July 12, 2023 | Peel #499

Silver banana goes to...

In this issue of the Peel:

• Investor interest is shifting from U.S. markets to Europe due to factors like perceived premium multiple assigned to U.S. companies.
• In the market, Coinbase and Zillow performed well, while Eli Lilly and JetBlue lagged.
• Microsoft’s $68.7bn acquisition of Activision Blizzard was approved by a U.S. court, paving the way for a landmark deal in the tech industry, although it still faces possible challenges from the FTC and overseas.

To Win the M&A Game, It Helps to Know the Terrain

Ah, the annual SRS Acquiom M&A Deal Terms Study. It’s back again already? You bet it is. And, as always, it’s bubbling over with the deal data and insights you need to be truly in the know.

You won’t get this intel from industry news sites, regulatory filings, or any other sources, by the way. Nope, only the SRS Acquiom Study provides analysis of more than 2,100 private-target acquisitions valued at more than $460 billion—most of which aren’t required to be publicly reported.

Why should you care? Think: better negotiating and smoother due diligence. Think: avoiding potential transaction issues. Think: competitive advantage for you and your clients, and all the good stuff that comes with it.

By the way, the Study is free. You have no excuse not to download it right now.

Click here to get the good stuff >>

Banana Bits

• With all that hiring going on, as seen in June’s jobs report, it’s no wonder small businesses are feeling larger than life right now
• So far, the battle of Lina Khan vs. Big Tech has been more of a “using a turkey baster to put out a house fire” type of conflict
• NATO managed to enrage both Ukraine and Russia at the same time, but then again, isn’t the strongest uniting force a common enemy?
• Get your popcorn hot and ready by 8:30 am because it’s CPI day

Macro Monkey Says

Over the Hedge

In addition to being the title of a classic American cinematic masterpiece, “Over the Hedge” also appears to be how many investors seem to be thinking about U.S. markets.

According to the FT, hedge funds are beginning to hedge away their U.S. exposure. But, at the same time, retail investors simply seem over it.

During the prior week, U.S. retail investors loaded up on a $7bn net addition in their exposure to U.S. markets. At the same time, hedge funds did almost the opposite; they didn’t pile into bonds, but something far worse—they increased exposure to Europe.

Alright, alright—let’s not get too crazy here. What’s actually going on?

• Hedge funds have their lowest-ever allocation to U.S. equity markets since records began in 2013, per Goldman Prime Brokerage data.
• These investors are growing increasingly cautious at the premium multiple assigned to U.S. companies relative to international peers.
• The 2023 large-cap led rally in U.S. stocks is getting more hate than Jonah Hill right now.

For the majority of the careers of many Wall Street professionals, the exact opposite has been the case. Sure, in school, they teach you about “geographic diversification,” but for a whole generation of people that pronounce finance as “fih-nance,” U.S. outperformance is all they know.

Now, the data from Goldman is a nearly nonexistent sample size, and the anecdotal evidence in the rest of the article is just that, anecdotal. But the message and questions driving these themes clearly have some worried.

"But the message and questions driving these themes clearly have some worried."

If this reallocation towards the other side of the pond is, in fact, as widespread as this data and stories suggest, there are quite literally only two possible justifications. Of course, they are:

• The Multiple View: U.S. stocks have been priced at a premium compared to similar European competitors for too long without lasting justification, meaning European multiples will expand in comparison as a form of mean reversion, or
• The Fundamental View: European companies and their equity markets are better positioned to drive higher returns based on more likely strong fundamental financial performance going forward

I think we know which of the two is more likely the mainstream narrative.

Backing the view of U.S. multiple contraction-led outperformance by Euro area stocks appears to be two drivers: rate hikes and international discounts.

For a multitude of reasons (such as a history of innovation, less bureaucracy, cheaper & deeper financing, a more robust consumer, etc., etc.) U.S. companies and their cash flows have been valued at more cents on the dollar, if you will, than their European counterparts. Basically, investors are willing to pay more now for future cash flows in the U.S. than anywhere else.

"... it could be as simple as outperformance leading outperformance ..."

However, given JPow’s recent nuclear rate bomb, outpacing many Western counterparts, elevated discount rates here stateside could contribute to U.S. underperformance, as one crackpot theory goes.

As for the other crackpot theory, European stocks trade at hefty, hefty, hefty discounts to U.S. names. A lot of this is due to the same reasons laid out above, but it could be as simple as outperformance leading outperformance; the U.S. had been doing better for so long that investors got more and more sure that trend would continue.

So far, in the post-GFC environment, that’s been the case. But that sure as hell doesn’t mean it’ll last forever.

It’s an early sign of what could be a major story, but if the trend of going over the hedge and across the pond continues, anything is possible.

What's Ripe

Coinbase (COIN) ↑ 9.78% ↑

• Oh, no. No matter how much exposure to the digital asset sector you have, I’d argue no economic gain can overcome the suffering brought on by cryptobros on Twitter during a bull market.
• Here we go again. Shares in Coinbase surged on Tuesday while actual digital assets like BTC and ETH looked like the sane ones in the room for once.
• The stock now trades at its highest level since last summer, largely on the back of high-profile applications to list spot BTC ETFs from the world’s largest asset managers like BlackRock and Fidelity.
• Both have signaled an interest in using Coinbase’s exchange as the surveillance mechanism to regulate BTC prices in the ETF, meaning this might be the first-ever DeFi news with actual fundamental bearings. Can’t wait to see how this one goes.

