I need to be totally honest, when I recommended buying Activision Blizzard before the New Year ended, there was no way that I could have foreseen that they would get bought out for a massive premium. I have to say though, that it has been an excellent surprise, being both great for my pocketbook and both businesses. Microsoft has put forth a confirmed offer at $95/share to acquire Activision and all of its owned properties. Now, for some reason, the stock might still be a buy and we’ll explore why here!
Why is the buyout good for Activision?
Activision, despite owning some excellent IP, and having a very profitable business was a long-term play. It needed a few years to get back to any substantial growth as it fixed its HR and development issues - starting to churn out games again. So, although they would probably have reached somewhere near $95/share or more in the next 3-ish years, investors now get a much shorter timeframe and don’t have to deal with the bumps along the way from the aforementioned HR lawsuits. All in all, it takes a sinking ship in Blizzard and lets us turn it around basically for free. Ironically, it was the massive share price depreciation from the HR drop that caused Microsoft to investigate Activision in the first place! Keep in mind also, that the deal is an all cash buyout, so we have no risk associated with the transaction, just cold hard cash at the end.
Why is the deal good for Microsoft?
Well, Microsoft is trying heavily to enter the gaming and now Metaverse spaces. Management realizes that the future is in the gaming and online world with more and more users converting each year - they also realize that if they can capture enough users early in the cycle they will keep them forever. Essentially, Microsoft wants to transform its Xbox segment into the Netflix of gaming - getting its users to be locked in an ecosystem where all their games are on Xbox and making them never want to switch, thus effectively printing money. Lucky for Microsoft, buying out arguably the biggest gaming company in terms of recognizable IP, and making their content exclusive is a good way to convince people to switch from Sony Playstation (especially in combination with games like Bethesda’s Elder Scrolls)… In general, the acquisition should bolster the strength of the popular GamePass service and fast-track their customer acquisition process. Overall, Microsoft is taking a short term hit and giving ATVI shareholders a nice break in order to get massive profits down the road. They are betting that they can turn around the ship, something that seems quite likely since Microsoft has excellent management and has shown a much more favourable workplace culture than Activision and their CEO.
Why is the current share price 16% below the buyout price?
First to understand is that the close date on the transaction where you would actually receive the cash is uncertain - it is predicted though that it will be completed in 1-1.5 years. The thing causing the uncertainty is the government scrutiny that is likely to arise in the antitrust space; while unlikely to disrupt the deal going forward it could cause challenges that end up in court and delay the process - such as a government agency requiring that Microsoft agree to not make Call of Duty exclusive to Xbox. Additionally, the sexual harassment challenges could further delay things as the prosecution attempts to get further concession to take advantage of the further complicated scenario. Keep in mind, there is also the risk that the whole deal gets cancelled from the previously mentioned regulatory challenges as well. The market is pricing a ton of risk into the transaction as it seems to think that it will take at least 2 years, which impacts the stock on a time value of money basis (suggesting an 8% guaranteed rate of return per year, which matches the S&P 500), while also considering the potential for a cancellation of the deal and subsequent collapse in the share price.
Decision
All in all, there are a lot of potential delays and risks associated with closing of the acquisition and although there is a massive underappreciation of the share price investors should be cautious. At the end of the day, I will be holding my own shares and hoping that the process takes less time than anticipated. However, there are a ton of deals in the market right now and I totally understand if an investor feels their money is better spent elsewhere or not at all.
By: Mateo Gjinali
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