• Microsoft-Activision merger navigated global regulatory hurdles, gaining crucial approvals in the EU and USA after significant concessions.
• The UK’s CMA initial blockage and subsequent preliminary approval of Microsoft’s acquisition of Activision Blizzard mark a crucial development.
• Activision-Blizzard investors and employees will receive $95 per share post-acquisition, with clear provisions for vested and unvested options.
• Given the limited 1.13% upside and uncertain completion date of the acquisition, Activision is considered a hold despite anticipated approval.

Investment Thesis

I believe Activision Blizzard Inc. (NASDAQ:ATVI) is a hold. The journey of the Microsoft (NASDAQ:MSFT) Activision merger has been a complex tapestry of regulatory negotiations, marked by significant concessions to gain approvals from stringent global regulators, notably in the EU and USA. The UK’s Competition and Markets Authority (CMA) played a pivotal role, initially blocking the deal due to competition concerns, but a revised proposal has substantially addressed these concerns, marking a significant step forward in the merger process. For Activision Blizzard investors and employees, the acquisition translates to a clear and structured financial outcome, receiving $95 per share and having provisions for both vested and unvested options. However, the investment perspective on Activision is nuanced. The limited upside of 1.13% and the uncertainty surrounding the completion date of the acquisition make Activision a hold, despite the high probability of the acquisition’s completion, reflecting the intricate balance of opportunities and challenges in this high-stake merger.

Company Overview

Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment content and services, developing content for video game consoles, PCs, and mobile devices. It operates esports leagues and offers digital advertising within some of its content. Activision Blizzard’s key product offerings include titles and content for franchises like Call of Duty and Blizzard Entertainment’s Warcraft, Diablo, and Overwatch.

On January 18, 2022, announced plans in an all-cash transaction valued at $68.7 billion, offering $95.00 per share. This acquisition has been approved by Activision Blizzard’s shareholders and is expected to accelerate growth in Microsoft’s gaming business across mobile, PC, console, and cloud gaming. However, the completion of this acquisition is subject to obtaining required regulatory approvals and satisfaction of other customary closing conditions. Microsoft and Activision Blizzard have agreed to extend the merger agreement through October 18, 2023, to resolve remaining regulatory concerns. Recent developments from government regulators across many of Activision’s major markets suggest to me that a deal is close.

A Long Journey with the End in Sight

The journey of the Microsoft-Activision Blizzard merger has been a labyrinth of regulatory hurdles, marked by approvals, rejections, and ongoing scrutiny. The merger has received the green light in numerous countries, including the European Union (EU), China and the USA. I note these countries in particular because these are some of Activision’s largest markets and have historically made it difficult for Big Tech companies such as Microsoft to acquire smaller business and this takeover attempt has been no different.

In order to get approval from regulators, the company had to concede on many issues. The European Commission had concerns around the mergers impact on competition in the cloud gaming space and as such it proposed to provide free licenses that would allow European consumers to stream Activision games on various cloud gaming services for the next ten years. This compromise was pivotal in swaying the Commission, with the EU’s competition commissioner, Margrethe Vestager, commending the decision as a promoter of competition and growth within the cloud gaming sector. Activision’s biggest market, the US, was one of the last major markets to approve the merger and was strongly opposed to the proposal with the Federal Trade Commission (FTC) attempting to halt Microsoft’s purchase of Activision. This was until July 11 when the US appeals court rejected the FTC’s request to halt Microsoft’s $69 billion purchase. This decision was crucial as it eliminated one of the major barriers Microsoft faced in finalizing the deal and expanding its gaming empire and left only one major market left, the UK.

Approval in the UK is a Pivotal Moment

The recent developments in Microsoft’s acquisition attempt of Activision Blizzard signify a pivotal moment in Microsoft and Activision’s ongoing dance with regulatory scrutiny. The UK’s CMA has been a significant hurdle, initially blocking the deal over concerns it would stifle competition, particularly in the burgeoning cloud gaming sector. However, the CMA’s recent statement on September 22, that Microsoft and Activision Blizzard have “substantially addressed” the antitrust concerns mark a crucial step forward, potentially setting a precedent for future tech mega mergers.

In my opinion, Microsoft’s strategic navigation through the regulatory landscape, marked by its willingness to transfer cloud streaming licensing rights of Activision Blizzard games to Ubisoft Entertainment, reflects a sophisticated understanding of balancing innovation and market dominance. This move, intended to prevent Microsoft from monopolizing the cloud gaming sector by releasing Activision games exclusively on its own streaming service, is a significant concession. It demonstrates a pragmatic approach to compliance, potentially serving as a blueprint for other tech giants in future acquisitions.

The CMA’s reversal is particularly noteworthy given the global context, with the deal having cleared regulatory barriers in other jurisdictions. It underscores the pressure on the last-standing regulatory body when the acquisition has received a nod in regions representing a substantial share of global revenues. The ongoing consultation until October 6 is now the focal point, with the final decision poised to impact not just the entities involved but also set the tone for regulatory approaches to tech acquisitions globally.

The broader implication of this development is the potential emboldening of Big Tech in pursuing large-scale acquisitions, albeit with a clearer understanding that substantial concessions may be inevitable. The tech industry’s growing power continues to be under the microscope, and how companies like Microsoft maneuver through this scrutiny will likely shape the industry’s acquisition strategies moving forward.

Given the extensive information and the recent developments, particularly the UK approval, I believe the probability of the Microsoft-Activision Blizzard merger reaching completion has significantly increased. The meticulous scrutiny and the subsequent approvals from various global regulatory bodies, including the decisive rejection of the FTC’s request to halt the purchase by the US appeals court, have been pivotal in steering the deal towards closure. These were substantial hurdles and overcoming them has brought a sense of inevitability to the merger’s completion.

What this Means for Investors

As I mentioned, the most recent development from the UK’s CMA has significantly increased the probability that the merger is complete, and the Activision is bought out for $68.7 billion or around $95 per share. As this acquisition is set to be all cash, Activision Blizzard shareholder will receive $95.00 for each share of Activision Blizzard stock they own after the closing of the deal.

For investors and employees holding Activision Blizzard options, the acquisition is also very clear. Activision Blizzard employees will be able to convert their unvested Restricted Stock Units (RSUs) and Performance Stock Units (PSUs) to Microsoft RSUs and is designed to maintain the existing schedule and structure of employee stock units. Employees with stocks that are yet to vest will have their stocks converted to Microsoft’s, adhering to the original timeline set by Activision Blizzard. This implies that upon the completion of the vesting period, employees will acquire Microsoft stocks instead of Activision Blizzard’s, ensuring a seamless transition of stock assets. For vested RSUs and options, the approach is distinct. Vested RSUs will be cancelled, and employees will receive $95.00 for each, compensating the value of the vested stocks at the merger consideration price. Vested options will also be cancelled, but employees will be compensated with the difference between the $95.00 per share merger consideration and the exercise price of the Activision Blizzard option. For instance, if an option allows an employee to buy a share at $80, the employee will receive $15 as the difference, compensating for the value they held. However, there is a specific provision for options that are ‘out of the money’, meaning the exercise price is equal to or exceeds the $95.00 per share merger consideration. If an employee or investor has the option to buy a share at a price equal to or exceeding $95, the option holds no intrinsic value and will be cancelled without any compensation. This provision is clear and unambiguous, ensuring uniform understanding among all stakeholders regarding the acquisition terms.

For Microsoft investors, you will be acquiring an industry leader in the video game industry with an impressive portfolio of well-known and established brands, including Call of Duty, World of Warcraft and Overwatch, as well as impressive financials which I will detail in the following section.

Activision also controls 8.3% of the video game software publishing industry, which is anticipated to grow at a compound annual growth rate (CAGR) of 13.4% until 2030. This acquisition will help Microsoft continue to increase its presence in the growing video game industry, surpassing some of its biggest competitors. In addition, Activision Blizzard will also contribute positively to cash flow generation for the Microsoft.

Financial Overview

Over the past 5 years, the company has demonstrated strong financial performance. Its revenue grown steadily, increasing from $7.5 billion in 2018 to $8.71 billion in the last 12 months (LTM), however its worth noting its LTM revenue is below its 2021 revenue of $8.8 billion. The earnings per share (EPS), has also grown steadily from 5 years ago and like revenue, peaked in 2021 at $3.44 before dropping to $2.73 in the LTM, though we should consider that 2021 was an exceptional year for ATVI and was fueled by the tailwinds resulting from the pandemic.

The book value per share (BVPS) has seen a consistent upward trend, growing from $14.91 in 2018 to $26.43 in the LTM, indicating a CAGR of approximately 12.1%. This suggests that the company has been successful in increasing its intrinsic value over the period. Free cash flow (FCF) has also been growing strong for ATVI, growing from $1.72 billion in 2018 to $2.45 billion in the LTM corresponding to a CAGR of 8.1%.

Activision Blizzard anticipate delivering robust financial performance for the entire year, propelled by the successful revitalization of the Diablo franchise and expansion in live operations throughout the company. However, they are mindful of potential risks, including those associated with their execution, consumer spending climate, and the labor market, and are thus cautiously forecasting their content releases for the second half. They continue to project at least high-teens year-over-year growth for revenue in 2023, and at least high-single digit year-over-year growth in net bookings and total segment operating income for the year.

