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Despite approving Microsoft’s (MSFT) offer of $95 per share in April this year, shares of Activision Blizzard Inc. (NASDAQ: ATVI) are still 22% below the offer price as Wall Street is betting the deal won’t go through. The FTC is seeking additional data from the two companies as part of its antitrust review. The FTC is reportedly investigating the merger’s impact on competition among game consoles, Microsoft’s handling of consumer data if the merger goes through, and working conditions for console developers. games.
The 2020 Vertical Merger Guidelines can give us an idea of how the FTC will look at these issues. This article will argue that, based on the guidelines, the merger is very likely to go ahead. He will also argue that Activision shares offer an attractive opportunity for investors seeking protection against recent market volatility.
microsoft is small
One of the biggest hurdles facing the deal in investors’ minds is Microsoft’s status as a tech giant; It is the third largest company in the world by market capitalization. But Microsoft is a relatively small player in gaming, with revenue of about $15 billion during the company’s 2021 fiscal year. Tencent’s gaming revenue in 2021 was approximately $26 billion. Microsoft’s main competitor, Sony, has comparable revenue to Tencent of about $25 billion. If Microsoft closes on its acquisition of Activision, it would have about $24 billion in revenue. This indicates that the merger would add a fourth big player in the game rather than establish a leader, something the FTC could really welcome.
There is no clearer demonstration of Microsoft’s small size in games than the 25 million subscribers it has on its Xbox Game Pass. That number is dwarfed by Sony’s PlayStation Network, which has four times as many subscribers.
Under the 2020 Vertical Merger Guidelines, the agencies would seek commitments from Microsoft that it would not use its acquisition of Activision to take advantage of Xbox over other competitors. An example of such practices would be making the Call of Duty franchise exclusively available on Xbox. In an interview, Microsoft president Brad Smith said that the company has no intention of taking games off platforms, quite the contrary:
We’d like to bring it to Nintendo devices, we’d like to bring the other popular titles that Activision Blizzard has and make sure they continue to be available on PlayStation and are available on Nintendo.
Microsoft has a history of doing that with Minecraft, where the company expanded the game to more platforms after the acquisition rather than making it exclusive to Xbox. That might be encouraging to regulators, but they likely want more than just Microsoft’s word for it.
Another topic mentioned in the guidelines is the use of consumer data. Microsoft could potentially use additional consumer data it acquires from the merger to benefit its platforms. Mobile games in particular are notorious for their data collection practices, regulators might want to take a closer look at what Microsoft’s practices will look like and could find reason to block the deal.
However, the company has already committed to respecting consumer privacy and not using data in a way that favors competition.
We will continue to respect consumer privacy in our app stores by giving them controls to manage their data and how it is used… We will treat apps equally in our app store without unreasonable preference or ranking of our apps or our business partners. ‘ applications over others.
These verbal commitments won’t be enough to appease regulators, but they do do two things: 1) They make it impossible for regulators to show that Microsoft would gain monopoly powers from the mergers. 2) Give regulators room to negotiate with the company over its app store’s data usage and practices. If the company, in good faith, changes its app store principles to encourage competition and respect consumer privacy, the FTC cannot claim that the deal will harm competition. However, what the FTC can do is discuss and establish a framework to implement these principles in a way that it would approve.
This article will not address the risks that could occur after the merger, since it recommends merger arbitration. With more than $104 billion in cash and cash equivalents on its balance sheet, there’s little doubt that Microsoft won’t be able to pay the money. One potential risk, however, is that adverse market conditions could push Microsoft away from the deal, similar to the situation with Elon Musk and Twitter. Microsoft might consider paying the $2bn break fee as a better option, though the company’s pedigree means the deal is unlikely to fall through because of that. The real risk of a further deterioration in market conditions would be a further drop in ATVI’s price. This happened in 2020 when many arbitrary merger funds turned to forced sellers of target companies. Obviously, in that case, the potential return becomes more attractive, but investors would not get as much volatility protection as they would have liked.
However, the biggest risk, and the one that kept me from buying the stock, is that investors would do well to ride out the volatility and take advantage of some of the incredible deals the market has to offer. Sure, 30% almost risk-free is a good return, but does it compare to a “once-in-a-generation buying opportunity”?
One regulatory risk is that the FTC has withdrawn from the 2020 Vertical Merger Guidelines. Introducing new guidelines prior to merger closing may alter how regulators view mergers like the one with Microsoft and Activision. However, the deal is likely to get the green light when considering the factors the FTC wants to update in future guidelines.
Activision stock represents a compelling opportunity, as buyers would earn 30% from here in about 13 months. There are few risks in this scenario, given that Microsoft has the money and the deal would likely face a little regulatory pushback. Regulators will consider the impact the merger would have on competition in games, but Microsoft’s small size relative to competitors means the deal intensifies rather than kills competition. The 2020 Vertical Merger Guidelines also indicate that regulators will look at how consumer data could potentially be used, and Microsoft has already signaled that it is ready to find a solution that will please regulators for the deal to go through.