Activision Blizzard Hits a Wall

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The end of July came with sunny days and calm clear nights in Activision Blizzard (NASDAQ: ATVI  ) land. The company announced it would buy its shares back from Vivendi, putting it back in charge of its own destiny. This week, though, the rain clouds came rolling back. Investors filed a class action lawsuit last week to block the purchase, and a court order has put the whole thing on hold.

The lawsuit
This isn't the first go-around for the buyback deal. Immediately after the July announcement, shareholder Todd Miller sued Activision Blizzard, alleging the deal allowed insiders to unjustly gain from the company's work and resources. The complaint stemmed from the second half of the two-part agreement announced by the game developer.

The first portion of the deal is the main repurchasing, with Activision Blizzard buying 429 million shares back from Vivendi at $13.60 per share. The second part is harder to explain. In it, an "investment vehicle" comprised of Activision Blizzard CEO Bobby Kotick and Chairman Brian Kelly buys 172 million shares from Vivendi at the same discounted $13.60 per share. The first lawsuit pointed out that the purchase would give the insiders more than $660 million in profits for no risk simply due to the shares being discounted.

The path forward
The new lawsuit, brought by Douglas Hayes, is broader and claims the company breached its duty to shareholders by not bringing the action up for a vote. Right now, that puts the entire deal in stasis.

Activision Blizzard has said that it is committed to making the transaction happen as quickly as possible, and it still has some options. It has two paths to deal with Hayes' objection -- appeal the ruling or put the action up for a vote by non-Vivendi shareholders.

If those options don't pan out, it's going to be bad news for both companies. Vivendi is in desperate need of cash, and this sale was going to give the company plenty of resources to start remaking itself. Activision Blizzard was hoping to ditch Vivendi before the company could force a special dividend, draining the Activision Blizzard's cash reserves.

To me, this seems like a bump in the road rather than a dead end. Activision Blizzard should be able to circumvent the issue and finish up the Vivendi deal. I'm still worried about the insider investment, which doesn't seem to make Activision Blizzard better in any way, but I'm hopeful it will be explained as the transaction proceeds.

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