Looking forward I anticipate the company continues to grow as the they continue to release strong, well-known titles in an industry that I anticipate will continue to see robust growth. Much of this growth of course, will be experienced by Microsoft who I expect to take control of Activision by October 18, which is when Microsoft executive Brad Smith said the firm is attempting to close the deal.

Valuation

As I have mentioned throughout this article, now that the much of the regulatory concerns are behind us, I anticipate Microsoft will take control of Activision Blizzard. When the deal goes through, shareholders will receive $95 per share in exchange for all ATVI shares they own. Based on the current price of $93.92, this only corresponds to an upside of 1.13%, which is a rather limited upside. If you were to assume this deal were to be completed by October 18, which is 25 days from now, and the payout were to occur that same day, you would achieve a return of 17.8% CAGR. Obviously if the payout date were to occur any time after October 18 the CAGR achieved would continue to get worse.

As I strongly believe this acquisition will happen and because of this limited upside, and the fact that there’s no guarantee of when this deal will be completed, I believe that ATVI is a hold.

Conclusion

The journey of the Microsoft-Activision merger has been a complex tapestry of regulatory negotiations, marked by significant concessions to gain approvals from stringent global regulators, notably in the EU and USA. The UK’s CMA played a pivotal role, initially blocking the deal due to competition concerns, but a revised proposal has substantially addressed these concerns, marking a significant step forward in the merger process. For Activision Blizzard investors and employees, the acquisition translates to a clear and structured financial outcome, receiving $95 per share and having provisions for both vested and unvested options. However, the investment perspective on Activision is nuanced. The limited upside of 1.13% and the uncertainty surrounding the completion date of the acquisition make Activision a hold, despite the high probability of the acquisition’s completion, reflecting the intricate balance of opportunities and challenges in this merger.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Activision Blizzard: Latest Approval Marks A Significant Milestone In Complex Merger Journey appeared first on Up2info.com.

• The Competition and Markets Authority (CMA) has nearly approved the acquisition of Activision Blizzard by Microsoft in a deal valued at $75 billion.
• The CMA’s concerns revolved around Microsoft’s dominance in the cloud gaming market, but the deal now allows other gaming platforms access to Activision Blizzard’s games.
• Activision Blizzard has seen strong financial performance in 2023, with a 34.5% increase in revenue driven by PC gaming and digital online channels.
• This means the deal still makes sense for Microsoft, but there might be better places to park money now rather than keeping it in Activision Blizzard.

It has been a wild ride for software giant Microsoft (NASDAQ:MSFT) and video game behemoth Activision Blizzard (NASDAQ:ATVI). But it looks as though that ride is quickly coming to a conclusion. Shares of the latter rose up by around 2% on September 22 after news broke that the Competition and Markets Authority (or CMA for short) has preliminarily approved the acquisition of Activision Blizzard by Microsoft in a deal that’s valued at approximately $75 billion. In what follows, I would describe the recent events and disclose why it might not make sense to own shares of the video game publisher from this point on.

A major, and maybe final, development

For nearly two years now, shareholders of both Activision Blizzard and Microsoft have been on a journey of sorts together. That is because, in January of 2022, Microsoft announced that it was buying the video game publisher in a deal valuing it at roughly $75 billion. After stripping out net cash, the effective purchase price was a bit lower at $68.7 billion. As can be expected of any major deal like this, regulators immediately took note. And because both companies are global enterprises, they must deal with regulators in most or all of the regions in which they operate. This is no easy task and, in theory, a failure to appease parties in any single region could result in the deal falling apart or having to be modified significantly.

I will spare you all of the many different steps that occurred along the way. In fact, I did write two different articles earlier this year that discussed what, at the time, were recent updates. I would encourage you to read them here and here. Heading into the present day, there were still two regulatory agencies that pushed back significantly on any sort of transaction coming to fruition. After Japan gave its blessing in March of this year, that only left the US FTC and Britain’s CMA. After suffering multiple court defeats between June and July, the FTC finally threw in the towel on July 20, resulting in the CMA remaining as the only regulatory agency with significant reservations about the transaction.

Perhaps surprisingly to some, the resistance by the CMA did not center around any of the major operations of the two companies. Rather, it was out of concern for the nascent cloud gaming market. At the time, the CMA estimated that Microsoft already had a 60% to 70% share of that market in the UK. And by acquiring a major video game publisher that produced high-end games, the fear was that either Microsoft would be able to deny other gaming platforms access to its games and/or it would require those gaming platforms to charge incredibly high fees in order to achieve access. Microsoft offered up proposals in response to this aimed at addressing these concerns, but they were considered too limited in scope by the agency. And for a market that was expected to grow to $1.25 billion (for the UK only) by 2026, that could prove an issue.

At the end of the day, it was decided that Activision Blizzard would sell its non-European streaming rights to Ubisoft Entertainment (OTCPK:UBSFY) (OTCPK:UBSFF) for an undisclosed sum. As part of the deal, Ubisoft we’ll have streaming rights not only for existing PC and console games, but also for any new games released by the video game publisher for the next 15 years. Earlier in the year, there were concerns that any significant change in the transaction terms might result in the European Commission reopening its review of the deal that was previously approved. But that ended up not coming to pass.

Finally, on September 22, the CMA issued a press release in which it stated that the new deal, as structured, ‘addresses previous’ concerns that the agency had about the transaction. In particular, the CMA was pleased by the fact that, as opposed to the prior offers that were rejected by it that were made by Microsoft, the current arrangement will allow Ubisoft to offer Activision Blizzard’s games both directly to consumers and to all cloud gaming service providers, including in various formats, without pushback from Microsoft. And the deal also forces Microsoft to ‘port’ games made by the video game publisher to operating systems outside of just Windows, while also supporting game emulators as requested.

This does not mean that the deal will definitely go through, but it very likely will. I say this because, according to the press release issued by the CMA, it still has some concerns regarding certain provisions in the sale of the cloud streaming rights. These concerns largely revolve around how the streaming rights arrangement with Ubisoft could be theoretically ‘circumvented, terminated, or not enforced’. However, Microsoft has offered remedies aimed at addressing these issues and Sarah Cardell, the CEO of the CMA, stated that Microsoft has now taken ‘the necessary steps to address’ the agency’s ‘original concerns’.

Given how much time has passed, it would be understandable for some investors to wonder if it would have made more sense for Microsoft to not allow enough changes to be made in order for the deal to go through. After all, the video game space has not faced a very pleasant time over the past year or so. In 2022, for instance, global gaming revenue fell by roughly 5%. This year, the space is expected to grow by about 2.6%. But that is being driven largely by a 7.4% rise in console sales, which is something that Microsoft benefits directly from, but that does nothing for Activision Blizzard.

The good news for those who are fans of this transaction is that, despite some weakness in the video game market, Activision Blizzard has seen some really attractive results so far in 2023. Revenue in the first half of the year, for instance, came in at $4.59 billion. That’s a 34.5% surge over the $3.41 billion reported one year earlier. The biggest chunk of this increase came not from mobile as some might expect. Rather, it came from a $543 million increase, translating to a year-over-year rise of 75.8%, in revenue associated with PCs. Higher sales from Call of Duty: Modern Warfare II compared to the weaker performance of Call of Duty: Vanguard the year prior, as well as from both Overwatch and Diablo IV, helped the company tremendously. In addition, revenue increased year over year when it came to World of Warcraft.

As expected, almost all of the company’s revenue growth so far this year has come from digital online channels, which consists of digitally distributed downloadable content, microtransactions, subscriptions, licensing royalties, and other factors. This, to me, should not be a surprise. Long gone are the days where the company benefits significantly from retail channels and other lines of business, such as its gaming leagues, are still only a small piece of the overall pie.

The growth in revenue also brought with it higher profits. For instance, net income has nearly doubled from $675 million to $1.33 billion. Operating cash flow grew from $840 million to $1.17 billion, while the adjusted figure for this expanded from $932 million to $1.56 billion. Lastly, EBITDA for Activision Blizzard also grew year over year, climbing from $882 million to $1.44 billion. And to assure you that the performance was not due to a one quarter spike, in the chart below I also provided financial results for each of the two quarters of this year set beside one another and compared to the same two quarters last year.

Takeaway

Based on the data provided, it seems highly likely that the acquisition of Activision Blizzard by Microsoft will be completed. In fact, I would put the probability at over 98%. The CMA has opened a consultation, until October 6, in order to address Microsoft’s proposed remedies that still remain. But assuming that goes well, the transaction will be completed. Now, this does not necessarily mean that investors should buy into Activision Blizzard at this time. Because while the deal almost certainly will be completed, the spread between the current price that shares are trading at and the $95 that they are being acquired for by Microsoft is only about 1.1%. I would make the case that, between now and the time the deal closes, there are certainly better opportunities that can be captured that can generate more appealing upside than that.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post The Marriage Between Microsoft And Activision Blizzard Looks Set To Proceed appeared first on Up2info.com.

• Chris DeMuth Jr. discusses his investment approach, focusing on mispriced securities.
• His thoughts on current market conditions, highlighting investment interests in energy and potential opportunities in Activision.
• Update on Innovate, his best new idea for 2023.

Listen to the podcast below or on the go via Apple Podcasts or Spotify.

