Microsoft's (MSFT 0.50%) proposal to buy top game publisher Activision Blizzard (ATVI) is far from a done deal. On Tuesday, the software giant agreed to pay $68.7 billion, or $95 per share, in an all-cash deal to buy Activision.
However, Activision stock closed Tuesday's trading session at $82.31, which suggests market participants are placing 50/50 odds on the deal being approved by regulators. The deal is expected to close sometime in Microsoft's fiscal 2023 (which begins July 1, 2022).
Image source: Getty Images.
Big tech hasn't gotten an easy pass from regulators in recent years, and Microsoft's bid for one of the world's top video game publishers will certainly be put under the microscope by the U.S. Department of Justice (DOJ) and Federal Trade Commission.
I bought shares of Activision Blizzard when the stock was trading in the $60s, but deal or no deal, there are two reasons I'm not planning to cash out anytime soon.
Reason 1: It's easy money
Microsoft's buyout offer was 15% above Tuesday's closing price. Investors can earn another 15% gain by simply holding their Activision shares until the deal is finalized, which will look like a smart move if the market declines in 2022. But first, the deal has to be approved. Here's why that should happen.
The video game industry is bigger than movies and is estimated to be worth $175 billion by market researcher Newzoo. But the combined revenue of the top three U.S.-based game companies -- Activision, Electronic Arts (EA -0.26%), and Take-Two Interactive (TTWO -0.17%) -- makes up just 11% of the entire industry.
By itself, Activision's trailing-12-month revenue is only 5% of annual video game sales.
Microsoft's gaming business generated $15 billion in revenue in fiscal 2021, so with Activision's $9 billion, Microsoft would control only 14% of the industry. From that perspective, there shouldn't be competition concerns, but there's more to it.
Reason 2: The deal might not happen
One reason the deal won't receive approval is that it would fuel more industry consolidation and, in turn, give big tech the green light to make more deals and dominate a large and growing entertainment market.
Last year, Microsoft scooped up one of the largest privately-held game companies by paying $7.5 billion for ZeniMax Media, owner of Bethesda Softworks, which makes the classic Elder Scrolls franchise, among others.
Just about all the big tech companies are investing in video games in some form, but if Microsoft's deal is approved, I would keep my eye on Alphabet (GOOG -0.02%) (GOOGL -0.07%), which is trying to grow the Google Stadia cloud gaming service.
Google Stadia is a direct competitor with Microsoft's Xbox Game Pass subscription service. The addition of Activision's nearly 400 million monthly active users to the Xbox ecosystem would essentially push Game Pass way out in the lead in cloud gaming, where Game Pass already has 25 million subscribers.
If Google Stadia wants to remain relevant, Alphabet might make a move to acquire another top gaming studio to shore up its exclusive game catalog and win more subscribers.
Another thing to remember is that Microsoft cited the metaverse as a reason for its interest in buying Activision. Facebook parent Meta Platforms (META 0.25%) is already investing heavily in virtual reality and also plans to invest in the metaverse over the next several years. All said, if Microsoft lands Activision, Electronic Arts, and Take-Two will become prime takeover targets as tech companies race to stack up a talented roster of software programmers to build the future of gaming.
But the prospects of a few tech platforms consolidating control over an increasingly important market for consumers is a reason this deal may not happen. The Biden administration has taken a strong stance on enforcing antitrust and competition policy at the DOJ, so it's doubtful that regulators would give the big tech giants a thumbs-up to go forth and conquer a $175 billion industry. Keep in mind, the combined cash sitting on the books at Alphabet and Meta Platforms is $195 billion, or 1.1 times the size of the gaming industry.
It's a win-win
If Microsoft's acquisition attempt fails, Activision shareholders would still own a highly profitable game company that is well-positioned to ride the future growth of the industry, with top franchises under its belt, and interests in esports and consumer products to boot. Plus, Microsoft's offer validates that Activision's intrinsic value is higher than what the stock has been trading for in the last few months.
Either way, investors will lock in a 15% gain over Tuesday's closing price, or the deal won't happen, and shareholders can continue holding a top video game stock that will likely be worth more than $95 a share in another five years.
