Chris DeMuth's State of the Markets December 2022

Episode Summary

Executive Summary: Andrew Walker and Chris Muth discussed a market where broken M&A, rising rates, and tighter financing have made traditional pre-arb and takeover speculation unusually dangerous. They favored fresh event-driven ideas, especially majority owners taking out public minorities and select take-privates, while flagging major regulatory risk in deals like Activision Blizzard/Microsoft and Amazon/iRobot.

Main Topics: Post-2022 event-driven setup and deal market reset (Priority: 5/5): The hosts argued that 2022’s rate shock and financing collapse caused many takeover situations to break down, leaving boards and buyers more willing to retrade deals in 2023 if conditions stabilize. Why traditional pre-arb became a bad environment (Priority: 5/5): They explained that rapidly falling stocks, higher rates, and fragile debt markets turned many rumored or market-checked deals into poor risk-reward trades, with downside often worse than expected. Regulatory overhang on big tech and strategic deals (Priority: 5/5): Activision Blizzard/Microsoft and Amazon/iRobot were framed as cases where FTC/CMA-style scrutiny can stall or kill deals, with process itself becoming a penalty even when substantive antitrust logic seems weak. Majority owners taking out public minorities (Priority: 4/5): Muth highlighted public subsidiaries and minority stakes in majority-controlled companies as one of the best event categories left, because strategic owners may rationally pay to eliminate public-market friction and governance hassle. Willis Lease Finance take-private attempt (Priority: 4/5): The discussion dug into WLFC as a classic controlled-company take-private, with the founder-family/controller making another bid, this time alongside a consortium, and the stock trading above the initial bid but still potentially below intrinsic value. iRobot/Amazon as a weaker antitrust case than Activision (Priority: 3/5): They debated the logic of blocking Amazon’s iRobot acquisition, concluding the case looks more like a broader anti-tech hook than a conventional antitrust harm theory.

Key Arguments: 2022 damaged the entire merger-arb ecosystem because falling equities, higher rates, and weaker credit made supposedly strong deals fail late in the process. In a bear market, the idea that a busted deal has 'no downside' is often wrong; event-stock prices can keep drifting lower as arb holders exit and fundamentals deteriorate. Majority owners who already control a public company often have strong economic and governance incentives to buy out minorities, especially when public listing costs and lawsuits are burdensome. Public MLP and controlled-sub deals have worked relatively well because they offer a clean strategic rationale and are easier to defend on valuation grounds. Activision/Microsoft may have real legal and regulatory obstacles, especially in the UK CMA process, despite arguments that exclusivity concerns are economically weak. Amazon/iRobot appears even less like a classic antitrust problem and more like an attempt by regulators to make a statement about big tech. Controlled-company take-privates can be attractive because insiders can justify premiums to depressed market prices while still buying assets below what they view as fair value. Willis Lease’s bid mechanics and book-value structure make the offer more credible than a typical sponsor process, especially with a committed consortium involved.

Data Points: Visible Alpha broker network: 165+ brokers - Sponsor read-in describing consensus data coverage Microsoft break fee: $3 billion - Discussing downside if the Activision deal fails Activision year-to-date stock move: up about 15% - Compared with peers to argue downside may not be zero Electronic Arts year-to-date stock move: down about 10% - Peer comparison for Activision Take-Two year-to-date stock move: down about 45% - Peer comparison for Activision Russell 2000 year-to-date move: down about 22% - Broad market context for event names Kohl's rejected bid level: $70 per share - Referenced as an earlier offer the board turned down Kohl's later bid level: $50 per share - Reported final bid before refusal Kohl's stock price: $26 per share - Used to illustrate how far the stock fell below prior bids Kohl's implied real estate value: $35-$40 per share - Reported financing/value rationale behind the bid CANO rumored CVS bid: $10-$12 per share - Earlier strategic interest before stock collapsed CANO stock price: about $1 per share - Illustrating deterioration after deal hopes faded Activision cash consideration discussed: about $75-$77 per share - Referenced as the trading level around the Microsoft deal iRobot deal spread: $13 - Difference between deal value and trading price at the time discussed iRobot deal value: $61 cash - Amazon’s announced acquisition price iRobot pre-deal trading level: about $46 per share - Referenced as the stock price before deal announcement Willis Lease Finance bid: $45 per share - Founder-led consortium take-private proposal Willis Lease Finance stock price: $56 per share - Current trading level relative to bid Willis Lease Finance prior offer metric: 110% of tangible book value - Historical bid framing used to infer potential value ChatGPT adoption speed: 1 million users in about 5 days - Used to argue technology and competition evolve rapidly

Pivotal Quotes: "No inventory bias." — Chris Muth: His opening framework for approaching new ideas without being constrained by existing positions "The process becomes the punishment." — Chris Muth: On FTC/CMA review processes in deals like Activision and iRobot "A lot of things fell apart this year at the five-yard line." — Chris Muth: Describing how many deal situations broke down late in 2022

Implications: Listeners should expect more selective event-driven opportunities in 2023, especially controlled-company take-privates, but should also treat big-tech M&A and pre-arb names as highly regulatory- and financing-sensitive.