Chris DeMuth Jr. returns to talk the state of the markets (2:20) M&A, deal financing and arbitrage. (5:50) Activision, Microsoft, the FTC and why Chris sees the deal closing (15:40) Opportunity today is in energy, especially oil and gas (24:30) Update on Innovate (NYSE:VATE), a long-term hold (33:45).

Transcript

Rena Sherbill: Chris DeMuth, welcome back to the show. It’s always nice to talk to you.

Chris DeMuth: It’s good to be here. Thanks so much for having me again.

RS: For those who don’t know you, maybe like synthesizing in a line or two what you’re all about and what you’re focused on at Rangeley Capital and Sifting the World. And if you want to break the rules and add a line, that’s fine. But not like an exposition.

CD: My wife always likes me to give a short version. She usually requests a single word. A word is a little hard. I’m an investor. I guess if I had to say one word, if I had a few sentences, I would say my background is in public policy research. I’m very interested in data analysis. I’m very interested in thinking about complex subjective risks with a probabilistic framework.

So whenever there’s hairy, ugly policy issues, whenever there’s litigation issues, whenever there’s the kind of thing where you might have some counterparties who are price insensitive for reasons unrelated to the underlying economic value I like to take the other side. So that’s Rangeley Capital. That’s me.

I have a couple of great colleagues that I work with on finding investment ideas and sizing them and do other things in my spare time. But what I’m working I’m thinking about, mispriced securities generally with some kind of corporate action that’s going to for better for worse unlock the underlying value typically 3 to 5 years ahead.

RS: So given where we are this year, late August, rounding the corner towards September, how are you thinking about the markets? What are you thinking about as you’re looking broadly speaking? And you can narrow it down as you keep going?

CD: Sure. Last year 2022, so thinking about the calendar year, made a lot of sense to me. It was very cathartic, especially on the short side, especially looking at the kind of things that were preemptively getting crushed with the onset of reality of real interest rates and the cost of capital.

You had this kind of weird, suspended animation era where as long as there’s no cost of capital, kind of the more dramatic, the total addressable market, the more of a story you have to say about what can happen over the next 10 years, has very little cost. So you’re just stuck with what is the most dramatic benefit that you can describe, which is a kind of a, a childish, and strange enterprise.

And then as interest rates rose, you have a real cost of capital and you can’t just do that anymore. And a lot of things that I thought looked probably worth less, and certainly worth much less than where they were trading did badly. They kind of bounced back a lot this year. It’s been a hard one on the short side. It’s been a hard one for skeptics and debunkers and value investors on the short side.

This month actually has been a very good one, but this year has been a very bad one for nonsense, getting kind of inflated. And weirdly enough, I guess the market’s a discounting mechanism, it’s done that as the interest rates actually rose as opposed to the prediction of them rising. I don’t think that’ll last. I don’t think it can last for years.

A lot of these guys are kind of frantic producers of press releases and incremental shares. Whatever their stock price is doing, the stock count is kind of going up into the right full time. And they kind of put out a press release for every little thing they do. So a lot of kind of never profitable tech. Interestingly it was kind of on its last legs.

And then the AI enthusiasm really saved it. Not only did it save it, but it saved a lot of the huge asset allocators, including SoftBank (OTCPK:SFTBY), where they were going to just have to dump inventory on the market. And we’re probably weeks away from kind of dramatically impacting the market. And then we’re able to hang on because of AI enthusiasm. So that has some very good things in it, that has some legitimate investments, but also has a lot of nonsense that it rescued.

On the long side, ditto, last year, kind of started to have this revival of small cap over large and value over growth and that’s kind of dissipated a bit. I can say where I’m spending a lot of my time in energy and capital is really on two categories.

The first is ESG service provider for buying all the stuff that ESG sells price insensitively for mandates energy mostly and specifically oil and gas where there are equities that are just wildly mispriced relative to the underlying commodities.

And then secondly, an area that I think is most for better or for worse, uncorrelated over the next few years, is litigation. We have some major litigation efforts underway. Some I can talk about, some I can’t yet. And that’s going to kind of make our luck between those two. We have this and that elsewhere.

I’m certainly always paying attention to the M&A market. I’m very involved in researching arbitrage. My arbitrage books is as light as it’s ever been, kind of directional bets and equities are pretty light outside of litigation and outside of oil and gas. If those two areas work well, I would have a hard time hurting myself elsewhere, just how we’re sized and scaled.

If those two things go badly, I’d have a hard time saving my bacon elsewhere. Again, just how we’re sized. So these are kind of our two firm exposures. And then we have this and that as opportunistically things arise.

RS: Why would you say that things are light on the arb side these days?

CD: Two-fold, one is deal financing was in havoc as interest rates rose. We can handle high interest rates, but we can’t really handle uncertainty and fluctuation.

So just deal financing kind of the market was closed, that was really hard on LBOs and psychologically hard on deal target boards. The boards kind of tend to have this funny sense that you should pay me for a premium to the best I ever traded during my tenure, even if half the value is gone away, right.

So it’s hard when things are fluctuating on the credit side to have a very active deal market. And then when you do, we have a fanatical regulatory regime in Washington, which is unlike anything we’ve seen in prior Republican or Democrat administrations.

I was very close to a lot of the Obama Democrats. I found them sane, sober, free on their own recognizance, normal humans who you could do business with, maybe more skeptical of M&A than some of the Republicans. But you had a big change with Biden. Biden is pretty checked out, maybe generally, but certainly from administrative state enforcement of regulatory minutia.

That’s never been his beat. It certainly is not his beat now to any extent. All his pressure comes from his left. So if you kind of place him as a pretty normal Democrat, call him the center of the Democrat kind of spectrum. So kind of the middle of the left of center of American politics. All his pressure comes from his left.

So from progressive, I guess they’re like progressive more than they used to like liberal. But if you look at kind of Liz Warren activists, and then combine that with this idea of all of government, basically weaponizing these individual bureaus for other political purposes outside of their statutory mandate, punishing their enemies. And so you have just absurd cases being brought where if it’s a company they don’t like, they’ll just sue them for anything they can think of. And M&A is always an opportunity.

And now, interestingly while you have these kind of hipster, woke, fanatics running the FTC and the DOJ, the judges are not that way. Democrat and Republican judges are just down the line have been tossing out this administration’s cases one after another. So they’re really hurting their credibility, but they’re slowing down deals and not only is it stricter, but it’s sort of unanalyzable because it’s like judging somebody else’s religion.

It’s not yours and you don’t want to insult them or something, but also it’s not something that your own framework is going to necessarily be all that valid and understanding. It’s not like all the other administrations in history, that were based on economics and the law where all you had to do is understand economics and the law, and you could second guess more or less nine times out of 10, what they’re going to do. There’s nothing — this administration has nothing to do with the law. Nothing.

You would get every single thing wrong and you’d be surprised every day if you try to study law and economics and understand what the FTC Chairman does next. She punishes enemies of this administration near or far with any tools necessary with a zeal and without statutory mandate. So it’s harder to want to jump in front of that. Now because the cases are so absurd, as absurd as they were with Spectrum Group (SPB) which was a huge position of ours, as absurd as it was with Activision (NASDAQ:ATVI), which still is a huge position of ours.

These judges are getting it right. And the judges have a real process. The FTC can just make something up and they really are completely — they’re unelected. They’re without recourse. They have no procedural way to affect them within the FTC. But these judges don’t like getting overruled and they’re just serious people. Maybe the profession attracts serious people. But since COVID everything’s recorded, it’s very easy remotely to kind of track a bunch of cases at the same time. And young, old Democrat, Republican, progressive, conservative, men, women, all these just every demographic difference and every level of specialization.

Some people happen to be experts in antitrust. Some have, in the case of Activision, the judge had actually recently done an antitrust case on this. A little bit of a different antitrust case involving Activision. She’s already a pretty expert.

Other cases, they’ve never done antitrust, probably outside the class in law school. And they’ve just been great. I mean, they’ve been, even if you can’t analyze what the heck the administration is doing, if you just pay attention to the facts and the law, these judges have been getting it all right. So the litigation has been a great opportunity for me to really apply logic and put a lot of capital to work.

RS: So, let’s expand on that. How are you thinking about litigation?

CD: Sure. So, I like being in ones where I think there’s kind of a plausible valuation if I’m dead wrong. I like to survive. I like to tie. I like mediocrity. I like getting my money back. I like not being poor. If I’m wrong about everything. So clearly you’re not going to necessarily be outlandishly awarded with gaudy riches, right or wrong. That would be optimal.

But I can kind of put up with paying close to somewhere around $40 for Spectrum Brands that I think it’s worth to kind of more or less that without out a deal that I thought was a fabulous deal for them. And clearly the right antitrust decision to approve and it didn’t even matter anyway.

So the government kind of had an incorrect case about a really stupid point they were trying to make. So it was kind of one of these things where factually they were wrong. They were wrong on the law. But even if they’re right, it was kind of just the weirdest, like, pedantic thing to worry about kind of high-end door locks. I mean, normal people can buy normal door locks whenever they want, super competitive market. So we’re going to have a slight concentration in high-end, kind of complicated door locks.

