most importantly, can we use that as a horizon lead-in? The government and the FTC is pulling their challenge administratively for Horizon, which seems like the most settle able of all of these cases. It's a completely novel bundling theory. It's untested and they'd be testing it against a Republican judge with companies that are resolute to fight this to the bitter end because this is the kind of deal they want to do, the theory would be a disaster. An apocalyptic disaster for the target who basically wouldn't be able to get bought with that point. And a disaster for the buyer that wants to do this kind of deal. So this is not an industry that wants this decision on the books. So they're going to fight, they have a great judge for the companies. The government has a weird theory that hasn't been tried before and the companies are saying, "That thing you're accusing us of in theory, possibly doing in the future, which we are not going to do. Sure, we'll sign a piece of paper saying we won't do it and we weren't." They're willing to do that settlement. The staff's willing to take it. If you were to turn down their promise to do the thing that you've dreamed up that they're going to do, that's going to be a bad look going into court.
Andrew: Just going back to the judges I quickly want to show one thing. I think it's a great point because you and I have dealt in state courts where there can be elected judges and sometimes the elected judges are getting elected maybe not because they're the best lawyers or the best students but because they're the most charismatic or they've got the most money or this type of stuff and not that none of that matters but with federally appointed judges they have to go through before the Senate Judiciary Committee like they kind of get bedded. As you said, it's like the star students who are probably getting approached by the different societies that get your nomination in the first place up there. So these are like really smart judges and to have ace law school, all this sort of stuff, they probably do have a lot of case law. They're willing to do the work. It just is a different burden. And then I totally agree with you. Let me ask you another question. So you and I were talking about this before, so I think we'll rehash our prior discussion. But as we sit here August 29th. The staff has paused the trial and they've taken a recommendation to the commission that says, "Hey, we think you should take the settlement, where the thing that you're worried about the Horizon doing, they have agreed, the thing you're worried about Amgen doing, they've agreed not to do it. So take the settlement." The deal price, if this goes through, it would be 116.50. The stock, as we're talking, is 112.50. So, I mean, it's a tight spread, but it's certainly not closed because this deal could close in a month or two. And 4% in a month or two, even in a Fed funds rate of pretty nice 4% in a month or two is a really nice annualized number. So I think the market's got some worry that the commission is going to reject the staff and say, "Hey, go fight this trial anyway." For some reason. And I want to explore both lines. A, what's the base rate? Has the staff ever gotten a settlement, pause the trial, gone to the commission, said, "Here's our settlement, let's stop this trial." Has that ever happened before?
Chris: Our listeners can come back and correct us if I missed something, but it has not happened in my experience. So that's kind of essentially this century, I guess, 1999, I started thinking about this. So I have not seen it. Polling colleagues and peers in this area, I've not chatted with anybody who's seen it. I believe tentatively answers know that would be totally unprecedented to get this far having pulled and then re litigate that same challenge. But historically, staff's more aggressive than the commission. This is one of the only time in history where the commissioners on average are more aggressive than staff. So we do have a little bit of a different dynamic here. It could be the first one, but no, that the fact pattern is one that historically 100% of the time you get some kind of settlement.
Andrew: I agree with you, right? And I was doing some math earlier. I think the market has priced in about a 75% chance that this deal is closing in the next month to six weeks, which feels much too low to me. People can mess me offline if they want to talk math on that, but let's go to the second case. What if the commission says, "Hey, staff, thanks for the offer, but we don't want to settle here." Like that's the really interesting case to me. Because then, you've got a staff who needs to go fight this, who's already indicated they think they've gotten what they can and they don't want to fight this. I think Amgen and Horizon and their court filings are going to have a field day with, "Hey." I don't know if you can legally argue this, I think you can, you can say, "Hey, we offered a settlement that the staff approved, they filed with the court that they approved it and they were pausing the trial to take it to the commission and the commission rejected it." Like, yeah, it's in their purview, but court, I think you should just look at the docs, everything we're arguing, precedent, all this and say, "This is a silly case that's getting tried for political reasons. You need to reject the FTC settlement." I don't know. What do you think in that kind of world where the commission rejects it?
