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The deal could clear the remaining hurdles, but it won’t be easy. Above, Satya Nadella, CEO of Microsoft, arrives in federal court in San Francisco on June 28.
Loren Elliott/Getty Images
The fate of
Microsoft
‘s
$69 billion purchase of
Activity
Blizzard will finally announce itself in the coming weeks – and investors may want to consider taking profits on the video game maker’s stock before then.
On Thursday, lawyers from the US Federal Trade Commission and Microsoft (ticker: MSFT) finished their arguments in a case that will likely determine whether the software giant can close the biggest technology deal in history and games like Duty to his silo. It is now up to U.S. District Judge Jacqueline Scott Corley to grant the commission’s request to prevent Microsoft from acquiring Activision (ATVI) before an FTC administrative judge holds hearings in August.
If Corley rules in Microsoft’s favor, it would essentially pave the way for the US deal to close. The FTC would likely drop its antitrust complaint, as it did when a judge refused to grant the regulator a blocking order
Meta platforms
(META) acquisition of virtual reality company Within Unlimited. If the injunction is granted, Microsoft and Activision will likely walk away from the deal when it expires on July 18.
Activision shares recently closed at $84.30, representing a discount of $10.70 from the cash takeout price of $95 per share. While the stock has risen in recent weeks as investors reevaluate the risks and rewards of holdings ahead of a major regulatory decision, there are clear concerns that the deal will fall through.
from Baron Activision stock first featured a year ago when it traded at $77.86. At the time, we argued that competition concerns were overblown and that the merger was likely to be completed. We reiterated our pick in November, after the shares fell to $74.10, assuming Activision’s video game sales were worth at least that much. Shares are up 8.3% from the July harvest and 13.8% from the November follow-up.
It may be time to sell. We still believe the deal can clear the remaining hurdles, but it won’t be easy. Regulatory scrutiny has tightened, with FTC Chair Lina Khan and regulators in the UK set their sights on major mergers. A positive ruling in the US is no guarantee, and the British Competition and Markets Authority’s decision to block the deal, which is currently under appeal, further complicates matters. The deal should be renegotiated or extended before the July 18 deadline.
Yes, a standalone Activision Blizzard would be worth owning in the long run. The stock recently traded at 19.5 times next year’s estimated earnings, compared to a five-year average of 20.7 times, according to FactSet. That’s based on analyst estimates that would improve if Activision continues to string together strong releases following the success of Call of Duty: Modern Warfare II And Diablo IV. And a $3 billion severance payment from Microsoft would provide some dry powder to drive more upside.
But if the deal falls apart, Activision’s stock would likely tumble as funds betting specifically on the merger choose to dump the stock. If you’re pessimistic about the merger, there’s likely to be a better opportunity to buy shares in the coming weeks and months.
Write to Connor Smith at connor.smith@barrons.com