And several times a day listening to this case because it was a boring case and it came right after Elon, which was endlessly entertaining for me. I was listening to this, I’m like, look, I think we’re going to be right. I think we’re going to make a ton of money. I think this makes sense. I think it’s going well, but it’s so freaking boring listening to.

Why does the government even care? Like, don’t they have anything better to do? Do we really have a government that’s so big that we can just everything anybody can come up with we can spend millions of dollars, and months of our limited life expectancy, discovering whether this company is going to dominate high-end door locks, which by the way, if Amazon spent three seconds on this, they would crush them like a bug if they ever wanted to.

So we would be so lucky. I mean, I whispered this, I guess I can say it now. We don’t have a position anymore. We whispered like, I only wish we almost had pricing power in this business. Like it was, it was not even, it was not even an approximation of the truth, in an event. But anywhere close to 40, you had a free roll, that you’d win something you’d probably win. And then it traded to — doubled almost. So I think it touched 80, close to 80. It’s high-70s now, which is, you know, it’s fine. That’s about what it’s worth with the deal that they were able to get done.

Twitter was a huge position of ours. Last year it was definitely a case where that was more of an actual speculation, like, we would’ve been properly screwed if we had lost that. But that was an extreme case of the entirety of American corporate law and contracts resting on something that if that failed might as well burn it all down because then contracts wouldn’t have meant anything.

But for the most part, we want to be in where we’re kind of okay without a big win. Burford is a case we’re very involved with, against Argentina. Big position of mine. And without that win, without that full win, express the way we think it’s going to be. It’s kind of okay here and with it it’s spectacular.

And that’s kind of where we like to be kind of have a half dozen roles between mediocre and spectacular. So our winners pay for our losers with some left over, but our losers are either tolerable, or if I’m just playing very small, very, very small. I mean, because I write, because I get bored and get into mischief. Sometimes we really do something speculative, but we’re talking basis points. They’re are not percentages.

I know Activision (ATVI), you mentioned them. They’re a big focus of yours. You want to talk to listeners how you’re thinking about Activision?

CS: Sure. There was an incredibly weak case in the U.S. by American legal and procedural standards. There’s actually not a big deal risk. There was a hiccup which is the EU — Europe is going very well. Got approved.

But the UK has procedurally an incredibly strong regulator, that you can kind of see philosophically a lot of the differences in how Americans think about this thing, which is, even when the government comes after you, in theory it’s still their burden and they have to prove their case in front of a judge which this government, I mean, they were – they beclowned themselves. I mean, they had a joke of an expert they were certain what would happen in the future, but they didn’t even understand just basic industry dynamics today.

And they acted as if they were a agent for a multibillion dollar multinational Japanese competitor in a way that at one point I thought that that had this had a government role that they would have had to actually file as acting as an agent of a foreign entity here. They, I mean, they basically had us another company write this complaint and it was weak. The judge’s decision was perfect.

But the only hiccup was, right before all of this happened, the head of the FTC met with the CMA and the CMA blocked this. The CMA — the British analogs where it’s very, very hard to successfully overcome CMA challenges. And so we basically, it appears, consistent with using a foreign government that had weaker due process to prove a case that we were unable to prove in the U.S. against two American companies on behalf of a foreign company.

So that’s however corrupt it is. They claimed, ‘oh no, we didn’t tell them what to do, we didn’t discuss this.’ Sure. If you lined up every American, out of 340 million Americans, the last in line for believing me if I said, oh I was kind of meeting with this counterpart in business, we went to the Bohemia Club and we were having cocktails, but don’t worry, we didn’t discuss pricing a week before we both set pricing.

She’d be the last one in America to believe that. Right. So, she hates companies. She hates capitalism. She hates deals. Hates, I don’t know America. But the idea that she can then go and secretly collude with a foreign regulator and we’re just supposed to go by her say so. Now we were going to get a lot of discovery on all that and that kind of changed things real quickly. But so, clearly, at the least, it was the Americans saying, will no one rid me of this troublesome priest and the CMA knew what to do. And at most, it was actively explicitly coordinated.

Whenever anything looks this corrupt, my history in observing situations like this is it tends to be the most tawdry, the least evil secret mastermindy and the most just like debased as possible, I don’t know if it’s very debased or slightly debased, however, the CMA did the bidding of the FTC. That’s unwinding quickly now that the FTC lost.

It was actually in this tribunal review of the CMA decision where you really heard a lot of the back and forth between the two sides. Weirdly, the CMA and the companies were really on the same page. The tribunal didn’t want to just remove procedurally the decision to block it. But I think it’s quite likely that they’ll be given some kind of SOP to change that decision.

I strongly suspect that Microsoft (MSFT) turned to Activision and said, hey, give me some division that we’re going to shutdown anyways. And we’ll throw ourselves at the feet of the CMA and beg for forgiveness and see if we can divest. We are going to fire Bob, right. We’ll divest Bob. Like, let’s give them Bob. Like we were going to fire him anyways. Maybe we don’t have to pay workers comp if we do that. But it is a $4.28 net spread. That’s 56% annualized return if it closes in the middle of next month, it will. Maybe there’s a little delay, who knows?

But I think the funny thing about the tribunal was, if they were very quick, they would have not had to shell out another dollar dividend. If they were very slow, I think it’s reasonably likely that the company would simply close around the CMA and move those businesses to Luxembourg. They were kind of in the middle, so we’re kind of in this delay period right now. But I don’t think there’s a lot of substance or deal risk to it.

Obviously, I could be proved humiliatingly, embarrassingly quickly wrong if the thing gets blocked. But I just don’t think it’s going to get blocked. I think it’s going to get done. I think you can make over $4 a share. And unlike the Twitter situation where we were really betting a diabolical downside if we were on this, we just, in that case, we were just invested in the contract. We believed in the contract. We believed the contract was worth 54.20. We didn’t think the company was worth much of anything.

Activision is doing great. Activision is worth, a lot. I was surprised that they put up with such a small deal bump of just a buck. I think that was kind of an agency problem. These are people who are going to be working together soon and I don’t think they care that much about their shareholders anymore. But it’s worth, it’s worth quite a lot. So I think, make $4 bucks, risk $10 or $15 assuming there’s not something other than what we know what’s wrong with it that would cause it to break. But I think it’s probably 90% chance or so that it closes. Maybe 95%.

RS: Do you have a sense of the timeline on that?

CD: Yeah, next month or so?

RS: Before the October 18th date?

CD: Yeah. And if not, then give us another dollar dividend every month, maybe be a little ballsier about asking for a serious recut if we need more time. I don’t think we’re going to, but demand something for it.

RS: Do you have thoughts on Microsoft (MSFT)?

CD: No. I would say I got to hear a lot from the management kind of online and offline over the past several months and was just consistent. Maybe when you don’t have a reason to look behind the scenes of a big tech company, maybe they’re all like this. But I don’t know, it’s a $2 trillion company. I guess it’s good that the people running it are good. But the people running Microsoft are really good. CEO is really impressive. The guy who runs Xbox Gaming is really impressive. They’re top people. I was glad to see them standing up for themselves and their company and their industry. An industry that’s dynamic, that’s completely transformed itself over a few years.

And amongst the perverse thing that was about this government, in some combination of stupid and evil is that they would have frozen the state of this industry dozens of times along the way, in the way that they’re saying, oh my gosh, I’m scandalized. This is how you could use this pricing power now if we were to not freeze the state of this market. Well, these markets are very dynamic, they change all the time.

And I feel like Microsoft really understands that. I feel like Microsoft is really ahead of the curve on a lot of things right now. So I’m really, really impressed by the people involved. They’re just kind of cool. They handled themselves so well on the stand. This lady, Sarah Bond that I hadn’t known about before, one of the top Microsoft execs, just like, they’re fantastic people, not edgy, actionable. I have no direct position in Microsoft, probably should have through all these years. But — so impressed by the company and think Activision will be in good hands. Like Twitter, once I get cashed out of it, my interest will decline by 99.99%. But I wish them well.

RS: All right. Talk to us about energy. What are you seeing over there?

CD: I think thematically my job is always to find arbitrariness, to find counterparties. I always assume if you come to me with really any bet that you want to make me, Rena, I’m going to say, no. Because I’m going to say, well, I first suspect that you’re at least as smart as I am. Then I suspect you have at least as good judgment as I do. And I suspect if you want to bet me, you’ve worked at least as hard as I have on it.

And then, I won’t say this about you, but I’ll say this generally. What if somebody’s cheating and what if they win all the bets they cheat? And say they were just cheating 1% of the time. So I assume that I’m going to have an expectancy based on, I don’t know, mid-forties percentage, likelihood of winning stuff my default against kind of fair game. So what I really love is counterparties, not where I’m pitting my judgment against somebody else, which sounds like an awful idea. I like finding somebody who’s constrained. Who comes to me and says, I have to do this. I have to buy this. I have to sell this.

In my PA which is much, much, much smaller than my fund, all of my investments are in the dark export market where most retail brokers literally say, you have to sell this security, if you want to trade it, you may not buy it. And they’re just like hoovering stuff up at a tiny fraction of their value where many people have, literally contractually have to sell something, or indexes that have to buy it. I like constrained counterparties, people who are forced to do something and I’m just kind of making my way in this world as a service provider who just takes the other side of the train because they need somebody to take the other side of the train.

