MSFT - Activision's Comeback Raises $69 Billion Question
2023-07-14 09:45:00 ET
Summary
- Activision Blizzard's $69 billion sale to Microsoft is nearing completion, but may face delays due to regulatory holdouts.
- Activision's business has rebounded, with the success of "Call of Duty" and "Diablo 4" potentially increasing its standalone value.
- If the merger process continues to drag on, Activision CEO Bobby Kotick may seek better terms due to the company's improved performance.
Activision Blizzard’s ( ATVI ) next game might be its highest-stakes one yet. The “Call of Duty” maker’s $69 billion sale to Microsoft ( MSFT ) is creeping toward the finish line, but might not make it there before a looming Tuesday deadline. If the company’s suitor needs more time, CEO Bobby Kotick might have negotiating leverage to seek better terms.
A court loss for U.S. trustbusters means there will be no legal barriers to the deal closing in the United States at the end of the week. The Federal Trade Commission has appealed the decision , while its British counterparts might take longer for Microsoft to satisfy.
The situation leaves a cliffhanger over whether the companies can complete the merger before their agreement expires on July 18. If not, Activision will have to agree to an extension. The suspense is heightened by how much has changed over the past 18 months.
When Activision unveiled the deal in January 2022, its shares were reeling as its flagship warfare franchise misfired, setting up earnings to drop by half in the first quarter of that year. Meanwhile, technology companies were in free-fall. Like rival Electronic Arts ( EA ), Activision’s valuation had tumbled from around 25 times expected earnings to around 17 times, according to Refinitiv data. Microsoft provided a lifeline with its 45% premium.
Activision’s business bounced back, however, as a fresh “Call of Duty” recorded an $800 million opening in its first three days. Earnings per share are now expected to reach a post-pandemic high of $4 this year, according to estimates gathered by Refinitiv.
Assume Activision would trade at 20 times that profit, about where EA is headed, and its standalone value would be $80 per share, nearly halving the deal’s implied premium. Microsoft also would owe its target a $3 billion fee if the deal collapses, worth another $3 a share, assuming a 25% tax rate.
If Microsoft only needs a couple extra weeks to sway regulatory holdouts, its $95 a share offer should remain compelling enough. Failure would send deal arbitrageurs scurrying and leave Activision to rebuild from there. Going it alone also might revive tough questions about how Kotick handled allegations of misconduct .
If the process keeps dragging, though, the Activision boss could reasonably wonder whether his company’s brightening future, buoyed by the recent success of “Diablo 4,” should command a higher price. The name of the game for Microsoft is beat the clock.
Context News
Microsoft can proceed with its $69 billion acquisition of video game publisher Activision Blizzard, a U.S. judge ruled on July 11, rejecting arguments made by the Federal Trade Commission to block the deal. The agency said it would appeal the decision. A temporary restraining order preventing the companies from completing the transaction is set to expire on July 14. Britain’s Competition and Markets Authority, which had previously moved to stop the combination, said on July 12 that it was ready to engage with the companies about how to address its concerns. The merger agreement is set to expire on July 18.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Activision's Comeback Raises $69 Billion Question