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Facebook May Be the Best Way to Play the Collapse of the Comcast/Time Warner Cable Merger

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Facebook's management is exhibiting extreme overconfidence, and that could mean rocky times ahead.

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Over the weekend, Fortune.com a story, "How investors can play the Comcast-Time Warner Cable deal collapse," in which reporter Jen Wieczner offers the views of several professionals on how to capitalize on the deal's unraveling.

My suggestion? Short Facebook (FB).

If this doesn't feel at all intuitive to you, you're not alone. I doubt anyone has put the Comcast/TWC deal and Facebook together, but they should.

Let me explain.

Last week, while the pundits were offering their views on the why the deal collapsed, I went back to what I was thinking last winter before and just after the merger was announced.

What I saw was striking.

Looking back through my weekly commentaries from early last year, there many peak confidence indicators. Not only was Pharrell Williams' hit "Happy" blaring on the radio, but the IPO market was also going strong. In late January, for example, the IPO for "'fast-growing auto lender Santander Consumer USA Holdings was upsized, accelerated and priced at the high end of a revised-higher range, all suggesting extremely high confidence for a company closely tied to the financial health of U.S. consumer."

The Wall Street Journal even included a profile on Santander Consumer's Pebble Beach Pro-Am playing "subprime billionaire" CEO Thomas Dundon, highlighting his 13,556 square-foot Dallas home with "eight bedrooms, indoor and outdoor tennis courts, three wet bars, a swimming pool and an indoor slide that goes from the second floor to the first."

But there were plenty of other displays of lavish architecture on display late last winter too. A few week's before the Comcast/Time Warner Cable deal was announced, The Economist noted that, "From Cambridge, MA, to Cambridge, UK, an arms race is under way [among global business schools] to provide MBAs with the plushest place to study."The article highlighted several new multi-hundred million dollar buildings being constructed to meet "rising expectations among prospective students."

Marketwatch highlighted "The Streets of Monaco," a $400 million floating city complete with smaller versions of tourist attractions like the Hotel de Paris, Prince's Palace, Port Hercule and La Rascasse. The proposed mega yacht would come with a helipad, swimming pools, Jacuzzis, Jet Skis and even a go-kart track replica (three-wide!) of the famous Formula One circuit in Monaco.

Talk about an expression of peak confidence.

But it wasn't just these architectural extravagances that caught my eye.

Less than a month before the merger with Time Warner Cable was announced, Comcast unveiled plans for a new "innovation center" in downtown Philadelphia in what would be the tallest building in the country outside New York and Chicago.

Per the Philadelphia Inquirer:

Six years after Comcast Corp. moved into the city's tallest building, the cable-TV and Internet giant expects to break ground this summer on an even taller, more dazzling, $1.2 billion tower.

One of the world's leading architects, Britain's Norman Foster, has designed the trophy building with a host of innovative features. The building will at least initially be called the Comcast Innovation and Technology Center. Its structural core will run the vertical length of one side of the see-through, all-glass tower, instead of through the middle like a more traditional skyscraper. There will be 13 "sky gardens," or three-story atriums, for software designers, engineers, and product developers to collaborate, and the building will be topped by a blade extending about 150 feet higher than the Comcast Center. Instead of offices, the building will be mostly broken into "lofts."


Cautioning my clients that an extreme peak in confidence was near, I wrote, "Nothing says the sky is the limit like a new over-the-top skyscraper HQ."

Barely had the ink dried on that comment, I was writing this:

Well this week, Comcast took its exhibition of self-confidence to a whole new level with its announcement that it will acquire Time Warner Cable for a whopping $45.2 billion, topping a competing bid by Charter Communications. The deal will create what is arguably a monopoly in cable television.

While some have called the deal defensive, this chart of Comcast A shares suggests that nothing could be further from the truth.



