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In today's email: John Foley, Masa Son, Tim Cook, Reed Hastings, and the formidable Lina Khan. I'll be back on Wednesday with more.

Bill

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Winter Is Coming for Wall Street

Notes on Peloton’s collapse, Netflix’s future, M&A arbitrage, and Apollo’s next potential pound of flesh.

Poor Peloton, that rare beacon of Covid hope that is now likely to experience the other side of life in the public markets. It will take its place in the overhyped gym equipment pantheon alongside the venerable Stairmaster, the clunky Nordictrack (version 1.0), not to mention the many other failed businesses that tried to make a virtue out of group fitness. At least SoulCycle never marketed itself as a social media company.

Back in December 2020, when we were muddling through that endless pandemic winter, the company had a market value of $50 billion. Now that Wall Street is looking forward to some version of normal later in 2022, the company is worth around $9 billion—and that’s only because of the intrigue that Apple (or perhaps Nike or someone like that) may buy it. 

As we’ve discussed before, I’ve been a skeptic of Peloton’s stock performance since October 2019, when I heard C.E.O. John Foley blither on at the Vanity Fair New Establishment Summit about how the bikes were not actually fancy fitness furniture but rather a mechanism to create a social community of wealthy urbane fitness nuts. It was surely an optimistic view of the company’s prospects, and not altogether different from Adam Neumann’s bygone proclamation that WeWork wasn’t an office rental company but rather some new age “community” of its own—a phrase that lent itself to the oft-ridiculed “community-adjusted EBITDA” that was riddled throughout WeWork’s S-1. But it was hard to blame Foley at the time. Unlike Neumann, he’d gotten his company public a month earlier to great fanfare and Foley must have been feeling magnificent. 

It’s all a shame, to be honest, because the Peloton equipment is first-rate and has many devotees. But the hype, which is how Wall Street sells an I.P.O. like Peloton, ended up creating a stock chart that looks like the Matterhorn. 

Maybe I was predisposed to cynicism, having worked as the senior M&A banker on the deal to sell LifeFitness to Brunswick in 1997 for $310 million. Back then, exercise equipment was just exercise equipment, not a social-media statement. (In 2019, Brunswick sold Life Fitness to a private-equity firm for some $490 million.) Foley, meanwhile, is still flogging the rosy future of “connected fitness” (and its inflated EBITDA multiple), despite acknowledging that the company is headed for layoffs and a production reset. Some dreams never die, even in the face of reality.

Only Tim Cook and his braintrust in Cupertino know whether Apple is actually interested in buying Peloton. I’m not sure I see the fit, but maybe, given Apple’s nearly $200 billion of cash is otherwise sitting around doing nothing. Perhaps you can wear your Beats and your Apple Watch while pumping away on your Peloton. More likely Peloton will go the way of GoPro, another overhyped novelty gadget. In 2014, GoPro went public at $24 a share and, thanks to the Wall Street hype machine, traded as high as $87 a share some three months later. These days, GoPro is still an independent public company with a stock trading around $9 a share and a market value of $1.4 billion, down 90 percent from its peak. 

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Is Netflix Cooked?

Speaking of the tech stock meltdown, Netflix lost 22 percent of its value on Friday, or about $50 billion in market value in one day. That’s a serious turnaround. It was the worst trading day for Netflix since July 2012, when the stock fell 25 percent in one day after the company reported better than expected earnings and then suggested that its outlook for the year was less robust than expected. That plunge followed a similar debacle in September 2011, when the stock cratered after C.E.O. Reed Hastings infamously announced that the company was splitting into two pieces–one for streaming and one for renting DVDs–sending consumers into a panic. Back then, of course, the market was clueless as to what Hastings was talking about. Streaming? What was that? Actually, it was the future, thank you very much, and Hastings was on top of it eons before anyone else. 

The lesson, in short, is that Netflix’s stock has always been a roller-coaster ride and has always proven to be a buy after one of these periodic investor freak-outs. This is not investment advice: I have no idea what will happen this time. High-flying stocks such as Netflix are facing serious headwinds in the face of what is starting to look like the end of a 13-year bull market. So Netflix could be down for a while. A year ago, Netflix was trading at 95 times its earnings. That’s nosebleed territory for a company with genuine earnings. Today, it’s trading at a far more reasonable—but not cheap—36 times earnings. My bet, for what it’s worth, is that the stock ultimately recovers. One thing that I have learned in watching Hastings and his co-C.E.O., Ted Sarandos, over the past decade, is not to bet against these two guys. They always figure out something to get back on track.

Wall Street’s Microsoft-Activision Arbitrage

If I could predict whether the Biden administration will clamp down on Microsoft’s $69 billion acquisition of Activision, I would be a merger arbitrageur—or, at the least, a very highly paid antitrust lawyer. I’m neither, so take the following with a cone of salt. 

