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The agreement could eliminate the remaining obstacles, but it will not be simple. Above, Microsoft CEO Satya Nadella arrives in federal court on June 28 in San Francisco.
Loren Elliott/Getty Images
The fate of
Microsoft
It is
$69 billion purchase of
Activision
Blizzard will finally be known in the coming weeks, and investors may want to consider taking profits on the video game maker’s stock until then.
On Thursday, lawyers for the US Federal Trade Commission and Microsoft (ticker: MSFT) concluded their arguments in a case which will probably determine if the software giant can make the biggest tech deal in history and add games like Call of Duty at his silo. It is now up to U.S. District Judge Jacqueline Scott Corley to rule on the commission’s request to block Microsoft from acquiring Activision (ATVI) before an FTC administrative judge holds hearings in August.
If Corley comes out in favor of Microsoft, that would effectively pave the way for the deal to be completed in the United States. The FTC would probably pull out his antitrust complaint, as he did when a judge refused to grant the regulator an injunction blocking
Metaplatforms
‘ (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 stock recently closed at $84.30, which is a discount of $10.70 from the cash redemption price of $95 per share. Although the stock has rallied in recent weeks as investors reassess the risks and rewards of owning it ahead of a major regulatory move, there are clear concerns that the deal will not materialize.
Barrons recommended first Activision stock a year ago, when it was trading at $77.86. At the time, we argued that competition concerns were overblown and that the merger was likely to go through. We renewed our choice in November, after shares fell to $74.10, assuming Activision’s video game sales business was worth at least that much. The shares are up 8.3% from the July pick and 13.8% from the November track.
It may be time to sell. We still believe that the agreement could eliminate the remaining obstacles, but it will not be easy. Regulatory control has been strengthened, FTC Chair Lina Khan and UK regulators considering big mergers. A positive ruling in the US is no guarantee, and the decision by the UK Competition and Markets Authority to block the deal, currently on appeal, further complicates matters. The deal is expected to be renegotiated or extended before the July 18 deadline.
Yes, a standalone Activision Blizzard would be worth owning for the long haul. The stock was recently trading at 19.5 times next year’s estimated earnings, compared to a five-year average of 20.7 times, according to FactSet. This is based on analyst estimates that would improve if Activision continue to chain strong outingsfollowing the success of Call of Duty: Modern Warfare 2 And Diablo IV. And a $3 billion break fee from Microsoft would provide dry powder to boost further.
But if the deal fails, Activision shares would likely plummet 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 stocks in the weeks and months ahead.
Write to Connor Smith at connor.smith@barrons.com
