The Federal Trade Commission (FTC) announced Thursday that it would be suing to block Microsoft's (MSFT -0.28%) acquisition of video game publisher Activision Blizzard (ATVI). In the complaint it filed today, the regulatory body alleged the deal would allow Microsoft to suppress competition to its gaming platforms and services.

Despite the FTC's challenge to the pending acquisition, Microsoft stock still ended the day up roughly 1.2% thanks to gains for the broader market that helped lift technology stocks. Activision Blizzard, on the other hand, closed out the daily session with its stock down approximately 1.5%. Should investors sell the stocks on the recent news? 

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Background on the deal, concessions, and the FTC's challenge

Activision Blizzard is one of the world's leading creators and publishers of video games and is responsible for franchises including Call of Duty, World of Warcraft, Candy Crush Saga, and many other hit properties. Microsoft announced at the beginning of this year that it had entered into an agreement to purchase Activision Blizzard in a $68.7 billion all-cash deal. If completed, it would be the software giant's largest-ever acquisition, but the FTC has now filed an antitrust suit to block the deal in an administrative court.

Integrating Activision Blizzard would not only bolster the appeal of Microsoft's Xbox gaming platform, it would also significantly strengthen the company's Game Pass subscription service. Microsoft is aiming to make Game Pass the leading multi-platform subscription gaming service, similar to a version of Netflix for video games, but it remains unlikely that it will be brought to Sony's PlayStation consoles anytime soon. Acquiring Activision Blizzard would likely also give Microsoft a much stronger position in the metaverse

Microsoft recently announced that it had reached an agreement to bring Activision Blizzard's hugely popular Call of Duty games to Nintendo platforms for the next decade if the acquisition is completed. The software giant also made a similar offer to Sony, but it appears the creator of the PlayStation was cold on the proposition.

Microsoft was likely willing to offer the concession as an attempt to dissuade the FTC from attempting to block the acquisition, but the olive branch wasn't enough. Notably, the FTC highlighted the tech giant's recent acquisitions of publishers Bethesda and ZeniMax and noted that these integrations led to titles being withheld from competitors' platforms despite Microsoft previously stating to European regulators that it didn't have incentives to keep games away from rivals. 

In response to the complaint filed by the FTC today, Microsoft President Brad Smith stated that his company has complete confidence in the pending deal and welcomed the opportunity to present its case in court. Activision Blizzard CEO Bobby Kotick published an update on his company's website stating that, while the news sounded alarming, he remained confident that the deal would close and that allegations that the acquisition would be anticompetitive didn't align with the facts.

Should investors sell Microsoft and Activision Blizzard stocks?

Microsoft may be able to bolster its case in the FTC suit by pointing out its willingness to make concessions and highlighting competition from gaming-focused companies and other tech giants including Apple, Alphabet, Meta Platforms, and Amazon. Even if the Activision Blizzard deal doesn't go through, Microsoft will remain well positioned for growth thanks to its Azure cloud infrastructure services, productivity software, and array of other products and services. Long-term investors in the company shouldn't sell out of the stock just because the FTC is challenging its big acquisition move. 

For investors holding Activision Blizzard stock in hopes that the deal would close in the very near future, the recent FTC news may be cause for some reappraisal. With the game publisher valued at approximately $75 per share after today's pullback, the company's stock has roughly 27% upside if the deal is completed at the planned $95-per-share buyout price, but the likelihood and timeline for seeing a return on the deal may be shifting. The two companies had previously stated that they expected the deal to close before the second half of next year, but it could take longer for the purchase to be finalized even if it winds up clearing legal challenges. 

Ultimately, I don't think Activision Blizzard shareholders should dump the stock on the recent FTC news. As the relatively small dip for the company's share price today indicates, regulatory hurdles were expected, and Microsoft will actually wind up paying the gaming publisher a termination fee of up to $3 billion if the deal is scuttled. There's still a decent chance that the acquisition will go through, and Activision Blizzard is an industry leader with a strong balance sheet that should become even stronger if the deal is blocked.