In January, Microsoft (MSFT) announced its deal to acquire Activision Blizzard (ATVI) for a cash offer of $95. Six months later, with a yawning discount in the stock price of ATVI for Microsoft’s offering, MoffettNathanson on Monday upgraded ATVI to “outperform,” hoping the deal would be approved.
From a risk/reward perspective and a fair take on the FTC approval process, Moffett makes a solid case that the shares are discounted 20% and are worth a speculative buy.
The Biden administration has been strict about the merger lately. The FTC voted to change the formula for evaluating vertical mergers, cracking down on mergers billed as “pro-consumer.” Subsequently, the FTC sued Nvidia (NVDA) to block the purchase of Arm Ltd. and the Lockheed Martin (LMT) deal for Aerojet Rocketdyne (ARJT).
Moffett believes the FTC’s second request for data in March suggests that a good effort on the part of Microsoft/Activision to address the Commission’s concerns is back and forth with a good effort. They believe that time has passed without objection from the FTC, meaning the FTC is unlikely to enter the final phase with this proposed combination with much political heat from Washington.
The UK’s Antitrust Agency has also opened an investigation into the proposed merger to determine whether the deal will reduce competition in the UK. The Chinese antitrust authorities are also reviewing and will need to approve the merger. Microsoft argues that the deal will benefit both video game players and the gaming industry.
From the outset, it’s hard to see how the transaction will change the competitive landscape in the video game market. Moffett is dubious Activision’s top console video game, call of dutyOf course, Microsoft could help Steamroll competitors even if it turns into an Xbox exclusive. Still, a possible bargaining measure could be for Sony (Sony) and Nintendo (NTDOY) to ensure access to Activision’s console games, even though Microsoft would have little incentive to ban the game and they had previously We have since been committed to keeping them available to other console makers.
Wider deal spreads would usually have significant deal risk, but Moffett believes this is a function of a bear market and the risk of exposure outweighs the likelihood of the deal – hence the opportunity. Analyst argues that the stock is limited below current levels due to reasonable P/E and Blizzard momentum. overwatch 2 Coming in the fall as a follow-up to the massive success of the original Overwatch. Also, are scheduled for release diablo immortal and dragonflight (The world of Warcraft Expansion).
If the deal falls through due to antitrust action, Microsoft would have to pay a $3 billion breakup fee, approximately $4/share in ATVI. This infusion for Activision’s larger cash hoard will quell the market’s negative reaction to a negative FTC result. The hefty breakaway fee would also encourage Microsoft to fight the FTC in court if the deal is challenged.
Since the announcement of the deal, Berkshire Hathaway (BRK.A) (BRK.B) significantly added to an original small stake in Activision to become the largest shareholder with an 8.25% stake (64.3 million shares). Berkshire is not known to arbitrage, so they should either see value in a stand-alone ATVI or also believe that the market is discounting the possibility of a deal too much, which is highly favorable risk/ Reward is.
Most likely, Berkshire agrees with Moffett that there is little reasoning for why the FTC would block the deal, and eventually, the deal would be done. The risk/reward opportunity in ATVI shares turns reasonably positive for ~20% gain against ~15% loss at close of the deal. Most investors aren’t merger-billion players, but Moffettanathan’s case and Berkshire’s involvement are enough to warrant a buyout.
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