That opportunity today is in energy, especially oil and gas. And especially situations where you’re a service provider to ESG mandated funds. It’s not rational or self-seeking in the economic case, but as an agent that might be completely rational or self-seeking, we might figure while they’re making more in fees than they’re giving up in returns, and I can pick up the returns. So, oil, gas, to some extent uranium, other kind of real stuff, energy, and areas that have an environmental impact.

Of course, when you’re talking about the secondary stock market and when you’re talking about individual projects, the impact on the global environment is zero because you just take projects that were going to be one place, you move them someplace else. You have somebody else own something and a company that is cash flowing doesn’t need to raise new capital. The secondary market has no impact whatsoever on production.

But you have waves of situations in history. I don’t know how similar this is in other countries, but I can think of many examples in the U.S. where a political regime tries to co-opt the private sector because it wants to use a private sector balance sheet as well as the public on behalf of some political goal.

And in doing so tends to vilify a company or an industry. And in doing so when they settle or come to terms, has a sort of fascistic public partnership, public private partnership with them that ends up wildly accrruing to the benefit of the equity holders in situations where they can’t necessarily do CapEx. They can’t necessarily fight the regime, but they can be co-opted in a way that if it were a private contract and not the government, it would be a legitimate antitrust violation.

And the examples I would give are the NSA with tobacco in 1999, ended up being incredibly good for tobacco investors because they basically weren’t allowed to spend money on all sorts of things like advertising. They weren’t allowed to make health claims against each other. And the U.S. government, or at least the States, basically become limited partners of Philip Morris (PM). And so 100 years from now, people will be smoking Marlboro Reds and Philip Morris, and Altria (MO) will be spewing their distributions to shareholders over this. And so it was really good for them.

UnitedHealth (UNH) and Obamacare. The companies that were supposed to be the pariahs got rich. Politicians, they got rich too, but — on both sides of that trade. But they were insiders, they were partners and at the superficial rhetorical level, they were villainized. But being the villain is a great deal and being the villains can be a great deal in oil and gas and energy right now because the last thing anybody’s going to do is CapEx.

They’re not going to start new projects. The most cyclical of cyclical industries is going to have the cycle broken where these guys, when prices are really high, do a bunch more projects; when they’re really low, they stop, they kind of flail back and forth. Well, at $80 a barrel right now, prices could double and they’ll sit on their hands. They’ll say, okay, we’ll distribute all the money out to investors. Distribute all the money out to investors.

They’re being screamed at by the politicians to stop doing what they’re doing. The politicians want to strangle supply. They are goosing demand with endless fiscal and monetary stimulus and they want demand to skyrocket. They want supply to go away and then they complain if prices are high. So it’s completely an innumerate combination of preferences.

But if anybody in the world understands them, the decision makers in the oil and gas companies do, and people who have tortured shareholders for years because they just keep, they like to drill, they like their business and they’re somewhat insensitive to timing these things well, they’re going to be forced to because they know they’re not supposed to build — you’re not supposed to build refineries. You’re not supposed to drill for oil and gas.

And intermittent energy is a peak supplement in certain geographies at certain times of year, but it is not a substitute. So, if it’s really, really sunny, that’s fine. If it’s really, really windy. But sometimes, the sun sets or is clouded over and some days are still.

And so, maybe we have a consensus forming, kind of a bipartisan across ideologies in favor of nuclear. And we have a big position in physical uranium to cover our bases there.

But until then there is a multi-decade delta between rhetoric and reality and we’ve actually placed our policy bets on the rhetoric. So we’re saying we want this and that and the other thing, but we’re decades away from being able to replace it and everybody that votes, seems to want to be able to turn the lights on at night and wants to be cool in the summer and warm in the winter.

And the fact that this past year had an incredibly mild European winter kind of pushed off the reckoning by 12 months. But not necessarily more than that. And so I think oil and gas is terrific and I think a lot of the equities were trading at big, kind of, discounts to where the commodities imply they should be at. Especially if they are going to become kind of a cash returning machines instead of drilling machines.

RS: We’ve seen a big resurgence lately in energy. Do you feel like that’s going to keep incrementally going up in that sector?

CD: Yeah, just starting. I would say demand is really hard to forecast. And so who the heck knows? Quarter-to-quarter, I think, whether or not we have a recession and how China is kind of post-COVID reopening, kind of how fast they bounce back, a lot of things like that matter are important, maybe not that knowable or at least knowable by me.

But I think that the supply constraints, the intentional supply constraints on projects that take a long time to turn back on if you turn them off, I think it’s going to make the supply picture tricky for oil and gas.

And I think the likelihood is, prices are much, much higher. And that the likelihood is that, at some point you get much more of the value of their companies in this area recognize kind of upstream oil and gas companies.

But I really don’t care. I don’t care just like I didn’t care with tobacco, and I didn’t care with UnitedHealth. And I don’t care if the market cares, as long as we’re getting distributions, right? Like I can get my money back in M&A and regular special dividends, and buybacks.

And if I have to wait for those, fine. If I have to wait for those, it’ll make it easier for me to get bigger. I don’t have to worry about literally everybody in the world, but me, could adopt ESG as a religion. And that’s fine. That’s fine.

RS: Last time you were on, in May, you were talking about Innovate (VATE) as your top pick. You want to update listeners on that one?

CD: Sure. So we’ve owned this one for a while. I think this is one that we bought last fall. It’s a leveraged equity. It could easily be worth zero and more easily in this high interest rate environment.

So call it like zero is the downside. Like I think that’s fair with, you know, you can also play the bonds. Like, the bonds are probably a less spicy way to play this, but they’re pretty yieldy. And it’s a weird hodgepodge of spectrum, engineering and life sciences. Spectrum, I hope they can monetize at some point. I don’t think they care about have some value.

The engineering business is an okay business. It’s a little bit chunky. A big kind of fancy expensive projects, you know, kind of retractable stadium roofs, that kind of thing. It’s been, I guess, let’s just say all the bad news and the good news because that’s an easy way to organize a conversation. The bad news is interest rates are higher if you have a highly leveraged equity that puts more stress on them. And engineering has been a little softer than I would have hoped and expected.

My thesis in this is that, engineering kind of pays for the debt and leaves some residual equity value over. None of that, yeah, we’re not the punch line yet. That’s not what I’m here for, but that has been little softer than I would have said.

Good news. They made a, they’ve been paying their coupons, like they’ve been servicing the debt. And for better or for worse, let me put this as a question mark. Management’s far more confident than I am in their ability to manage their balance sheet. I kind of like management scared. I kind of like pessimists and people who are worried about filing for bankruptcy. I think there’s some kind of counter indicator sometime. Optimists make me nervous.

But these guys think they’re fine. They think I’m a worrier. I would put in more money if they needed to get recapitalized. I would put more money if they had a big equity offering. They need to sell equity or assets. Full stop.

The balance sheet is not stable over the next several years. They know this, the people in charge think they have time and want to kind of sort through what they want to be left with and what they want to jettison. They don’t seem to have any interest in raising equity right now. That’s fine just as well. You’re not going to get diluted here. But all of this is to pay for a few shots on goal.

So the stock price was $0.70. Then it was three bucks and a change. Now, it’s a buck and change. Like, I think it’s reasonably likely to be something where we’re just going to see. The shots on goal are all in the life sciences. There’s a couple small subsidiaries just because they’re kind of buried in this. It’s a $131 million market cap company.

So it’s just a sliver of market cap for the equity holders and there’s all sorts of different parts within that. But the shots on goal that they could put this year and possibly score on could be worth a multiple of the market cap.

The one, MediBeacon is the one that I’m most interested in. That’s at the FDA now. I think it’s going to get approved. I think it’s going to get to market. I think it could become a consistently common product for medicine and it has the kind of razor, razor blade model of the marker, will have to be continually resold.

Now, you could just flip that today and solve the balance sheet problem, but I don’t think the insiders want to. I think the insiders, my sense is that, MediBeacon, well they want to be left with because that could be $10 a share, or $20 a share. I mean, that could be a spectacular bonanza. So I think they’re waiting to kind of manage and maybe sell R2, maybe sell one of the other things to kind of fix the balance sheet and probably be left with MediBeacon.

Maybe spin it, or have some kind of – rename the company MediBeacon. Have that the focus heading into 2024. I think it could be spectacularly valuable. Might not, might not get approved, might not get adopted. But I think it’ll be approved. I think it’ll be adopted. I think upon approval, the stock price doubles, I think upon adoption it doubles again and could become a great one.

So, TBD, we just don’t know yet. And, not a lot of news, but I think over we’ve seen the data. We’ve seen what they’ve submitted at the FDA. It looks not just, really robust and convincing, but robust, convincing, and largely onto some minutiae that’s left before final approval. So we think final approval is in great shape for this year.

RS: Appreciate that update. And thanks for always sharing so much actionable insights with us. Really appreciate it, Chris.

CD: You’re welcome. It’s good to be here. Anybody can follow-up. I’m easy to find on Seeking Alpha. I’m always grateful to have a conversation. Always something to talk about. And so thank you, Rena, I really appreciate it and I look forward to speaking again sometime.

RS: Absolutely. You run Sifting the World on Seeking Alpha. Anywhere else besides Seeking Alpha that people can find you?

