M&A Feels A Chill From Blocked Microsoft Merger

Plus: Elizabeth Holmes is pushing her prison dates. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

April 27, 2023

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Good morning.

Fans of the band Queen should rejoice — and start scrounging together their loose change. Some thirty years after the death of Freddie Mercury, the legendary frontman’s former fiancé and lifelong friend Mary Austin has finally decided to give the public a chance to own his dearest possessions. For a price, of course.

This September, Sotheby’s will host an auction of Mercury’s impressive art collection and Queen memorabilia such as guitars, costumes, and original handwritten lyrics for songs like “Killer Queen” and “We Are the Champions.” Whoever wins the auction for the latter has an obvious playlist topper for their Uber Black ride home.

Morning Brief

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Microsoft loses a life.

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Accountants are turning to AI.

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Don’t go directly to jail. Wait a few days first.

M&A

UK Blocks Microsoft’s $69 billion Activision Blizzard Acquisition

(Photo Credit: Sam Pak/Unsplash)

Microsoft’s bet on ChatGPT has it at the top of the AI mountain, but it just took a big stumble down the video game power ladder.

On Wednesday, the UK’s antitrust regulator officially announced that it won’t allow Microsoft to go through with its $69 billion acquisition of Call of Duty maker Activision Blizzard. The Competition and Markets Authority’s rejection of the deal is sending chills down not just the spines of Microsoft and Activision Blizzard executives, but to dealmakers everywhere.

Big Boss

Microsoft’s proposed acquisition of Activision Blizzard would have been the video game sector’s biggest-ever deal. It came after Microsoft had shelled out a few billion here and there to acquire game studios, harvesting game titles it could then host — exclusively if it so chose — on its Xbox platform. But considering Activision Blizzard makes some wildly popular game titles, the worry from competitors (most notably Sony’s PlayStation) was that Microsoft could use those rights as a cudgel, forcing gamers to switch to Xbox to play their favorite titles.

Microsoft tried desperately to convince regulators that it would refrain from turning Call of Duty into an Xbox exclusive, but it clearly failed to persuade Britain. The deal is still under scrutiny from US and EU regulators, but the CMA’s decision will put a massive damper on the deal’s future.

The regulatory stop sign comes at a time when dealmaking across all sectors is already weak:

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Global M&A activity shrank to its lowest level for a decade in the first quarter of 2023. This was, as JP Morgan’s global head of M&A Anu Aiyengar put it, due to “extraordinary levels of volatility and uncertainty” putting many deal announcements on ice.

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Of course, lean times don’t mean M&A grinds to a halt entirely; some big fish take the chance to swallow up corporate minnows for cheap. But for big tech companies with a big cash cache (read: just Apple) the tanked Microsoft-Activision deal might be enough to make them stop and pause.

Morgan Stanley CEO James Gorman, who just reported another quarter of extremely sluggish dealmaking activity, sounded sanguine about deal flow on his firm’s earnings call last week, musing “We are seeing a growing M&A pipeline and some spring-like signs of new issuance emerging.” But with antitrust authorities playing hardball, Gorman’s prediction that deals could heat up in late 2023 and 2024 might go cold.

Save and Reload: Activision Blizzard CEO Bobby Kotick said in an internal email published on the company’s website that it is appealing the decision. Although Kotick insisted the CMA’s decision was “far from the final word,” CMA rulings are tough to overturn — as Meta learned when it was forced to relinquish its acquisition of gif library Giphy. Incidentally, Activision Blizzard was in the throes of a sexual misconduct scandal prior to the almost-deal with Microsoft, which resulted in staffers calling for Kotick’s resignation.

– Isobel Asher Hamilton

PricewaterhouseCoopers is Investing Big in AI

Looks like your accountant welcomes his new AI overlord.

On Wednesday, PricewaterhouseCoopers announced that it intends to invest $1 billion into generative artificial intelligence technologies over the next three years, automating parts of its tax, audit, and consulting services. Accounting: a job so dull, even human accountants don’t want to do it!

RoboCountant

The investment comes at an interesting time for the accounting industry. Compliance is only getting knottier thanks to a refulgent IRS, just as more number-crunchers than ever are leaving the field. Over 300,000 accountants and auditors left their jobs in 2021 and 2022, according to the Bureau of Labor Statistics, a staggering 17% shrinkage. And a full 75% of CPAs met the retirement age in 2020, according to the American Institute of Certified Public Accountants. That same report found incoming CPA exam candidates dropped from roughly 50,000 in 2010 to 32,000 in 2021.

“Folks are also leaving the accounting realm for technology and analytics,” Christopher Madpak, Managing Director of Tax & Tax Technology at SS&C Technologies, told The Daily Upside.