Chris: Quite analogous to the Spectrum Brands case, where they made it utterly clear to the judge that we've bent over backwards. Not only are we right substantively, and being right substantively has to be 90% of what you spend your time and energy on, but you can also kind of bank shot as the other side basically stipulated as we were well along into settling, you get all of that ex parte back and forth, well into the record and the trial. So I think that it would be hard to get this far. And one of the reasons why you want to go all the way to a settlement if you're the government, you really tend to have a litigation track or a settlement track. It's really not that possible, at least for the same people to be assertively moving in both directions at the same time which is why, just the cliche or the phrase is usually pencils down, isn't like we're not talking because we're fighting you now. And with the pencils back up, kind of writing up a settlement here, I would say that it would be nearly impossible to revert to the status quo ante because it's such an admission of weakness on the government side that even going into trial, things would be somewhat but not dramatically better than where the companies were before the challenge was listed. And I thought they were really good. It popped a little bit on the challenge being pulled. The new market implied probability is about where I was before the challenge was pulled. I just think it's very strong for these companies.
Andrew: The other thing is like the commission does have to consider both staff morale and precedent. And I'm not saying if the staff for some corrupted reason came to you with a terrible settlement, you couldn't put it down, but the commission would have to consider, hey, if the staff has publicly, not privately, but publicly said, we recommend the settlement, because that's basically what they did by putting in the court filing. And we reject them. Staff members are going to be leaving left and right for one, and B, in the future, when our staff is dealing with any companies, nobody's going to be able to believe them or trust them. So it's going to be harder for us to regulate, settle, negotiate with companies, because everyone knows theoretically when you negotiate with staff right now, the commission can reject it. But if it happens in this public way, you can't do settlements anymore. Because any settlement is just the 30 day, 60 day delay on a trial. So everyone's going to say, "Let's just go to court and you guys can take your awful case. We'll note that we can't settle because you guys negotiated in bad faith. Look at a rise in Amgen."
Chris: Absolutely.
Andrew: Let's go to a different place. Let's go to one we haven't talked about too much. Somebody submitted on Twitter a question about CVRs. You and I have talked a lot about CVRs, probably private. I think we've mentioned it a little bit on the podcast, not too much. Now I'll just give another disclaimer. Look, if anybody is looking at CVRs, talking about CVRs, we're not talking publicly traded CVRs which have a lot of risk, but CVRs do carry a lot of risks. So people should really go read the documents, be sure what you're talking about. But what we're talking about here is we've seen a lot of small, especially small biotech companies getting taken out recently, where they're getting taken out kind of for
about the cash value on their balance sheet and then big CVRs, or we've seen a lot of biotechs that trade below cash that are getting taken out for about the value of their cash and then maybe a small CVR ticker. So people were just saying, "Hey, why do you think we're seeing such a increase in M&A that has CVRs attached to it?" So I'll pause there and toss it over to you.
Chris: Sure, I love this topic. The buyer has, first of all, a negotiating tactic that CVRs are very common in M&A negotiations and nine out of 10 times they go away. They're flipped over to cash for various reasons. But it's a wonderful negotiating tactic to say, "Hey, if you are the bidder and I'm the target, there's going to be some completely uncontroversial parts of this." So we can kind of stipulate with cash or with equity, the uncontroversial parts, but as a placeholder in our conversation to say, some percentage of my value is really not determinate yet, you could say, well, here's the range. It's not worth more than this, not worth less than that. Maybe you just keep it. So these often come up in negotiations. Secondly, it's a great tool for accounting because you can kind of describe accretion and dilution in accounting games with what your upfront costs are and then push a lot of it later. It's a nice CYA for the people, during a deal where bad deals is a good way to get fired from a lucrative job. You can structure the deal for cash at a price that it is going to be a non disaster mediocre. And in the same mediocre, you don't get fired world. You're not paying out the CVR. So it's a very good agency problem fix for the individual. It's a good accounting fix. That's a good negotiating thing for the buyer. For the target, it can be a good tax thing. So if you're a founder negotiating, getting a bonanza windfall, it takes a little of the edge off of the windfall that year. Secondly, you can communicate your confidence.
