Microsoft’s Activision Blizzard Deal: Is it Time to Sell?

December 13, 2022

Last week, the US Federal Trade Commission (FTC) announced that it would be suing to block Microsoft Corporation‘s (NASDAQ: MSFT) US$69 billion acquisition of Activision Blizzard Inc (NASDAQ: ATVI).

The regulatory body said that the tie-up between the tech giant and popular gaming publisher would harm competition in the online gaming market.

Activision’s share price fell 1.5% to US$74.76 following the news, a further decline from the 3.9% decline earlier. Meanwhile, Microsoft’s share price rose 1.2% to US$247.40.

Regulators said Microsoft’s ownership of Activision could hurt other players in the $200 billion gaming market by limiting rivals’ access to the company’s biggest games.

The transaction would turn Microsoft into the No. 3 gaming company worldwide, behind only Tencent Holdings Ltd (SEHK: 700) and Sony Group Corp (TYO: 6758) (NYSE: SONY).

Microsoft’s proposed Activision deal is the largest ever deal for the Windows and Xbox maker, and is one of the 30 biggest acquisitions of all time.

Activision Blizzard’s share price could see near-term pressure

The recent FTC news is a setback to investors holding out for the monster deal to close in the near future.

At US$74.76, Activision’s share price is still significantly below the proposed US$95 per share buyout price.

The gaming publisher’s CEO, Bobby Kotick, assured employees in a letter that he remains confident that the deal will close.

However, with new regulatory hurdles such as this, the deal could take longer to complete.

Other competition regulators, including in the UK and European Union (EU), have also raised concerns on the deal although Brazilian antitrust officials cleared the Microsoft-Activision deal in October.

In the near term, investors could see some pressure on Activision’s share price.

However, even without Microsoft’s buyout, Activision is one of the world’s leading publishers of video games.

The company is responsible for popular franchises such as Call of Duty, World of Warcraft, Candy Crush Saga and many other hit titles.

In terms of its financials, earnings growth has been sustained while Activision has a strong balance sheet, high margins and positive operating cash flow.

It is also worth noting that a termination deal could see Microsoft having to pay between US$2 billion to US$3 billion to Activision.

Microsoft remains well positioned for growth

Even if the Activision deal doesn’t go through, Microsoft remains well positioned for growth thanks to its wide array of products.

These include, but are not limited to, its Azure cloud infrastructure services, productivity software, and other products and services.

Long-term investors will likely look beyond the Activision deal when it comes to investing in Microsoft.

However, there would be an impact on Microsoft’s plan to strengthen its Game Pass subscription service.

The company aims to make Game Pass the leading multi-platform subscription gaming service, with many dubbing it as the “Netflix for video games”.

In response to the complaint filed by the FTC, Microsoft President Brad Smith stated that Microsoft has complete confidence in the pending deal and welcomed the opportunity to present its case in court.

Looking beyond Activision deal

Microsoft’s proposed acquisition of Activision could take longer than expected. Both Microsoft and Activision have previously said that the deal will close by 30 June 2023.

Most investors have likely took into account the regulatory hurdles, as seen by Activision’s share price, which is trading significantly below the US$95 per share proposed buyout price.

Beyond the Activision deal, Microsoft has continued to move towards a content-based subscription business.

Even without the deal, Microsoft has gone ahead with its Game Pass subscription while Xbox has continued to gain market share in US at the expense of Sony’s PlayStation.

Microsoft is also collaborating with Netflix Inc (NASDAQ: NLFX) and was named as the exclusive technology and sales partner to power the streaming platform’s first ad-supported tier offering.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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