MSFT - UK blocking of Microsoft-Activision deal surprises Wall Street analysts

2023-04-26 10:09:14 ET

With the U.K.'s business regulator blocking Microsoft's ( NASDAQ: MSFT ) proposed $69B acquisition of videogame publisher Activision Blizzard ( NASDAQ: ATVI ), it took little time for Wall Street analysts on Wednesday to weigh in what might come next for the for the deal.

Prior to the start of trading, the U.K.'s Competition and Markets Authority [CMA] said it would not sign off on Microsoft's ( MSFT ) attempt to acquire the Call of Duty publisher, largely due to concerns about Microsoft's ( MSFT ) already strong position in the cloud gaming industry.

For its part, the CMA said it found no problems with the deal impacting competition regarding consumer choices around videogames. However, the regulators said that with Microsoft ( MSFT ) already having a massive cloud business with its Azure service, and its Xbox gaming console and customer base, the company already has between 60% and 70% of the cloud-gaming market.

Jefferies analyst Andrew Uerkwitz said he was surprised that the U.K. used cloud-based gaming as its main reason for blocking the deal. Uerkwitz said there is "overwhelming evidence that cloud services are beneficial to consumers" and that the use of the cloud for by the TV, video and music industries also inspire broader investment in technology in general.

Uerkwitz also estimated that cloud-based gaming "is less than 2% of the overall gaming market," and that the industry is still "several years away" from seeing a version of Call of Duty , for example that is playable on a mass-market level via a cloud service.

Stifel analyst Drew Crum said that the U.K.'s decision to block the deal was somewhat surprising, as "recent commentary from the U.K. suggested such [competition] issues had been adequately addressed by Microsoft."

So, the big question now is: What comes next?

Microsoft ( MSFT ) is expected to appeal the CMA's decision, but the organization doesn't have a history of siding with many such actions. Uerkwitz said that if the U.K. turns down Microsoft's ( MSFT ) appeal, there could be a negative impact on the cloud market.

"We see this deal [if it is ultimately denied] as slowing down interest by all parties in cloud and/or subscription services," Uerkwitz said.

Stifel's Crum said that while Microsoft ( MSFT ) has indicated it will appeal the U.K.'s ruling, the company is also facing a U.S. Federal Trade Commission suit against its proposed acquisition, with a trial in that case expected to be held later this summer. Crum said that even it wins its case with the FTC, without the British regulators' approval, "it would seem impractical to operate outside an important market such as the U.K."

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