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The golf world was rocked on Tuesday.
After a bitter, year-long fight the PGA Tour and the Saudi-backed LIV Golf league have set aside their differences and announced a "newly formed commercial entity to unify golf."
In other words, the leagues have merged. Arms have been laid down in the world of irons and drivers and wedges.
What all this means is, by definition, up in the air. "All parties will work in the months to come to finalize terms of the agreement, with details to be announced in due course," the PGA Tour said in its release.
There are all kinds of angles to this story and most of them don't concern investors. And least not directly.
But we did see a reaction in shares of the two biggest golf-related plays in the US market on Tuesday. And the reaction was positive — Titleist parent company Acushnet (GOLF) and Topgolf Callaway (MODG), which owns clubmaker Callaway, both saw their stocks gain nearly 5% on the news.
In a note to clients on Tuesday, Randal Konik, an analyst at Jefferies, wrote "this unexpected agreement holds immense potential to elevate the sport of golf to new heights."
"By joining forces, this combined entity can harness their collective resources, capital, and expertise to generate heightened attention and overall interest in the game," Konik added. "The infusion of capital from PIF signifies a strong commitment to the growth and promotion of golf on a global scale."
Significantly, this agreement also saw pending litigation between the parties dropped.
But it wasn't just any kind of litigation — several LIV players sued the PGA Tour on antitrust grounds last August, with the complaint alleging the PGA Tour held "monopoly power" in the world of professional golf.
Less than a year later, the issue of fair competition in professional golf will find a resolution by the two sides — along with the DP World Tour, Europe's biggest professional golf circuit — joining forces.
That the market liked seeing good old-fashioned open market competition in the world of golf go away should come as no surprise.
One of the most popular concepts in the world of investing is "moat." Meaning: does your business have a large, wide, and easily defensible position against its competition? The bigger the better.
In his 1993 letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders, Warren Buffett quotes the great Peter Lynch: "Competition may prove hazardous to human wealth."
Buffett's point, in context, is that Berkshire owned large positions in names like Coca-Cola (KO) and Gillette because they are brand names with competitive advantages that are "obvious to even the casual observer of business," Buffett writes. In other words, they have large moats.
There are other sodas and plenty of options for men's razors and shaving cream. But as an average consumer who doesn't think too hard about such things, it also happens that I prefer Diet Coke and use a Gillette razor.
In 2005, Berkshire made $5 billion when Procter & Gamble (PG) bought Gillette. Berkshire's holdings in Coke are now worth $25 billion. Last year, Coke paid Berkshire $700 million in dividends; Buffett spent $1.2 billion building the position from 1987-1984. This is the moat in action.
The stock market's reaction to news of a détente between the PGA Tour and LIV on Tuesday, then, is straightforward — this new entity's increased power in the marketplace will be a positive for the business of golf.
Whether this is good for consumers or players is a different question. But for investors, less competition is better.
Of course, many investors cheer the idea of free market capitalism and therefore would never be caught openly celebrating monopoly power.
Instead, call it a moat.
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