One of the things that when I see a CBR, I always like to go back to the people who negotiated it and try to say, "Who proposed it? What was the background?" Because some of the cases, it was a buyer's bet that something would happen. In other cases, it was a buyer's bet that it wouldn't. And it was a struggle in negotiation because the founder of Target had something implausible in his head where I'm saying, "Hey, Andrew, I want this big premium on this thing in my head. It's my life's work. And I might be the least analytical person on the planet because I'm just too close to it." Looking at the impressionist painting an inch away sometimes sees less than if you were farther away. And you say, "Okay, if that happens, I'll give you another dollar." And we've had some language when CVR milestones have failed from buyers that sounded smug and very consistent with the, "We said it wasn't going to happen. We were stuck in talks for weeks. He wanted us to pay him. This was our solution to it." So it allows a target. I actually have a private operating business that was sold in part for CVRs. And I really wanted to communicate, here's all the greats. You're the right owner. It's worth more to you than it is to me. This isn't for me to own anymore, but I truly believe it's going to be successful. And it was a way to kind of allow you to communicate that confidence. So there's a lot of good things about them. It slows down the SEC process. It's one more thing for the SEC to review. So it could take weeks longer if you register it. If it's publicly traded, then it takes much longer. And there's expense and bother and potential litigation associated with it. The bad news for an investor is, it is 100% of the time literally speculative. It is never the case. It is occasionally the case in investing.
If you properly understood what you're doing, you're not taking a risk. In this case, it's guaranteed you're taking a risk or it would have just been cash. So these are people with inside information in an adversarial arms length negotiation who cannot agree. They can't split the difference and they can't even agree on how you would discount something or it would just be a discounted risk. So it is always controversial. It is always speculative. It always has a huge agency problem where the person in charge is deciding on things that will result in whether or not they pay you. So sure there might be duties, but that's the kind of thing that's determined in court. That's not the kind of thing that's determined day to day. You call up IR and you are getting a phone call set up with management that is your adversary. I mean, they're your counterparty here and they're managing it for you. I would say that-that agency problem in practice over the last decade has been even worse than I would have discounted it. I would have every time given that as a caveat, warning, discount, concern, reason to not do it. And it should have been an even louder voice in the conversation than I gave it. And I gave it a serious look.
Andrew: Long time listeners to the podcast will know that.... What was it? The Bristol Meyer CVR.
Chris: And I'm getting some technical problems. You are frozen on the screen and the volume just went up. So hopefully we can recut this little bit here to see if it comes back.
Andrew: Hey, there we go. I think I'm back, Chris.
Chris: Yes, you just came back. Yes, I can hear you now.
Andrew: We'll have our editor work on that. I was pulling up a Reuters article that froze my computer unfortunately, to try to comment on something here. I guess I'll just hop in and we'll see if our editor can edit this or maybe we'll just post normally. I agree with everything you said. The two things I would yes and what you said is number one, long time listeners will remember the Bristol Myers CVR. I thought some of the best checks I've ever seen at the end of 2020 happened. As you said, there is an adversarial thing and a CVR, the buyer controls it and they have a lot of incentives to game it out, in the Bristol Myers CVR case, by playing games to get the FDA to delay approval by 10 days or 12 days or something, they saved themselves possibly six or $7 billion. And even if you think everything's kumbaya, like that can happen if the process gets delayed a little bit. Every day you get closer to that walk date, most CVR say you have to have FDA approval by 12, 31, 23. If you think you're going to get approval in 2021, great. Then that date doesn't matter. But if it gets delayed a little bit, every day it gets closer, the buyer's got a little more incentive to just push it a couple of days down the line and save themselves a few billion dollars. So that's number one, you can create huge, huge incentives, lots of games around revenue recognitions, if it's a revenue CVR then. And then the other one I just wanted to mention, I think we mentioned it on the podcast once, the Siglon, the ticker was SGTS. That was one of the most interesting ones we've ever seen where Siglon was trading for around $5 per share and Eli Lilly came in and offered them $15 per share cash plus a CBR that was worth, if every different milestone hit was worth like $115 per share in CVRs, who knows if they hit, who knows if they don't, but it was just such an eye-popping number. And it was such an interesting one where you know there were issues with value in a lot of things and a lot of differentials there if they came up with a CVR number that high versus the stock price. So I don't know, anything you want to add there?
