Craps at a Poker Table
The game is Texas Hold'em. A new player sits down at your table. Everyone ante's up. The dealer deals. The game begins. And your new friend rolls dice like they're at a craps table. Cue eye roll.
When you're at a poker table, you sort of assume everyone else is there to play poker too. Seems like a safe bet.
In the World of Markets, different people are playing different games all the time, simultaneously, at the same table. Game selection is an important piece of investing. You, a savvy investor, want to make sure to pick games against lesser opponents. Some enterprising ones even try to craft new games to tip the scales in their favor — see Crypto.
When government tries to assemble new games, that's a bit of a curveball. Government things are supposed to be a little stuck. Imagine if a new bureaucrat came in and on day-one changed all the streets to one-way. Chaos, right? Or if a city planner said one day that buildings couldn't be larger than 50,000 square feet. Are building owners supposed to chop-off their excess floors. Who pays?
Sometimes plucky government officials do try to "move fast and break things." Generally it doesn't work out. There are layers of government checked by other layers and balanced by a robust (at least here in the US) legal system. Its far from perfect, but it sort of works most of the time.
The FTC Chairperson is currently on one such side-quest. She has staked her corner against allowing big mergers, because, well, they're big. In some cases you can sympathize with the FTC. It's mission is to prevent practices that are anticompetitive or deceptive or unfair to consumers. The FTC emerged from the era of railroad trusts, which were big. It has an anti-big bias, but its mission is to protect. Bigness has to cause harm for the FTC to deliver on its mission.
The FTC has taken several avenues to try to establish that big equals bad. It’s rolling the dice with whatever threadbare legal grounds it can come up with. It’s trying to change the rules of the game. Under this regime, it's brought anti-merger cases against Microsoft, Illumina, Intercontinental Exchange, and Facebook, among others.
I'm not the savviest poker player, but I'm confident that a fist-full of dice is a weak poker hand.
And the courts are still playing poker. They're keeping to established rules. They've handed out a string of high-profile defeats to the FTC and forced a retreat. The FTC has extracted its pound of flesh in some instances — InterContinental's merger with Black Knight — and struck out in others — Microsoft's acquisition of Activision. So far, all the big deals look to make it across the finish line. The FTC is rolling snake eyes keeping things small.
The FTC rolled the dice again against Amgen and its proposed acquisition of Horizon Therapeutics. It would be one of Amgen's largest acquisitions ever in a history of large acquisitions. It’s big, so the FTC didn't like that.
The Commission has come up with some new, untested, legal arguments against the marriage, but it has let through many other similar pharmaceutical mergers in the past. Pharmaceutical formulations, after all, are protected by patents, which exist to establish legal monopolies for a limited period of time. The point is for companies to be able to make risky investments, have legal protection from competition and reap the benefits from the ones that work out. As a byproduct, sometimes these franchises get big.
The market has taken the view, though, that this FTC is the same FTC as in the past — a cold, calculating, ruthless adversary that brings cases when it thinks the odds very much in its favor. Marketeers currently expect about even odds for the Amgen-Horizon deal closing or being blocked. The FTC's run of high-profile whiffs, however, suggests real odds should favor the union.
While the market waits for the outcome of the case later this year, the price of Horizon reflects those overcooked doubts and offers a nice opportunity for investors interested in special situations.