Daily Archives: May 23, 2023

Late Stage Capitalism Ruining Things: EverQuest Edition

My post yesterday about Enad Global 7’s Q1 2023 financial results found me closing with the comment:

The joys of being a modest sized public company registered in Sweden I suppose, because if some Wall Street investment group was running the show they would be demanding stock buy backs and stripping it for quick cash boosts without thought towards the long term.

Of course, the universe had to immediately punish me for my hubris.

Enad Global 7

News popped up in my feed almost immediately about Alta Fox Capital Management sending a list of demands to the EG7 board of directors that they increase shareholder value now.

As I have opined before, most recently in a post about Blizzard and mergers, capital management firms are the new robber barons seeking a return to the gilded age, where the rich few basked in opulent luxury while workers lived in penury, with nothing to fall back if injured or in old age.  It is the time of the company store and Pinkertons and troops being set on workers seeking a living wage.

Capital management firms seek only immediate returns and dramatic increasing in shareholder value.  They have taken many a stable and profitable business and forced them into mergers or sold them off in pieces to maximize their return right then and there, with no thought to anything but their own bottom line.

Working in Silicon Valley and having been at several companies that have been thus maltreated… and having seen many other going through similar upheavals… I can tell you that the public, the customers, and the employees all suffer to enrich a very few.

Despite the lies told that these mergers will benefit the public via lower prices and more consumer choices, that is never the outcome.  The ideal merger is one that creates a monopoly that can then set prices however high the company sees fit.  Remember Mylan, which acquired the EpiPen rights?  It was already a $50 device to deliver an estimated $1 in drugs.  Having the exclusive right, they jacked the price so high that even the government noticed and stepped in, making them drop the price down to $600 for a two pack, a mere six fold increase in cost imposed on consumers simply because they could.

If you want a reason why we cannot have nice things, the words “capital management” should suffice.  Every public company is subject to their demands… though they make sure that senior management and the board of directors get paid off so they’ll cooperate.  They take care of their own and screw the rest of us.

Anyway, enough ranting.  What did Alta Fox demand that EG7 do?

  • Relist the Stock on a United States Exchange. Relisting in the United States would allow the Company to aggressively buy back shares at an attractive free cash flow yield, which is not allowed with the current Swedish listing. Even an up-listing in Sweden to allow buybacks would be better than the status quo.

If EG7 relists in the US then they would no longer be subject to the laws of Sweden, which has much more stringent consumer protections.  They certainly tip their hand as to what they want out of this by offering a side option in Sweden where the company is allowed to do stock buybacks, which is the common course in the US.

  • Initiate a Recurring Dividend. This would immediately turn the Company’s valuation multiple into a dividend yield. We estimate EG7 could easily pay a 10%+ dividend on the current share price while still properly reinvesting and maintaining a net cash balance sheet.

This one is just straight up “give us the fucking money!”  Pay enormous dividends while mouthing sweet words about still being able to reinvest.  Reinvestment is never allowed.

  • Run a Formal Strategic Review Process, Including a Sale of the Entire Company. We estimate multiple acquirers could pay a material premium to current prices and still have EG7 be a highly accretive transaction. Several peers were recently acquired for double-digit EBITDA multiples (SCPL and ROVIO), which we believe further highlights EG7’s valuation disconnect at ~4x EBITDA today.

Sell the company to some bigger fish we already own piece of, because that is a double win.  First they get whatever inflated price they can gin up… which will  first mean laying off a lot of staff to make the balance sheet look extra tasty.  Then, when they get that payout, the purchasing company will continue to reward them with stock buybacks.

This is all just naked greed with only one outcome in mind, and it has nothing to do with video games.  If they could increase shareholder value by 0.5% but shutting down all of the Daybreak titles, they would do it in a heartbeat.  They have no interest in the long term, just what they can grab today.

I used to be a firm believer in market capitalism, but Wall Street has spent the last 50 years figuring out how to min/max the system so they win and everybody else loses.  They get the money, the tax breaks, the loopholes, buy and sell supreme court justices, and are never called to account.

As with the Gilded Age, this is how you end up generating a progressive movement, where socialism isn’t a word you use for anything you don’t like.  This is how you get the working class to vote you out of office… unless you can keep them distracted by non-issues like where trans people can go to the bathroom or teaching history that isn’t just jingoistic lies.

The only upside in this Alta Fox demand is that if they had the voting power to do it, it would already be under way.  They hold 6% of the company currently and they’re trying to find some allies… and get a quick boost in stock price, because their fellow robber barons know what all these code words really mean.  It will be piggies to the trough and demands for more slop.