Chris: Sure. And I have to kind of divide up. I've worked in these a lot. And so I have experience and observations about what's happened that in some ways were consistent, but in a lot of ways were inconsistent with my theory about these. One of the ways that just observing what's worked and what hasn't, the ones outside of pharmaceuticals, I've had more big hits that worked out really well, that were kind of one-off in other industries where net of the cash you got, you paid nothing or next to nothing. Maybe you paid less than nothing to speculate that the deal would close for the cash consideration for a few months, and then you paid just pennies to make dollars even with no deal risk, like after it was unconditional right at the end, I've just had more of those outside of pharma. In pharma, it's such a good fit because you often have these two parts, the totally uncontroversial, here's how much cash on the balance sheet there is for a failed biotech company. We can both stare at that number and unless there's accounting fraud, come to instant agreement about what that's worth. And then the unbelievably speculative aspect of some drug that looks like it's probably worthless, what is it worth in the one in a hundred chance or one in 10 chance that there's some bonanza thing? None of us really know. It's not like it's just within my purview with non-public information to pass on. The truth is we don't know. And so it has these wildly different things and neither of us want, you don't want to pay for it and I don't want to not get paid for it. But that deal in particular, just on the cash consideration, one of the biggest premiums I've ever seen.
Andrew: Yes, it was a 300% premium. The Reuters article that crashed my computer said "It was a 300% premium on just the cash portion without including any of the CVR." And the CVR was worth like 75 times the free deals.
Chris: Let me make a bold claim that I have a little hard time sometimes proving the negative here. There's never been a bigger premium on a publicly traded target if the CVR fully pays out. That's the biggest premium ever. Somebody can come back with a counter example.
Andrew: It has to be. It was so large.
Chris: Now, the thing about this industry, even though it's kind of hard to win on a lot of these, that you could almost just roll up the whole industry of small cap biotech is the phenomenon where there's dozens and dozens of these trading at huge discounts to cash and liquid securities on the balance sheet. And so let's just say 50% discount. So let's look at the world of huge discounts. Let's just make me the target, you the buyer, if you come to me and I say, "I should keep managing this tiny little thing and maybe I'll just burn through my remaining cash and it'll go bankrupt. But I have this hope or expectation that this drug, something maybe comes to it, who knows? And I want to keep managing it." And you come and say, "Okay, I'll pay you 75% of the cash", which is better than the 50% the market's giving me credit for and that thing you think might be true, you'll get a bonanza if it's true. It's completely revealing. If I say no to that, how can I say no to that? I can liquidate separately. I can sell to you or I can prove that I'm kind of a liar and just out there for my last couple of paychecks versus caring at all about my shareholders. And if you're able to do that, then you've just bought more cash than you've spent. You can go on to the next one and roll up the whole industry in a very small scale as a buyer, it ends up being kind of like the perfect activism because it's utterly defenseless with honest defenses. And another technical problem, it's paused again. This time though, you were frozen in a more thoughtful, handsome looking expression than last time. So we're improving a little bit. The first time it looked a little goofy, this time it looks kind of thoughtful and handsome. So it's getting better, but still frozen.