Obviously, the management and boards of directors of both Microsoft and Activision, plus their highly paid bankers (Goldman Sachs, Allen & Co.) and lawyers (Simpson Thatcher, Skadden Arps) obviously believe the deal will go through. But that doesn’t mean there won’t be a regulatory challenge. And it’s not just a newly emboldened set of regulators looking to rewrite the rules for what deals constitute a restraint of trade or unfair competition. There’s also the European Commission, which has recently become more aggressive about trying to block deals, even when it doesn’t seem to have the slightest jurisdiction. (In September, I wrote about the E.C.’s efforts to block Illumina’s $7 billion acquisition of Grail, a fight that is ongoing.)

So who knows? But it sure seems that this one won’t get done without a serious fight, at least if I am able to parse correctly the hints that Lina Khan, the new head of the F.T.C., dropped for my friends Andrew Ross Sorkin and Kara Swisher during their exclusive interview with her this week. In dancing around the question of whether regulators might end up blocking the Microsoft-Activision deal, Khan likened it to the government’s failed effort to break up Microsoft more than two decades ago. She said that Microsoft had “captured control” of the operating system for personal computers and that the Justice Department’s case back then argued that Microsoft was “stifling [its] rivals” through the dominance of the operating system. “Those are the same kinds of questions we need to be asking today,” Khan continued. “Whenever you see potential moments of transition, that’s when enforcers need to be especially vigilant because that’s when incumbents often panic and realize that to stay relevant to stay dominant, they may have to engage in tactics that ultimately end up being illegal.” 

If that weren’t indication enough that there is a new regulatory regime in Washington—one that will be more vigilant about all sorts of mergers, whether Penguin Random House’s proposed acquisition of Simon & Schuster or CAA’s proposed acquisition of ICM—Khan also said further that Congress is now expecting that regulators like her will not wait to block the third or fourth mergers in a consolidating industry, such as gaming. 

I know bankers, lawyers and corporate executives get paid a lot of money to try to suss these things out in advance, but it sure sounds to me that Khan and her Washington colleagues are going to take the Microsoft-Activision deal for a serious spin around the block before allowing it to go through. And, for what it’s worth—putting my arbitrageur hat on for a second here—the Activision stock is trading at around $81 a share even though Microsoft has offered a certain $95 a share, in cash, to Activision shareholders. That’s a 15 percent discount. Even accounting for the time value of money—the time it would take for the deal to close, currently predicted as some time before June 2023—this suggests to me that the smart money has some doubts about whether this deal gets closed without a regulatory battle.

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Apollo’s Pound of Flesh

A curious thing happened around Christmastime last year, when few people were paying much attention: Apollo Global Management, the private equity and asset management behemoth, made a $4 billion loan to Softbank, the publicly traded venture-capital firm. On the surface, you can say, what’s the big deal? Apollo is increasingly getting into the business of making big loans to companies at relatively high rates of interest—and certainly above its cost of capital—and Softbank is one of those companies that has a voracious need for capital to be able to make its big whopping bets in startups like WeWork, which has collapsed in value, or OpenDoor and DoorDash, which are worth more than when SoftBank invested, but are down massively since going public. Why not use other people’s money to make those bets, especially since debt is cheaper than equity? The Apollo loan is reportedly secured by Softbank’s second Vision Fund, a roughly $40 billion venture capital fund with stakes in some 150 companies.

But, to me, this is an early warning sign that there could be further trouble brewing at Softbank. “We are in the middle of a blizzard,” Softbank C.E.O. Masayoshi Son said in November after announcing poor earnings for the company. After all, if things were going swimmingly, Apollo would be one of the last places from which you would want to borrow $4 billion. Not because the Apollo crew is any more nefarious than any other sophisticated Wall Street lender, but rather because they are about as smart, crafty, and opportunistic as they come. Apollo has a well-deserved reputation for extracting its pound of flesh, and then some. It was Apollo that made a $4 billion loan to Hertz, the car rental agency, in 2020, in order to allow the company to emerge from bankruptcy. It was Apollo that made GateHouse Media a $1.8 billion loan, at 11 percent interest (when interest rates were at historic lows), in order for GateHouse to consummate its merger with Gannett, in November 2019, to create the country’s largest newspaper chain. 

If Apollo is making a $4 billion loan to Softbank, one wonders if the latter had any other options. And that signals that Son is willing to pay up for a pricey loan from Apollo because it really needs the money, for whatever reason. Softbank’s stock is down nearly 50 percent in the past year as China has cracked down on many of the technology companies in the Softbank portfolio. Its stock is about flat since word of the Apollo loan came out before Christmas. We’ll have to wait to see how this plays out, but my gut tells me Apollo could one day end up owning a bunch of companies in the second Vision Fund.

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