Zillow (Z) ↑ 9.12% ↑

• Time to stop pouring one out for the real estate platforms out there; let’s get to popping bottles. That is, if you hold shares, of course. Names like Zillow, Redfin (RDFN, +23.92%), and Compass (COMP, +9.29%) boomed on Tuesday as sell-side analysts seem to have joined hands to sing Kumbaya on the residential real estate sector.
• The argument wasn’t necessarily that rate or price dynamics would get better anytime soon but that homebuyers would learn to deal with the higher housing expenses going forward. All this is seen as part of JPow’s higher for longer play, in this case, meaning higher stress levels and longer mortgage maturities.
• Nevertheless, several banks have started to see the headlining names in this sector far more favorably than otherwise in recent history.

What's Rotten

Eli Lilly (LLY) ↓ 3.04% ↓

• It’s tough to suck on a day like yesterday when U.S. stocks largely saw a certain rock band led by Billie Joe Armstrong kinda trading sessions.
• Despite the overwhelmingly Green Day, Eli Lilly still found a way to lose people’s money while simultaneously robbing hospital patients, as seems to be the usual practice of healthcare companies.
• It was an all-around negative news day for Eli Lilly. Minor studies pointing to not-so-positive vibes within recent Alzheimer’s and obesity drug testing weighed heavily (no pun intended).

JetBlue (JBLU) ↓ 2.59% ↓

• When you’re so good, sometimes it just isn’t cool to say it anymore.
• JetBlue learned that one the hard way yesterday, losing over 2.5% on a downgrade from Evercore to underweight.
• Evercore cited recent share outperformance (too good) and balance sheet concerns (who even knows what that means) as the drivers for the downgrade. All we know as of now is that JetBlue has at least one more hater.

Thought Banana

An Active Vision

After a year-and-a-half blizzard involving bureaucracy so extensive it’d make Karl Marx jealous, a U.S. court has officially given the green light to one of the country’s largest acquisitions since the Louisiana Purchase.

Yesterday, a federal judge made Microsoft CEO Satya Nadella’s dreams come true while simultaneously ruining those of FTC Chair Lina Khan by allowing the firm’s $68.7bn purchase of Activision Blizzard to go through.

Wow. Microsoft’s largest acquisition of all time just took perhaps its biggest step towards passing Go.

"Now, the deal took what is likely the biggest step forward toward completion."

Many wrote this thing off as having no shot of U.S. approval from the get-go, especially under a true-blue administration like Joey B’s was expected to be. Now, the deal took what is likely the biggest step forward toward completion.

In reading about this deal, you’ll see figures from $65bn to $75bn tossed around as the acquisition price. To clear things up, the deal is structured as follows:

• $95.00/sh of Activision Blizzard (ATVI) stock
• ATVI has ~785mn shares outstanding, implying a $74.58bn price tag
• After adjusting for Activision’s ~$5.9bn in net cash, we get $68.7bn

Not sure if that was annoying everyone else as much as it was me, but glad we cleared that up.

Anyway, let’s see what exactly happened because, despite how it stands, this could still be far from the end of the road.

Yesterday, a U.S. federal judge declined to grant the FTC a restraining order it had requested to stop the deal. Basically, the U.S. federal court circuit declined to decline the deal. The FTC still has a whole a** antitrust lawsuit filed, but nevertheless, the deal remains scheduled to close on July 18th.

Without the restraining order, the deal is all but guaranteed to go through by that date. But that doesn’t stop the FTC from blocking the deal via a forced separation/divestiture, kind of like if one spouse’s ex-partner showed up on their honeymoon.

As expected, Activision shares ripped on the news, gaining over 10% exclusively on these headlines. Meanwhile, Microsoft gained just under 0.2% on the day, a sign that investors view the deal as mostly accretive, especially in the long term.

"... the deal still has to work through other legal challenges like that in the U.K. ..."

Of course, the deal still has to work through other legal challenges like that in the U.K., but it pretty much seems to hinge solely on the fact that these regulators are scared Microsoft will limit games like Call of Duty to strictly Xbox and Microsoft cloud platforms.

If the firm is able to sell some kind of deal to regulators promising that will not be the case, expect to see new CoD campaigns drop on Excel sometime soon.

The big question: Will Microsoft’s acquisition of Activision Blizzard ever actually be finalized? If not, what will stop it at this point? How does this combined company impact the future of gaming in the U.S. and globally, from both a consumer and investor perspective?

Banana Brain Teaser

Yesterday — Insert one word in each pair to link the two words together. The end of the first word is the beginning of the second.

1. Digital __ __ __ __ __ __ Shy
2. Crystal __ __ __ __ Park
3. First __ __ __ __ __ Clown
4. Bed __ __ __ __ Candy

Answers

1. Camera
2. Ball
3. Class
4. Rock

Today — The following words have a similar characteristic. Can you tell me what that is, apart from the fact that they are all nouns?

• Case
• Keeper
• Maker
• Plate
• Seller
• Mark
• Store

Shoot us your guesses at [email protected] with the subject line “Banana Brain Teaser”.

Wise Investor Says

“The ability to do nothing is one of the most underappreciated skills in investing.” — Morgan Housel

Happy Investing,

Patrick & The Daily Peel Team

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