With its stock up almost five fold since the banking crisis, the Comcast management motto these days must be "Go big or go home!"
Socionomically speaking, though, the timing for the Time Warner deal couldn't be worse. Between the price, the size, the bidding war and the monopolistic nature of the deal, the deal oozes paid too much at the peak of confidence. But note that the deal announcement came within 24 hours of a new all-time high on the Nasdaq 100. Talk about shining stadium lights on the extreme confidence on display in big tech.


If things had quieted down, that would have been the end of the story, but a week later, I was writing about Facebook's acquisition of WhatsApp and sharing that the reason for the deal was far less complicated than the media and financial analysts had laid out. Confidence among Facebook and its investors was extremely high, not at all dissimilar to what we had just seen with Comcast's merger news with Time Warner Cable. 

As I write often, our preferences, decisions and actions follows our level of confidence. In the corporate world, the higher the confidence, the bigger and more outrageous the deal.

Transformational M&A happens at the top. Looking at a chart of Facebook stock and what it means as an expression of saturating high confidence, the timing of the WhatsApp deal was perfect.



At the time, I wrote:

Even more, with Facebook's stock up more than an additional 2% yesterday on the news, the rationale for the deal could just as easily have been, "Together, they represent an unprecedented powerhouse...this alliance is unbeatable. Now they have this great platform they can cross-fertilize..." Fourteen years ago those were the words offered by Scott Ehrens, Bear Stearns media analyst, about the Time Warner AOL merger.

Then again, I am afraid that that same quote could also have been used earlier this week to characterize the rumored Apple/Tesla deal. At the very top, even the combination of a computer manufacturer and a startup car company makes a peach of a pie.

If I seem more snarky than usual this week, it is because we've seen this movie before, and not that long ago.


Well here are updated charts for Santander Consumer USA Holdings Inc., Comcast and Facebook.







Based on the charts above, it would appear that I got just one out of three right. Only Santander Consumer USA Holdings' stock has declined since I wrote my Commentary more than a year ago.

But the failure this week of Comcast to receive regulatory approval for the Time Warner transaction also speaks to the extreme peak in confidence that took place in early 2014. Comcast management (along with their bankers and lawyers) clearly believed that the deal could and would close, despite the transaction's monopolistic nature. Just as with their new building, the leaders of Comcast believed that the sky was the limit. Anything was possible.

This week, regulators showed that's just not the case.

In hindsight, I expect that Comcast shareholders will be delighted that the deal didn't close. As I wrote above, peak of confidence, bidding-war mergers are notoriously poor performers. Just ask Royal Bank of Scotland shareholders.
This is not to say that Comcast shareholders will be devoid of pain in the future.

Extreme peaks in confidence are extreme peaks, and based not only on the Time Warner deal, but Comcast's new building, the wave looks like it is clearly cresting.

Even more, as my "dumbest chart ever" from July 2014 showed, huge media-related deals tend to happen at major peaks in confidence to begin with.


While Mr. Murdoch may have thought he spared News Corp shareholders pain by withdrawing his bid for Time Warner, this chart of News Corp shows that that has not been the case at all.



Again, extreme peaks in confidence are extreme peaks in confidence. Oversized mergers merely help to pinpoint them.
So what does this all mean for Facebook?

Given the coincidental timing of the WhatsApp acquisition (as well as many of the unique peak-of-the-market elements of the deal) it appears that there is a very high risk of that transaction far underperforming expectations.

Just like Comcast management was far too confident -- and acting on it -- so too were the leaders of Facebook.

With the Nasdaq at a new post-bubble high today, nobody cares. Should confidence falter, that will change.

Much like the worst loan is made at the peak of confidence, so too are the worst mergers. Just look at the success rate of the oversized deals from 2006 and 2007. Given the socionomic backdrop of early 2014 and last week's Comcast/Time Warner Cable merger collapse, Facebook may be in for a very rocky time ahead.

As a researcher in confidence-driven decision making, while hardly intuitive, I'd offer that shorting Facebook may be the best way to play the Comcast/Time Warner Cable deal collapse.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
 
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
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Position in SH,DBC,USO,TBT; creditor of JPMorgan
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