To fill the productivity void, PwC is rallying its remaining troops and embracing what the AI community has dubbed the “centaur” mentality, man and machine working together to accomplish more than either could do alone:

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The firm plans to pay for access to OpenAI’s top-of-the-line GPT-4 language model to train models and develop apps in Microsoft Azure that will write reports, prepare compliance documents, and locate operations inefficiencies, among other mind-numbing tasks.

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PwC’s goal isn’t to eventually replace workers, vice chair Mohamed Kande told The Wall Street Journal, but instead optimize the productivity of its 65,000-strong US workforce. “We are not going to leave anybody behind,” Kande told WSJ. “It’s going to be a team sport.”

“I think in traditional assets, like your publicly traded assets and traditional hedge funds, I think that is more ripe for artificial intelligence,” said Madpak. “But that might not be true for private markets, where things may be a little bit more gray, and need to be looked at a little bit more from an analytical perspective.”

Boom Cycle: PwC is offering the perhaps perfect use case for the productivity boom that AI apostles have long foretold. Generative AI is projected to contribute up to $15.7 trillion to the global economy by the end of the decade, according to an analysis done by none other than PwC. We’re all here for it, so long as it makes doing our taxes even a little easier.

– Brian Boyle

Sponsored by Power Corridor

Where are the IRS’s “Armed Agents” Headed Next?

Quick Fact check: the IRS is not actually hiring thousands of armed agents, no matter what social media might have you believe.

But — after decades of being starved of capital and resources — Congress did approve a $79.4 billion IRS cash infusion as part of last year’s Inflation Reduction Act, which will allow the agency to hire 87,000 new agents.

So, where will these new agents direct their attention? If history serves a useful precedent:

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Audits of millionaires have fallen dramatically over the past decade, from a high of 40,965 audits of millionaires’ returns in 2012 to a low of just above 7,000 millionaire audits over the past three years.

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In fact, the IRS audits twice as many taxpayers reporting zero positive income than taxpayers earning at least $500,000.

This year, the Biden administration is targeting a tenfold increase in audits on America’s wealthiest taxpayers and has aggressive plans to hunt down an estimated $2 trillion of American wealth in offshore tax havens.

If one thing is clear, the regulatory environment and balance of power between Wall Street and DC is shifting at a rapid clip. From large swaths of regional banks on the brink of collapse to our tenuous relationship with China, the stakes have never been higher.

For more context on the IRS’s next move and other important stories like this, sign up for Power Corridor.

Legal

Elizabeth Holmes Files Appeal and Staves Off Jail for a Few Days

Elizabeth Holmes isn’t going to jail… yet.

The disgraced CEO of defunct health tech company Theranos was supposed to report to prison today, but after requesting an appeal to her fraud conviction, Holmes has managed to finagle some extra time on the outside while the court processes her petition.

Fyre Fest of Health Tech

After attracting hundreds of millions of dollars from investors for blood-testing inventions she knew never worked, Holmes was found guilty of fraud and sentenced to 11 years in prison by a federal court in January 2022. But after having her initial appeal denied and receiving orders to report to prison on Thursday, the once turtlenecked Ted-Talking CEO filed a new appeal directly with the 9th Circuit Court of Appeals in San Francisco, meaning she was automatically allowed to remain free on bail while the court makes a decision.

While something of a desperate tactic, don’t be surprised if more and more white-collar crooks look to Holmes once again for inspiration:

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If ultimately convicted, newer alleged fraudsters like FTX’s Sam Bankman-Fried and Frank’s Charlie Javice might take note of Holmes’ strategy to keep appealing on grounds that she wasn’t maliciously or intentionally scamming investors, but rather simply running a failed business venture. Who’s to say that crypto princes and student loan platformers can’t make that case and stay in the news until they appear sympathetic?

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But the new class of SEC villains might want to curb their enthusiasm. Holmes’ literal partner-in-crime, Ramesh “Sunny” Balwani, similarly filed an appeal and it was rejected. He already started serving his 13-year prison sentence.

White Collar, White Shoe: One person who has already capitalized on the Holmes trial is the lawyer that prosecuted her. Jeff Schenk has left his gig as Assistant United States Attorney in the Northern District of California for law firm Jones Day, where he will be a partner in the Investigations & White Collar Defense Practice. Now there’s a TedTalk we’d like to watch.

– Griffin Kelly

Extra Upside

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Nixing Netflix: Streaming giant loses 1 million subscribers in Spain thanks to password sharing crackdown.

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No kids allowed: Bipartisan Senate bill would ban social media for children under 13.

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Liftoff: Boeing is increasing its 737 production.

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