- Ticker: ATVI.US
- Entry price: $74.15
- Target price: $95
- Potential: 28.11%
- Time horizon: 9 months
- Risk level: high
- Portfolio size: 2%
The Company
Activision Blizzard (ATVI.US) is the largest US publisher and developer of computer games. It produces and distributes game and entertainment content for consoles, personal computers and mobile devices worldwide. The company owns world-famous franchises as Call of Duty, World of Warcraft, Diablo, Hearthstone, Overwatch and Candy Crush. Activision Blizzard also manages eSports leagues and provides third-party publishers with production and distribution services for their content.
What's the idea?
In November 2021, Microsoft made an offer to acquire Activision Blizzard. Terms of the deal:
- Buyer: Microsoft (MSFT)
- Offer: $95 per share
- Growth potential: 28.11%
- Form of payment: cash
- Trade close: H1 2023
Description of the idea
We have previously discussed the general principles of implementing the M&A arbitrage investment strategy.
After a string of sex scandals that culminated in November 2021, Activision has reached an agreement with Microsoft under which the tech giant will buy the video game developer for $68.7bn, or $95 per share. ATVI shareholders have already approved the deal, leaving it to the US, EU and UK regulators, who are bound by a memorandum of understanding.
The deal is the largest ever for a technology company and has therefore attracted particular attention from antitrust regulators. The US Federal Trade Commission (FTC) and the UK Competition and Markets Authority (CMA) are in the second stage of an investigation. Regulators are concerned that Microsoft Xbox could gain an unfair competitive advantage in the games console market if it restricts access to Activision Blizzard games for other companies.
We think the chances of the deal closing. First, Microsoft president Brad Smith said in a recent interview that the company has no intention of removing games from competing platforms. The verbal statement is irrelevant to antitrust regulators, but it clearly expresses the company's position: Microsoft is willing to make concessions in order to reach an agreement with regulators.
Secondly, according to the Vertical Merger Guidelines followed by the FTC, one of the key factors for the regulator is the market share that the company will take after the takeover. Despite its huge size, Microsoft is a small player in the video game market. Xbox Game Pass has 25 million subscribers, four times less than Sony's PlayStation Network. If the deal closes successfully, the company will have approximately $24 billion in video game revenue, making it only the fourth player behind Tencent ($26 billion), Sony ($25 billion) and Apple ($15.5 billion).
It is worth noting that Warren Buffett's Berkshire Hathaway bought a stake in Activision Blizzard. The Oracle of Omaha also seems to believe in a successful closing of the deal.
Risks
- Key risk: regulatory approval
- Possible loss: - 23.4%
How to take advantage of the idea?
- Buy shares at a price of $74.15.
- Allocate no more than 2% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
- Sell when the price reaches $95.