Should you hold onto your shares of Activision Blizzard (ATVI) after the recent announcement that Microsoft (MSFT -1.27%) is acquiring the video game company for $68.7 billion? With shares currently trading more than 18% below its acquisition price, Activision Blizzard might not only be worth holding, but also buying.
The details
Microsoft has agreed to acquire Activision Blizzard for $95 per share in an all-cash deal. As of Tuesday, Jan. 25, Activision Blizzard shares were trading for $80, 18.75% below its acquisition price.
With the deal expected to close during Microsoft's fiscal year 2023 (July 2022 to June 2023), it may take anywhere from six to 17 months for investors to see that return. Even at the longer end of that timetable, investors would match the historical annualized performance of the S&P 500 return of 10.5%. But if the deal closes on the early end of the range, then shareholders will outperform the benchmark handily -- a common goal for investors.
Image source: Getty Images.
What could go wrong
In any acquisition, there is a possibility that the deal will not be approved by federal regulators, especially as big tech continues to draw ire from Congress. If the deal does fall through, few other suitors can afford Activision's $68.7 billion price tag, and you'll be left owning shares of a company plagued with scandal over the past year. Most notably, Activision Blizzard has been accused of harboring a culture of abuse and sexual harassment under the leadership of CEO Bobby Kotick. With Kotick retaining his role at least until proposed acquisition, it's unlikely that he would step down if the deal were to go sour.
So how likely is it that the government will nix the deal? Typically, federal regulators thwart deals over antitrust concerns like Visa's failed acquisition of Plaid. With robust competition in the gaming space, and the fact that gaming composes roughly 8% of Microsoft's overall revenue, regulators might be hard pressed to quash the deal based solely on antitrust law.
Meanwhile, advocates against big tech argue that Congress could spurn the deal under a new anti-tech bill, which has gained bipartisan support. But despite Congress's displeasure with big tech, Microsoft has developed a friendly relationship with lawmakers, according to The Washington Post. Its executives are called to testify on Capitol Hill less frequently than competitors like Alphabet, Amazon, and Meta Platforms. And when Microsoft's executives do testify, they're often thanked for providing valuable insights, like when Microsoft President Brad Smith testified before the House Judiciary Committee's antitrust panel in 2021.
The bottom line
This isn't Microsoft's first go-around with big acquisitions and federal regulators. In 2016, Microsoft acquired LinkedIn for $26.2 billion. Interestingly, that deal was approved in six short months. While the acquisition of Activision Blizzard is more than twice that deal's size, Microsoft's prudent management team appears well-equipped to answer any tough questions during the regulatory process.
DOJ antitrust chief Jonathan Kanter publicly commented that the DOJ and FTC are hoping to wrap up their review of the Microsoft-Activision acquisition in 2022, implying that any potential gains may come sooner rather than later. With a small chance of federal regulators shutting down the deal, investors should consider holding or even buying Activision Blizzard shares for a 18%-plus upside over the next six to 17 months.
