On Jan. 18, news broke that Microsoft (MSFT -1.27%) had agreed to acquire video game developer Activision Blizzard (ATVI) in a cash deal valued at $68.7 billion. That's equal to $95 per share, which caused the stock price of Activision Blizzard to spike from the low $60s it was trading at.
With Activision now trading around $80 a share, there's a gap between where the stock is and Microsoft's agreed price to buy it. That's a potential arbitrage opportunity, offering a shot at buying the stock today and pocketing the roughly $15 difference per share once the acquisition closes. But is it that simple? Here's what investors need to know.
Image source: Getty Images.
Why isn't the stock trading at $95?
Microsoft has agreed to pay $95 per share for Activision once the deal closes, so why isn't the stock at that price? The gap in the share price reflects the uncertainty the market feels about the deal. In other words, the market is pricing in the chance that the acquisition doesn't close.
Microsoft has become an increasingly more significant competitor in the gaming space over time; it's had the Xbox console system, as well as many developer studios that would design games for PC and console. But the company has increased spending in recent years, buying another prominent game developer, Bethesda Studios, for $7.5 billion last year.
Activision Blizzard owns some of the most popular gaming franchises globally, including World of Warcraft, Call of Duty, and Candy Crush. Its trailing-12-month revenue is $8.8 billion, so it's a significant acquisition. The deal would add to Microsoft's existing stable of 23 game developers, potentially raising antitrust concerns over the possibility for Microsoft to control the gaming market and how freely consumers can access game content.
It's become standard practice for different game manufacturers to have content exclusively on specific systems, and Microsoft has already banned Bethesda's upcoming potential blockbuster Starfield from being made available on the Sony PlayStation.
What happens if the deal fails?
In the price chart below, you can see how the stock spiked in early January on the news of the deal. The stock had been selling off before that, primarily due to controversy around the company's management team and alleged misconduct in the workplace.
ATVI data by YCharts.
Microsoft probably used the controversy as leverage in negotiations with Activision Blizzard, and the CEO could depart the company once the acquisition is closed.
Nobody knows for sure what will happen if the deal doesn't close, but the stock could likely revert to a level it traded at before the deal, potentially in the low $60s.
Is the risk worth the reward?
This is the question that investors ultimately need to answer for themselves. If the deal does close, buying the stock at $80 today gives you a potential 18.7% gain at the $95 per share acquisition price. If the deal falters, the downside is unknown because we cannot predict price action. But falling back to $64, its approximate price before the deal, would represent a potential downside of almost 25%.
If you're solely looking to play the acquisition as a trade, I'm not sure that the risk versus reward is worth it for most investors. The current sell-off among growth and technology stocks has many great stocks well off of their highs, and investors might be better off looking elsewhere to invest their money.
Potential investors might be better off looking beyond the acquisition itself, at their investment thesis, determining whether they would want to own Activision Blizzard outright. The company's revenue grew 10% year over year in 2020 and has strong momentum in mobile gaming. You will get paid if the deal closes and be left with a quality game developer if it doesn't.