CD: I try to keep all of my actionable investment content on Seeking Alpha. So you can find me there. So there’s, I guess the three categories are Sifting the World for investment ideas. Rangeley Capital, which you know, it’s a hedge fund. I can’t kind of market it or talk about it too much outside, but people can — people who want us to manage capital can do that.

And then thirdly, I have my kind of everything other than investing, I have called Vale Tudo, which is my other stuff I’m doing. So, mountaineering, MMA, CrossFit and trail running. So stuff that I kept wanting to talk to investors about, but that’s not what they’re here for. So I kind of try to shut up about that stuff and I have that separate.

So Vale Tudo, Sifting the World, and Rangeley Capital. And I’m available to chat about Activision, or Innovate, or anything else with people interested.

RS: Very good. A renaissance man. Chris, thanks for taking the time. Appreciate it.

The post Why Chris DeMuth Jr. Likes Activision, Oil & Gas + Innovate appeared first on Up2info.com.

• Microsoft’s planned acquisition of Activision Blizzard for $69 billion presents an attractive opportunity for potential investors.
• If the deal fails, MSFT is required to pay ATVI a $3B fee.
• The strategic decision not to make Call of Duty an exclusive title increases the likelihood of the deal being successful.

I recently wrote an analysis on Microsoft (MSFT) and the potential they have displayed within the gaming space. The planned acquisition of Activision Blizzard (NASDAQ:ATVI) by Microsoft has garnered significant attention. This would be MSFT’s largest acquisition in the gaming space and I’ll dig into why I believe buying before the acquisition finalizes presents an attractive opportunity.

Deal Details and Complexity

Microsoft’s intention to acquire Activision Blizzard for $95 per share has been a major focus since its announcement in early 2022. This deal, valued at $69 billion, stands as Microsoft’s largest acquisition bid to date. Despite the deal being initially profitable, evolving circumstances have introduced complexities that may affect its outcome.

The completion of the merger hinges on regulatory delays of approval from the UK’s Competition and Markets Authority. The authority demands that Microsoft relinquishes its cloud-based gaming rights in the UK to prevent potential monopoly concerns over the gaming industry. I see this as a buying opportunity and I think this will eventually get worked out as Microsoft and Activision are technically not direct competitors. With the exposure that MSFT will get with this acquisition, I think that it actually increases competition as it opens a brand new category of gaming for MSFT within mobile as their library in mobile is currently limited.

Major Road Block Already Settled – Exclusivity

Microsoft has stated they do not plan to take major franchise, Call Of Duty, as an exclusive title to Xbox. Only 3% of players would switch consoles to continue enjoying the franchise. Making the title an exclusive is not a profitable strategic move for Microsoft. As I stated in my previous analysis, Call Of Duty brings in $30+ billion for ATVI. Eliminating a portion of their player base would not be a smart strategic move. Now that this is off the table, I think it increases the likelihood of the deal being successful.

Although Call Of Duty won’t become an exclusive title, there are a handful of other titles that are still fall to that possibility and it complexes the merger from closing. Some examples of these games that can go exclusive are:

• Diablo IV
• World of Warcraft
• Overwatch
• Tony Hawk Series
• Crash Bandicoot

More than half of the gaming industry is now on mobile devices, and Apple (AAPL) and Google (GOOG) are the big players in mobile gaming. Microsoft’s presence in mobile gaming is currently centered around Minecraft, but they’ll have to broaden their offerings to be a real competitor. This is where a game like Candy Crush, acquired by Activision, comes in. In the areas where Microsoft is putting its attention, this merger would actually increase competition in the market, not decrease it. This is once again, another reason I believe the deal will more than likely be closed successfully.

In the unlikely event of the merger falling through, Microsoft could be liable to pay a break-up fee to Activision Blizzard of $3 billion. For Activision Blizzard’s shareholders, two scenarios emerge: the deal’s approval, resulting in a $95 per share payout, or the deal’s failure, resulting in a significant break-up fee of $3.0 billion from Microsoft and the talk of games being exclusive gets taken off the table. In my opinion, either outcome is a win for Activision so I believe entry here would be beneficial for investors. A win/win scenario!

If The Deal Doesn’t Happen

If the deal doesn’t happen, I believe ATVI remains a buy and has the strong financials and market share to succeed regardless.

In the second quarter of 2023, their reported revenues were 34% higher compared to the same period last year. This growth was driven by increased sales. Video game sales are expected to rise 7.9% annually until 2027. Additionally, ATVI’s EPS also went up from $0.36 in the second quarter of 2022 to $0.75 per share in 2023, representing an increase of 108%!

As mentioned, the annual release of Call of Duty brings in large amount of revenue for ATVI. Even the free to play mobile version of Call of Duty performs extremely well because of the sales of microtransactions. We can see that sales revenue totaled $32M in June on a free to play title. As previously mentioned, the mobile gaming space is estimated to grow at huge numbers and ATVI as a well-suited product diversity to benefit from each avenue of gaming including mobile, consoles, PC, physical copy revenue.

In fact, 43% of ATVI’s revenue last quarter came from the mobile space. Even though they saw growth in all areas, mobile gaming remains their strongest performer, bringing in $943 million, which is 43% of their total revenue. This is a 13% increase from the $831 million they earned in Q2 2022. All of this is to say, I strongly believe ATVI has positioned themselves to be totally fine regardless if the deal is successful or not.

ATVI’s revenue is projected to hit $12B and grow right alongside the gaming industry as a whole. ATVI’s strong portfolio of video game products will be the reason they capture the growth of the gaming industry. Considering all this, if the Microsoft-Activision Blizzard deal doesn’t go through, I don’t expect ATVI’s stock price to be significantly affected because of the break-up fee that ATVI would receive from Microsoft, combined with the company’s improved financial results, could offset any negative impact from the merger’s failure. The $3B that ATVI would receive, can be used to further develop future popular franchise releases.

We can see that mobile gaming has the largest active player base at the moment and is also projected to have the largest growing player base. We have already established that Activision’s mobile games bring in a majority of their revenue but some of these popular titles are:

• Call of Duty Mobile – $32M in revenue as of June 2023
• Diablo: Immortal – $525M in the first year
• Hearthstone – earned $660M since launch
• Warcraft Arclight Rumble
• Call Of Duty Warzone Mobile
• Candy Crush – $607M annually

Because of these strong portfolio of mobile and console games, I believe ATVI is a buy regardless of the deal being successful or not.

Valuation

Merger talk aside, let’s take a more level-headed look at the current valuation of ATVI. EBITDA Margin sits at 26% and significantly outperforms the sector median of 18%. Also, net income margin sits at 24.8% compared to the sector median of only 3.6%. ATVI is extremely profitable from a cash flow perspective as they also produce $2.5B in cash from operations.

ATVI’s last dividend raise was quite large and the average 5 year dividend growth rate is 23.8%. The yield is very low at only 1% and payments are scheduled annually. While this doesn’t fit well into a dividend investors portfolio, I mention it because it shows how cash flow positive ATVI has been and how the cash flow continues to grow. This isn’t surprising when the Call of Duty franchise alone is worth over $30B and rakes in $1B a quarter from in-game microtransactions.

Using the last 12 months EPS data, we can input a DCF (Discounted Cash Flow) analysis to get a fair value stock price estimate for ATVI. If we use the estimated growth rate of 7.9 that the gaming industry is projected to grow, alongside the last 12 months earnings per share of 4.12, we can see that the fair value comes to $103.57 per share. The EPS estimate based on Seeking Alpha’s earnings tab, is 4.34 for the year of 2024. Using this EPS number, the projected fair value for ATVI in 2024 comes to $109 per share. This would represent an approximate 20% upside from the current price of $90/share.

Lastly, let’s compare ATVI against some of the competing game companies. We can see that over the last 5 year period, ATVI has the healthiest EPS diluted growth of 268% compared to both Electronic Arts (EA) as well as Take-Two Interactive (TTWO). This further reinforces the idea that ATVI has a strong portfolio of products that are bringing in an increasing level of cash flow and are set to thrive along the rising growth of the gaming industry. Being that the current price is below both the deal buyout price ($95/share) and the DCF fair value estimate, we rate ATVI as a buy to capture the future upside here.

Risk

An obvious risk would be that the acquisition fails and the stock price takes a temporary dip downward. Since the deal has been on-going for so long though, I wouldn’t be surprised if the stock reacts a lot more dramatically and falls to $85/share support. I do think the risk is mitigated by the substantial fee that MSFT will have to pay to ATVI though.

Conclusion

The buzz surrounding Microsoft’s potential acquisition of Activision Blizzard underscores its significance within the gaming landscape. Despite regulatory complexities and hurdles, this presents an attractive opportunity for potential investors. The strategic decision not to confine Call of Duty to Xbox exclusively increases the merger’s likelihood.

In the unlikely event of a merger breakdown, Activision Blizzard shareholders could gain from a substantial $3 billion break-up fee. Furthermore, Activision’s solid financial standing is underscored by an EBITDA Margin of 26%, surpassing the sector median by a considerable margin. With a positive cash flow perspective and impressive dividend growth, ATVI’s resilience is evident.