Andrew: All right, we had some issues. Chris was technical issues. I'm going to have to talk to our computer admin people, but Chris was making a point on a CVR. We're obviously having technical issues, so we don't want to do too much. I would agree with everything Chris was saying there. The last point I want to make before we wrap this up because of the technical issues, I've always had a theory with CVRs, especially recently. You're buying my firm today, the CVR doesn't pay for three, five, seven years, whatever it is, the payout today is 90% of the value, the CVR is worth 10% of the value. So I've had this theory that CVRs can present a little risk adjusted alpha. And people have to keep in mind, the risk part is high. But they can present a little risk just up because there's not natural buyers for a company with a three year non publicly traded CVR. Like the most natural buyers are people like you and me, event driven funds, if you're an analyst at an event driven fund and the payouts three years from now, you don't know if you're going to be around to collect that payout, your firm will, as I've said before, you might not just be not at the firm you're at now, you might not be at the firm that you leave your firm to be at when that payout happens. I've kind of thought, not that these are like going for a complete song, but I've thought that the interest rate and all of that might just be a little too high and there's some risk adjusted off of there. What do you think of that theory?
Chris: Yeah, absolutely. There's no way that an analyst improves their bonus with this that year, depending on the analyst, depending on the year, might be a big part of their consideration. The other kind of arbitrariness to a hedge fund is that if you have explicit sizing rules with your LPs, even if a deal is announced as closed. So sometimes it might trade for another day or so after a tender offers unconditional ways[?] where there's really no deal risk left, if you have a, call it take an extreme case like 2% or 3% position cap, you could be capped to something that's going to lead to this tiny CVR exposure, that to get even a kind of moderate CVR exposure, you have to at least temporarily have this massive position. And some firms don't even have the mandate or authority to do that, even if that was a easy thing to do in terms of the risk you take. And then it can be a hustle for the broker. The broker comes back to you and says, "Oh my gosh, you just lost this extraordinary amount of money", if they're not counting either the security or the cash that you're owed. So it's a bit of a hustle dealing with them. And it's a hustle for anybody that has mandates around their specific index. It could be something about that, that you would own something that would violate your rules as a mutual fund or certainly as an index fund. So there's a lot of the normal suspects of who's supposed to capitalize equities that will not own these. And so that is the kind of thing that in theory should be a alpha opportunity.
Andrew: So yes, and everything you just said. There was one I wrote about on the blog earlier this year. I can't remember the company, but the cash component was $380 per share and the CVR, the fair value and the proxy was like $3. So it was less than 1% of the consideration and the CVR wouldn't pay out for two or three years. But the CVR in the public markets was the day before the deal closed was trading for like a dollar. So if you think about that, you're getting $3 and you know, that's fair valued MPV and all that sort of stuff. We are assuming the bank didn't lie to us, but the CVR was pretty heavily negotiated. You're getting $3 for a dollar. That's a pretty attractive value. But in order for you to make that a position, you have to take a 400% position in the stock the day before it closes to get kind of a one or 2% position in it. And that's going to blow through anyone's risk limits. And then once you put on that one or 2% position, as you said, you have to account for the CVRs every year, your accountants are going to have a hustle. Your portfolio manager every quarter, he's going to have to call you and be like, "Oh, we're dealing with that damn CVR again. Why'd you put this 1% position?" There's just not a lot of people who really want to put that position size on, go through that process. It's almost career limiting for you to put it on because your portfolio manager is going to think of you as a headache, not as kind of a moneymaker. And you just spent all this time to get, you know, a four basis point position on, even if you blow through your mixed risk limits, like just really hard.
Chris: Kind of thinking about my career and our firm and so forth, one of the things that I most overdo is feeling responsible, taking time on a topic that's a 1% of a 1% position. So the position isn't a huge thing and it's not even a huge thing to that investment, but it feels more responsible to spend some of your time. You spend none of your time on one bit topics. You just round those all to zero and reallocate the time and energy to something that's a 10% topic. And just having a higher quality information and judgment on 10% topics is just much more important because it literally can make or break you. One bit topics can't make or break you. You're better off just outsourcing, ignoring, zeroing out. And so there is this kind of gravity to, especially if you were a pre-existing shareholder, if we own something anyways, we get this big pop, maybe a big pop in a small position. Like we shouldn't back into doing a lot of work on a CVR organically just cause it's there. We should either be nominally massive at the end to have an okay size position that's worth the bother, worth the administrative bother, worth the headache or it's fairly reasonable just to blow out of it when the deal is announced and so there's a lot of people who own these and shouldn't own these and even as somebody who wants to exploit things that other people shouldn't do, there's lots of circumstances where we shouldn't do it either.
