Activision Blizzard could outperform even if Microsoft takeover fails

  • Activision Blizzard walks away from Microsoft’s $95 per share cash offer
  • The acquisition is under intense investigation by the European Union and scrutiny by US regulators.
  • Still, Activision is growing strongly, with its video game titles continuing to generate higher revenues.

Investors in Activision Blizzard (NASDAQ:) stock are getting nervous these days. The uptrend, which began earlier this year after Microsoft (NASDAQ:) announced it was buying the game publisher in an all-cash deal, is waning due to information that regulators might block the transaction.

An indication of this uncertainty is the growing gap between Activision’s current price and Microsoft’s cash offer of $95 per share, also known as merger arbitrage. At 73.51 dollars on Wednesday, Activision Blizzard stock offered a spread of 23%, significantly higher than the 8% of January 18, the date of the announcement of the operation.

ATVI (Blue), MSFT (Purple) Daily Chart

Merger arbitrage has intensified in recent days as reports surfaced that the US and Europe will be scrutinizing the proposed deal, which is tech giant Microsoft’s biggest-ever acquisition, for an amount of approximately 69 billion dollars.

Politico reported last week that the Federal Trade Commission is likely to file an antitrust complaint as early as next month on the grounds that the merger would give Microsoft an unfair advantage in the video game market. The two companies expect to complete the transaction in the first half of 2023.

The acquisition of Activision, which owns some of the most popular games franchises like Call of Duty and World of Warcraft, will help the software giant expand its offering for the Xbox console and enter the growing gaming markets. mobiles and the metaverse.

According to Politico, Sony (TYO:) Interactive Entertainment (NYSE:) has emerged as the main opponent of the deal, telling the FTC and regulators in other countries that if Microsoft makes hit games like Call of Duty exclusive to its platforms, Sony would be at a significant disadvantage.

Earlier this month, the European Union’s competition watchdog said it would conduct a full investigation into the deal to determine whether it could harm competition in the video game industry.

40% chance

For investors, this situation creates an attractive risk-reward proposition. If the deal is not approved by regulators, Activision stock is likely to weaken further. But if the deal is approved, they can make a significant return based on ATVI’s current price.

Aaron Glick, merger arbitrage specialist at Cowen & Co, said in a Bloomberg report that the market is pricing the deal’s chance of success at around 40%, assuming the stock would negotiate to $60 if unsuccessful.

While it’s hard to predict how the deal will turn out due to regulatory uncertainty, owning Activision stock isn’t a bad idea in any case. The company is growing strongly and its stock is worth holding in a long-term portfolio, even on a stand-alone basis.

Net bookings for Activision’s mobile platform were up 20% in the third quarter from a year earlier, driven by the huge popularity of games like Candy Crush and Diablo Immortal.

Additionally, Activision’s current quarter is filled with new releases, including the recent Call of Duty: Modern Warfare II. The latter title was a resounding success, surpassing $1 billion in sales within the first ten days of release, the fastest pace of any game in this hit franchise.

Activision’s dominant position in the video game universe has earned it a buy rating from 26 analysts surveyed by Investing.com. Their 12-month consensus price target shows 25% upside potential.

ATVI Consensus Estimates

Source: Investing.com

While moving Activision Blizzard from equal weight to overweight, Morgan Stanley said it saw compelling risk/reward in the deal. The note adds:

“While it is difficult to assess the likelihood of MSFT’s proposed acquisition receiving regulatory approvals, we believe the risk/reward is compelling on an entirely stand-alone basis…with a $95 call option in cash per share, if and when the MSFT transaction closes.”

MKM also raised Activision from neutral to buy, saying the current share price does not reflect fundamental improvements in its business and strong growth potential in 2023.

Conclusion: Should You Buy Activision Blizzard Stock?

Activision will not take a big hit if its proposed acquisition by MSFT is not approved by the regulatory authorities. Its gaming franchise is strong enough to produce healthy returns for its investors, even on a standalone basis.

Warning: At the time of writing this article, the author owns Microsoft stock. The opinions expressed in this article are solely those of the author and should not be considered as investment advice.

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