Lastly, if the Microsoft-Activision Blizzard deal falls through, ATVI remains a solid buy. Their Q2 2023 revenues surged by 34% year-on-year due to increased sales, with EPS growing by 108%. Call of Duty’s annual release is a major revenue driver, including the successful mobile version with $32M in June sales. Mobile gaming accounts for 43% of ATVI’s revenue, totaling $943 million, a 13% increase from Q2 2022. These strengths position ATVI well across gaming avenues—mobile, consoles, PC. Hence, regardless of the deal outcome, ATVI’s financials and market presence offer stability, helped by a potential $3B break-up fee from Microsoft. This could fund future franchise releases and offset any negative merger impact.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ATVI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Activision: A Buy Whether The Deal Closes Or Not appeared first on Up2info.com.

• Activision Blizzard’s stock has surged in value from its 2019 lows, indicating a robust bullish outlook in the short and long run.
• Berkshire Hathaway’s investment in Activision Blizzard and subsequent reduction of its stake highlight the stock’s attractiveness among investors.
• Technical analysis shows a bullish trajectory for Activision Blizzard’s stock, with potential for further price growth and buying opportunities.

Activision Blizzard, Inc. (NASDAQ:ATVI) is a premier developer and publisher of interactive entertainment offerings, celebrated for its top-tier franchises. Lately, there’s been notable movement in Activision Blizzard’s stock price, marked by heightened volatility. The stock has surged by a substantial 166.15% from its 2019 lows. Analyzing its price trajectory, the formation of an ascending broadening wedge and a rounding bottom suggests a robust bullish outlook in both the short and long run, pointing towards continued positive momentum. This piece delves into a technical examination of Activision Blizzard’s stock trajectory, aiming to discern its future direction and spotlight potential avenues for long-term investors.

Berkshire Hathaway’s Journey with Activision Blizzard

When Berkshire Hathaway (BRK.A) (BRK.B) announced its investment in Activision Blizzard, the investment world watched with bated breath, the surprise was further intensified by Microsoft’s subsequent revelation of its intention to acquire the gaming giant in a colossal $68.7 billion cash deal. While the market was rife with speculations and rumors, Warren Buffett, Berkshire’s legendary CEO, quickly stopped the narratives, clarifying that they were in the dark about Microsoft’s impending plans. As the dust settled on these announcements, the focus shifted to the stock market’s daily ebb and flow.

Looking back, Berkshire’s move to invest in Activision Blizzard appears astoundingly foresightful, especially considering the subsequent appreciation of its position in the firm. However, many were caught off guard when Buffett, often championing a long-term investment stance, opted to liquidate a significant portion of this winning stake sooner than anticipated. The latest figures tell: Berkshire’s share in Activision Blizzard plummeted from 6.7% to a modest 1.9%. This substantial shift was timed around a pivotal court decision that rejected the Federal Trade Commission’s bid to stall Microsoft’s acquisition endeavors. Following this sell-off, Activision Blizzard’s stock price surged by 10%, mirroring the market’s favorable response to the judicial verdict.

Buffett’s decision to pare down the stake stands in stark contrast to his well-known philosophy of holding stocks for the long haul. Notably, the original choice to invest in Activision Blizzard wasn’t a Buffett original but likely the handiwork of Todd Combs or Ted Weschler, two influential figures at Berkshire. Recognizing an opportunity, Buffett bolstered the position to capitalize on merger arbitrage potential. This tactic seeks to exploit price discrepancies during acquisition processes, especially given the inherent uncertainties of deal consummations. With Microsoft’s bid to acquire Activision Blizzard facing regulatory hurdles, the stage was set for Buffett to capitalize on this arbitrage opportunity.

Despite ongoing uncertainties in the market, the company’s forward-looking approach to tapping into the burgeoning esports arena, coupled with its strategic expansions into mobile gaming, positions it well in the rapidly evolving gaming industry. Additionally, the recent interest from major investors and potential acquisition interest reflects heightened market confidence in its future prospects. Given these factors, Activision Blizzard presents a compelling bullish case for investors, making it a prime buy in the current market landscape. The following chart showcases Activision Blizzard’s net income, standing at $587 million and displaying an upward trend, indicative of the company’s robust profit trajectory.

Adding to the bullish sentiment around Activision Blizzard, David Einhorn’s Greenlight Capital’s recent portfolio inclusion of Activision Blizzard, as divulged in its latest 13F filing, underscores a positive stance towards the gaming firm. The company’s addition and increased stakes in other enterprises signify a possible tactical pivot that could further amplify Activision Blizzard’s attractiveness among investors.

Unveiling the Bullish Price Surge

The ensuing quarterly chart presents a compelling narrative of Activision Blizzard’s enduring bullish trajectory spanning an extended duration. Beginning from its low point of $9.57 in 2012, the stock has showcased remarkable momentum, ascending to an unparalleled pinnacle of $102.31. Nonetheless, this pronounced upward drive has been accompanied by heightened volatility, giving rise to an ascending broadening wedge pattern in its aftermath. It’s noteworthy that the most substantial quarterly drop in the stock transpired in 2018, aligning with the support line of this pattern. This downturn can be attributed to many factors: concerns regarding market saturation within specific gaming genres, uncertainties surrounding Activision Blizzard’s capacity to sustain growth amidst intense competition, and evolving gaming preferences. The decision to introduce “Diablo Immortal” for mobile devices rather than a new PC/console iteration met disapproval from the loyal player base, further contributing to the industry-specific turbulence. The broader instability of the stock market towards the end of that year exacerbated this situation, exerting added downward pressure on various equities, including Activision Blizzard.

Nevertheless, despite these setbacks, the market demonstrated a resilient rebound, propelling the stock to its historical zenith. This heightened volatility while increasing overall market risk, also amplifies the potential for future price growth. A significant market decline in 2021 set the stage for another remarkable ascent in prices. At present, the stock is undergoing a phase of broad consolidation, suggestive of a positive trajectory ahead. This sentiment is reaffirmed by the notably favorable performance of the third quarter of 2023, as indicated by the quarterly candle, pointing towards a potential upward surge.

In addition to this viewpoint, the following monthly chart provides a detailed explanation of the Fibonacci retracement, which spans from the lowest point of the Great Recession at $7.14 to the highest point of the stock. The decline from this peak found strong support at the 50% retracement level, marked at $55.47. This observation is reinforced by a blue trendline, emphasizing the sustained bullish momentum and indicating a potential continuation of the upward price trend. Further supporting this analysis are the significant events of the June monthly candle, signifying a pivotal turning point, along with the notably positive price movements in July and August. Collectively, these factors suggest a market primed for an upward movement.

Key Action for Investors

The analysis above shows that the stock’s long-term and short-term perspectives are bullish. Delving deeper into the short-term outlook, the weekly chart highlights the robust bullish momentum characterized by multiple rounding bottoms. The swift recovery in 2019 took shape as a rounding bottom, and intriguingly, a similar rounding bottom pattern is evident in 2023, anchored at the $70.18 low, as illustrated in the chart below. The crucial neckline for this pattern stood at $86, which has since been surpassed, hinting at a potential upward trajectory. Any price pullback to the $86 mark may be considered a prime buying opportunity for long-term investors. Investors might contemplate entering at the current price levels and consider accumulating more positions if any price corrections develop.

Market Risk

Microsoft’s acquisition plans for Activision Blizzard face numerous regulatory challenges. Any setbacks could influence the stock’s performance, introducing doubts about integration, value capture, and synergistic opportunities. Significant investments from entities such as Berkshire Hathaway have affected the stock’s fluctuations. Depending too much on high-profile investors’ decisions might skew market perceptions, causing unstable price movements.

The gaming sector is marked by its swift transformations, fueled by changing gamer demands and tech advancements. This dynamism and concern about market saturation for specific game categories can challenge Activision Blizzard’s growth. While being seen as a lucrative merger arbitrage prospect, Activision Blizzard isn’t without its risks due to uncertainties tied to deal finalizations. Any disruptions or delays in the merger could spur short-lived price variances. From a technical perspective, the highlighted ascending broadening wedge pattern suggests a possibility for heightened price volatility. While such a pattern could usher in notable price hikes, there’s also a risk of sharp downturns, especially if prices fall below the critical $55.47 support point.

Bottom Line

The ongoing narrative surrounding Berkshire Hathaway’s investment in Activision Blizzard and the subsequent acquisition plans by Microsoft casts a revealing light on the intricacies of the investment arena. Warren Buffett’s unconventional decision to reduce holdings earlier than expected, along with legal verdicts and market responses, has given rise to a dynamic milieu for investors. While Berkshire’s actions provide a valuable strategic lesson, individual investors must use comprehensive research and meticulous analysis. Prominent investments, exemplified by Greenlight Capital and Third Point, demonstrate an optimistic sentiment towards Activision Blizzard, an attitude further accentuated by the stock’s favorable trajectory over time.

Looking through a technical lens, the stock’s price exhibits robust signs of a bullish pattern, evident in the ascending broadening wedge and rounding bottoms formations. An upward breach beyond the $86 mark signifies an additional bullish stride, making the current juncture opportune for investors to acquire the stock. In the event of potential market corrections, investors can progressively build up their positions, augmenting their investment in Activision Blizzard.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Activision Blizzard: Buy The Upward Surge (Technical Analysis) appeared first on Up2info.com.