Andrew: Again we're having technical issues and I feel a little burnt because I don't want to start another conversation on. We had about three more things we want to talk about, but I don't want to start and have it. And so I'll just wrap up with this. It is the end of August CMA has come out. They're reviewing Microsoft's new activism topic. We have been doing this podcast, our state of the markets for, I think 15 months now. And we have talked about Microsoft Activisions deal in every single podcast. Do you think we will be talking about Microsoft Activitions deal as a still open public deal next month, or do you think it will have closed by the end of the next month? And we will bid adieu to the only companies that we have talked about on every single podcast.
Chris: Good Lord, how many times will we be right at the end? It's kind of Charlie Brown's football of deal closings. This is going to close. There are so many reasons a regulator can take a little more time than you should expect. There is nothing substantively between the buyer, the seller, the remaining regulator, or anything that should lead to a big delay. I'm just trying to imagine somebody raises new concerns of new antitrust problems with the divestiture buyer coming up with some bundling theory. If you lower your standards enough for seriousness and logic, there could be something else. It should close. I think it's going to close. I'm virtually certain it's going to close. I think it's going to close without another delay, but this has been the king of weird plans.
Andrew: But do you think it will close end of September? Because the outside date is October 15th. I think the CMA said their deadline for comments is like a day or two before. I can't remember the exact date. They could close tomorrow. CMA could approve this tomorrow. CMA could prove it in two weeks. They could approve it on October 13th. So the question is, do you think it will close by the end of September or will we have one more time talking about it?
Chris: So I'm going to say end of September and I'll tell you why I'm nervous and why I'm like 60 or 70, not 99. I'd say preponderance, it's September, clear and convincing, no, I don't know, but not beyond a reasonable doubt. Wasn't listening to CMA's perspective again because everything's recorded now after COVID. You can listen to everything. I listened to every word of the tribunal appeal and I just couldn't believe. When we're substantively done talking about something, we usually enter conversations within five seconds and they were going hour after hour. The underlying thesis was that they all agreed and they were the most pedantic. I'm trying to come up with a light way to say this, but just ridiculous people in terms of, they were willing to delay a substantive thing just because of rules and I guess rules precedence and how they want to be perceived, the fact that they substantively had no point, didn't slow these guys down at all. So they're just the people who would delay another month or year or century or something for no particular purpose, which kind of spooks me about them in terms of procedure because normal humans at the tribunal like five seconds later would have been able to close the deal.
Andrew: Look, I completely agree with you. In the US we have had both sides reach a settlement, AMCA. Both sides reach a settlement and I actually think rightly, but the judge said, "Hey, let's make sure everything's getting considered. You'll have judges reject settlements for other reasons." So it can get rejected, it was very strange where everybody said, "Hey, this is the best path forward." And all of them said they were working towards close. And I was just like, "Hey, if everybody agrees, you can close, like, why not just close now?" I don't know, but I agree with you. I think this is closing. I'll even stick my foot out. I think this is closing third week of September. I'm defining that as the week of September 18th, 22nd. That's my guess. If it doesn't close then it'll close the next week. And if it doesn't close then it will definitely close before October 15th. I just cannot imagine a world where this doesn't close because I think the CMA knows, A, if they try to reject this, politically it's going to be unfeasible. Microsoft Activision might close over them and then they'll have to go challenge Microsoft Activision, a real court trying to seek fines. Regulators don't want to have that happen. As we talked about the FTC, once you start sending the string of precedents for losses, you lose face, you lose post-career influence, your agency loses morale. It's really bad for everyone. So anyway, Chris, I am looking forward to talking to you again, well, we'll talk but having you back on the podcast at the end of September, I will maybe have a new computer then, and we will have a lot of other issues, but this was great, and we will chat soon.
Chris: You'll get a new computer. I look forward to it. Thanks, bye.
Andrew: Bye, Chris.
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