Call Of Duty

Activision’s Microsoft deal discount offers a ‘Call of Duty’ to investors

Activision’s Microsoft deal discount offers a ‘Call of Duty’ to investors
Written by ga_dahmani
Activision’s Microsoft deal discount offers a ‘Call of Duty’ to investors

In January, Microsoft (MSFT) announced its agreement to acquire Activision Blizzard (ATVI) in a $95 all-cash offer. Six months later, with ATVI’s stock price at a huge discount to Microsoft’s offer, MoffettNathanson upgraded ATVI to “Outperform” on Monday, hoping the deal would go through.

From a risk/reward perspective and a reasonable view of the FTC approval process, Moffett makes a compelling case that the stock is improperly discounted at 20% and worth a speculative purchase.

The Biden Administration has recently been tough on mergers. The FTC voted to modify the formula for evaluating vertical mergers, cracking down on mergers advertised as “pro-consumer.” The FTC subsequently filed a lawsuit to block Nvidia’s (NVDA) purchase of Arm Ltd. and the Lockheed Martin (LMT) deal by Aerojet Rocketdyne (ARJT).

Moffett believes the FTC’s second data request in March suggests there is a good faith effort on the part of Microsoft/Activision to address the commission’s concerns. They believe that the length of time that has passed without objection from the FTC implies that the FTC is likely entering the final stages without much political pressure from Washington with this proposed combination.

The UK antitrust agency has also opened an investigation into the proposed merger to determine whether the deal would reduce competition in Britain. Chinese antitrust authorities are also reviewing and will need to approve the merger. Microsoft maintains that the deal would benefit both video game players and the gaming industry.

From the outset, it’s hard to see how the transaction would alter the competitive landscape in the video game market. Moffett is arguably Activision’s best console game, Obligations, it can help Microsoft crush its competitors even if it becomes an Xbox exclusive. However, one possible remedy for the deal could be to grant Sony (SONY) and Nintendo (NTDOY) access to Activision’s console games, although Microsoft would have little incentive to restrict the games and has already committed to keeping them available to consumers. other console manufacturers.

Wide trading spread would generally imply significant trading risk, but Moffett believes it is more a function of bear market and risk aversion than trading probability, hence the opportunity. The analyst argues that the stock has limited downside from current levels due to reasonable P/E and Blizzard’s momentum with surveillance 2 will arrive in the fall as a follow-up to the huge success of the original Supervision. In addition, releases are scheduled for Devil Immortal and Dragonflight (the world of warcraft expansion).

If the deal breaks down due to antitrust action, Microsoft must pay a $3 billion breakup fee, about $4 per share in ATVI. This injection into Activision’s large cash reserves would cushion the market’s downward reaction to a negative FTC result. The hefty break fee would also possibly incentivize Microsoft to fight the FTC in court in the face of a challenge to the settlement.

Since the deal was announced, Berkshire Hathaway (BRK.A) (BRK.B) significantly increased a small original stake in Activision to become the largest shareholder with an 8.25% stake (64.3 million shares). Berkshire is not known for arbitrage, so they must either see value in a standalone ATVI or else believe the market is overly discounting the probability of a deal, which is highly risk/reward.

Berkshire would most likely agree with Moffett that there is little reason for the FTC to block the deal and, in the end, the deal will go through. The risk/reward opportunity in ATVI stock is reasonably positively skewed for a ~20% gain on a deal closing play versus a ~15% loss if the deal crashes. Most investors are not merger arbitrage players, but the MoffettNathan case and Berkshire’s involvement are enough to consider buying.

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