As one of the most successful stock pickers in history, Warren Buffett regularly inspires investors around the world. Some of those folks may be interested to know that Buffett's holding company, Berkshire Hathaway (BRK.A 1.61%) (BRK.B 1.66%), has taken a targeted interest in video game powerhouse Activision Blizzard (ATVI +0.00%) throughout 2022.
At the end of 2021, Berkshire Hathaway owned roughly 1.8% of Activision Blizzard. Buffett increased his stake in the games company more than once in 2022, with shares growing from 64.3 million to 68.4 million in August -- or about 8.7% of Activision. Let's take a look at why it has captured Buffett's interest.
A possible deal with Microsoft
Buffett's move to increase his investment in Activision Blizzard was prompted by Microsoft's (MSFT 1.87%) announcement in January that it would acquire the gaming company for $95 per share in an all-cash transaction valued at $68.7 billion. The deal would be the biggest the gaming industry has ever seen, and thus attracted scrutiny from regulators around the world. Buffett garnered criticism back in April when Berkshire Hathaway first increased its investment in the company, as analysts believed the move was a gamble in the face of pending regulatory decisions.
However, Buffett's move to load up on Activision stock was a vote of confidence that the deal will be completed. The acquisition requires approval from various countries to ensure it does not lead to Microsoft becoming overly dominant in the video game market. The concern stems from Activision's franchise Call of Duty, the world's second-best-selling game series. In 2020 alone, more than 200 million people bought a total of $3 billion worth of products related to the franchise.
Under Microsoft's control, those games could give it a significantly greater edge in attracting players to its consoles and services over those of its competitors. While Activision Blizzard's game library would be a lucrative asset for Microsoft, the company is unlikely to become all-controlling in the market. Even with this acquisition, it would be just the third-largest video game company after Tencent and Sony -- a fact that bodes well for the deal's regulatory approval.
On Aug. 22, Saudi Arabia's regulator became the first authority to give the acquisition its stamp of approval. However, Microsoft most crucially needs sign-offs from the world's three main regulators: the U.S. Federal Trade Commission (FTC), the United Kingdom's Competition and Markets Authority (CMA), and the European Commission. Each of them has the power to block the deal or impose conditions.
What will the acquisition mean?
As the Activision Blizzard acquisition would be an all-cash deal, investors in the gaming company would see their shares disappear from their portfolios, replaced with the cash value if the purchase goes through. Activision Blizzard stock sits at about $75 a share and has fluctuated in the range of $75 to $79 over the past month.
Consequently, prospective buyers stand to profit by a little over 26% at Microsoft's purchase price of $95 a share. The Berkshire Hathaway stake is currently worth about $5.1 billion, which will become $6.4 billion if the deal goes through.
Even if the acquisition does not occur, Activision Blizzard shares may still make a smart, long-term buy. The share price is still 28% below the height it reached in February 2021, before it began to plummet following negative reports about the company's treatment of its employees. Additionally, Buffett purchased a stake in Activision Blizzard before the Microsoft deal was announced, an indication that he believes in the outlook for the video game company.
NASDAQ: ATVI
Key Data Points
How likely is regulatory approval?
The CMA revealed on Sept. 15 that it planned to take an even more "in-depth" approach to its regulatory process, moving into phase two of its investigation. The British antitrust authority has expressed concerns that Microsoft's Activision Blizzard acquisition would be anti-competitive. The CMA's next step will examine whether the deal means that Microsoft could "withhold or degrade" Activision's content from competing consoles or services and whether it will "raise barriers to entry and foreclose rivals in cloud gaming services."
The main concern is that Microsoft will make Call of Duty exclusive to its Xbox consoles. However, Microsoft has already asserted that it has no plans to do so, which should mitigate antitrust concerns. It's possible that regulators could approve the deal with the stipulation that Activision titles cannot be made exclusive to Xbox consoles -- a condition that would not devalue the deal for Microsoft.
Both parties have expressed optimism that the deal will go through. Activision Blizzard CEO Bobby Kotick said on Sept. 1 that the process is "generally moving along as expected," and said he expects it to be complete by June 2023. All in all, there seems to be a great deal of positivity surrounding the Activision acquisition, which has only been strengthened by Buffett's confidence in the stock. Now might be the best time to buy.
