We’ve two different little stories here both illustrating the importance now of the regulators – the bureaucrats – in investing decisions. The first is 888 Holdings (LON: 888) (OTCPK: EIHDF) which dropped 25% on Friday – with possibly more to come as well. The reason there was the Gambling Commission and who is a just and righteous, or perhaps who is not, person to have control of a gambling company. The other is Microsoft (NASDAQ: MSFT) and the takeover of Activision Blizzard (NASDAQ: ATVI) where they seem to have seen off both the US FTC and also the UK’s CMA. The point here is that we must understand the power that these bureaucrats hold. Our investing decisions have to incorporate that knowledge.
The 888 Holdings issue is that industry veterans previously involved with Entain were making a bid to insert themselves as 888’s new management. Well, why not? 888 does seem to have slightly lost its way and so new blood, or perhaps experienced industry blood could come in. Kenny Alexander and friends bought 6.5% of 888 (better known to most as William Hill) and were angling to be appointed CEO and other C-suite positions. Well, OK – as is well known they managed to buck up Entain during their time there.
If Entain’s going to get fined, then do we want that management at 888?
Enter the Gambling Commission. Who are worried that the stint at Entain might lead to fines etc over Turkish operations. “The regulator pointed to Entain’s admission that it was in talks with the Crown Prosecution Service about a deferred prosecution agreement, relating to alleged offences including bribery in its Turkish operations, during the period when Alexander, Feldman and Morana were at the company. “The implication here being that someone who was – perhaps – responsible for such a thing that maybe happened might not be allowed to head up another gambling related firm. The full gory details are from 888 here. The net effect is that the talks are off and so the 25% fall in 888 shares.
Microsoft beats the FTC though
The other issue is the Microsoft/Activision Blizzard one. The UK’s Competition and Markets Authority originally nixed the merger. This in itself shows the bureaucratic power – the UK has veto rights over the merger of two American companies? The answer being yes – an so does the EU, and China, And Oz, and, well, everyone. A big merger has to get through every regulator, not just the home one. The CMA then retreated when the Americans said that it could go through. And then MSFT actually won something. The FTC was opposed to the merger but it’s not really wholly the FTC’s gig to be worried about it. They were flexing their muscles that is. The courts told them to stop doing that – or, more gently, that their case was so weak that they should stop.
The share price movements have been much more muted. ATVI is up a bit, MSFT is barely changed – a $75 billion merger is real money, sure, but it’s not wholly material to a $2.5 trillion company.
Betting on takeovers is simply less interesting now
The bigger point here is that one of the great stock market games is in trying to work out who might get taken over. For when such a thing does happen it’s always at a substantial premium to the prevailing market price. So, trying to figure out who might buy whom is – if we get it right – very profitable. The standard tactic is to go short the bidder, long them biddee. OK, so we all know that. But now we’ve got this ever expanding layer of global bureaucracies sticking their oar in. Which complicates matters. For now the game becomes not who is going to try and takeover whom, but who will be allowed to do so? Which is a much more complicated game to play.
For there’s little to no point in a corporation trying to take over another which is entirely unrelated. The old Entain management were trying to buy into 888, a company in their field. Microsoft is trying to buy Activision, a games company so as to add to the MSFT strength in that field. But it’s this very desire to buy in linked fields which is coming under examination. To the point of people not being allowed to make such takeovers.
The joy of bureaucracy
This obviously makes the identification of likely targets more difficult as the new examinations will reduce the number of people willing to try. The bureaucrats seem to want to stop the takeovers that are worth doing for reasons of market consolidation, or vertical integration. Further, the considerations all take so much damn time that the exercise is less interesting anyway.
Sometimes the bureaucrats lose of course, as with ATVI. But the entire game of predicting the next target is made less interesting by the mere existence of the possibility of bureaucratic interference.