• Acquiring Activision Blizzard is not as profitable as it seemed 18 months ago for Microsoft.
• The completion of the deal is contingent on receiving approval from the UK’s Competition and Markets Authority. Microsoft might sell its could-based gaming rights in the UK to another company.
• According to ATVI’s current stock price, if the merger happens, the company’s shareholders will profit by 4%.
• If the deal fails, Activision Blizzard could receive a break-up fee of $3.0 to $4.5 billion from Microsoft, which is significant. The company’s operating income in 1H 2023 was $1.4 billion.
• If the merger fails, I don’t expect ATVI’s stock price to change significantly except for the first few days.

Investment Thesis

Since the announcement of the merger, the most important thing about Activision Blizzard (NASDAQ:ATVI) is Microsoft (MSFT) plans to acquire Activision Blizzard for $95 per share. Even all the past articles on ATVI on Seeking Alpha are focused on the deal between Microsoft and Activision Blizzard (see Figure 1). There is a reason for that. If this $69 billion worth of acquisition completes, it would be Microsoft’s biggest takeover ever. From 12 January 2022 (a few days before Microsoft announced its plans to acquire Activision Blizzard) to 16 August 2023, ATVI’s stock price increased from $75 to $91, up 40%. In the past few months, regarding the deal, lots of things have happened, and finally, on 18 October 2023, the Microsoft-Activision Blizzard deal is expected to complete, as they extended the merger agreement to get UK’s approval on the deal.

Figure 1 – All the past articles on ATVI are focused on the Microsoft-Activision deal

Microsoft must pay $3.5 billion to Activision Blizzard if the transaction is terminated after 29 August 2023 and also must pay $4.5 billion if the transaction is terminated after 15 September 2023. For now, it seems that the United States and European Union support the deal. However, Microsoft hasn’t been successful to get UK’s Competition and Markets Authority (CMA) approval yet. CMA wants Microsoft to sell its cloud gaming rights in the United Kingdom to another company, to make sure it is not going to turn to a monopoly. A month ago, Microsoft offered to sell off its cloud-based market rights for games in the UK. By 29 August 2023, CMA is expected to issue a legally final order on the deal. Now, Microsoft has to decide to sell its cloud-based gaming rights in the UK and get CMA’s approval on the deal, or keep its cloud-based gaming rights in the UK, forget about the acquisition of ATVI, and pay a huge break-up fee to Activision Blizzard. Also, Microsoft has already lost the war on Call of Duty to Sony. Microsoft and Sony signed a deal to keep Activision’s Call of Duty on PlayStation for 10 years a month ago. It simply means that acquiring Activision Blizzard, may not be as profitable as it could be earlier. Before signing a contract with Sony, Microsoft had the right to ban Sony from accessing Call of Duty, which could be a great thing for Xbox. However, now, if the deal between Microsoft and Activision happens closes, Microsoft is not able to make Call of Duty exclusive to its consoles.

On the other hand, from my perspective, Microsoft and Sony’s recent agreement is good for Activision Blizzard’s revenue, which will belong to Microsoft after the merger (if the deal closes). Xbox is not as favored as PlayStation in the world. Thus, assuming that the deal between Microsoft and Activision Blizzard is going to be completed, if Microsoft was able to exclude PlayStation from Call of Duty and other ATVI games, it could hurt Activision’s revenue in a significant way. One might argue that due to this, Microsoft didn’t have the plan to exclude PlayStation from Activision’s games at all. However, to improve Xbox’s competitiveness against PlayStation, sacrificing Activision’s revenue could be a strategy at certain times. Also, there are other games like Diablo IV, World of Warcraft, and Candy Crush that Microsoft might decide to make exclusives for its consoles (assuming that the acquisition of Activision completes), to improve the competitiveness of Xbox against PlayStation. Also, Microsoft is fighting another war with Meta Platforms (META). By acquiring Activision Blizzard, Microsoft can improve its presence in the gaming industry and the metaverse, and increase its competitiveness against META. Thus, even though acquiring Activision Blizzard has been turned into a less profitable deal for Microsoft after the announcement, the company still wants to close the deal as the break-up fee is significant, and Microsoft still can earn a lot if the merger succeeds. In this situation, I decide to see it as a 50-50.

Thus, for Activision Blizzard’s shareholders, I think two things can happen: 1) Microsoft may get CMA’s approval and close the deal, and ATVI’s shareholders will receive $95 per share; 2) The deal may fail, and Activision Blizzard may receive between $3.0 to $4.5 billion from Microsoft. According to its second-quarter financial results, Activision’s operating income in 2Q 2023 and 1H 2023 was $583 million, and $1383 million, respectively. Thus, receiving $3.0 to $4.5 billion from Microsoft (if the deal fails), means a lot for Activision. Also, it is worth noting that Activision’s higher stock prices in the past year cannot be entirely linked to the merger, as the company’s financial results improved significantly.

ATVI’s second-quarter financial results show that the company is now in a significantly better financial position compared to a year ago. In the second quarter of 2023, ATVI reported GAAP net revenues of $2207 million, compared with $1644 million in the same period last year, driven by higher sales in the Americas, EMEA, and Asia Pacific. Also, ATVI’s diluted earnings per common share increased from $0.36 in 2Q 2022 to $0.75 per share in 2Q 2023. Furthermore, in the second quarter of 2023, Blizzard delivered its first $1 billion net bookings, driven by the successful launch of Diablo IV. Diablo IV crossed $666 million sell within five days of launch. Over 10 million players experienced Diablo IV in June 2023, playing for over 700 million hours. Furthermore, Activision segment revenue grew 17% YoY in 2Q 2023 as a result of higher Call of Duty revenues across the Call of Duty franchise. Also, King segment revenue grew 9% YoY in 2Q 2023 driven by strong revenue across Candy Crush live operations.

Thus, if the Microsoft-Activision Blizzard deal fails, I don’t expect the price of ATVI to change significantly. The break-up fee (which ATVI receives from Microsoft) and the company’s improved financial results that have been overshadowed by the merger news in the past few quarters can entirely compensate for the negative effects of the failure of the merger.

Valuation

We can see in Figure 2 that ATVI’s EV-to-EBITDA is significantly higher than Electronic Arts (EA) and Nintendo’s EV-to-EBITDA (OTCPK:NTDOF). ATVI’s EV-to-EBITDA started increasing in January 2022, while EA’s EV-to-EBITDA decreased. Also, we can see that Nintendo’s EV-to-EBITDA almost remained flat, and significantly lower than its peers in the past two years. Thus, based on EV-to-EBITDA, Activision Blizzard is not in a good position compared to its peers. However, if the deal fails, the break-up fee of between $3.0 billion to $4.5 billion can prevent the stock price to drop. Furthermore, ATVI’s debt-to-equity is better than EA’s debt-to-equity. A better leverage ratio can somehow support Activision Blizzard’s higher EV-to-EBITDA, as ATVI’s investors can be less worried about the debt of the company. Also, with a lower debt-to-equity ratio, ATVI can invest more in new games and get more competitive.

Figure 2 – ATVI’s EV-to-EBITDA vs. peers

Figure 3 – ATVI’s debt-to-equity vs. peers

Why I might be wrong

As I explained earlier, if the deal fails, I don’t expect Activision Blizzard’s stock price to drop as I think the break-up fee from Microsoft, Activision Blizzard’s improved financial results, and its good debt position may have the ability to support its current stock price. However, as almost in the past two years, the merger with Microsoft has been the most important thing about ATVI, the negative effects of the failure of the merger can be stronger than I expect. At prices of around $90 per share, ATVI might not be attractive to investors, and they might say goodbye to Activision Blizzard after almost two years of struggling with news about the merger.

Conclusion

The stock is now trading at about $91 per share. If you buy it now, and if the deal closes, there could be a 4% profit (you will not get the dividend of $0.99 per share as it is payable on August 17th just to shareholders of record at the close of business on 2 August 2023). If the deal fails, I don’t expect ATVI’s stock price to fall (the stock’s price might decrease in the first few days after announcing the failure of the deal) as the break-up fee of $3.0 billion (if Microsoft terminates the deal after 29 August), $3.5 billion (if Microsoft terminates the deal after 29 August and before 16 September), and $4.5 billion (if Microsoft terminates the deal after 15 September), means a lot to Activision Blizzard. However, I don’t expect ATVI’s stock price to jump if the deal fails. Thus, from my point of view, ATVI is a hold. However, you might like a profit of 4% if you think that the deal is going to succeed. In that case, you can buy the stock, and if the deal fails, you might not get hurt. But a profit of 4% is not enough to put a buy rating on the stock.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Activision Blizzard: A Hold Whether The Deal Closes Or Not appeared first on Up2info.com.

• Berkshire Hathaway has significantly reduced its exposure to Activision Blizzard as Microsoft nears completing its acquisition of the gaming giant.
• Despite shares of Activision Blizzard rising by 14.2% since June, the potential upside for investors is limited with the risk of a potentially painful downside.
• While the acquisition is expected to go through, the only remaining obstacle is UK regulators, with a potential solution being the sale of some or all of their cloud gaming rights in the UK.
• Investors would be wise to play the picture more cautiously, given how the risk profile has changed relative to what upside is left.

As Microsoft (NASDAQ:MSFT) is inching near to completing its acquisition of gaming giant Activision Blizzard (NASDAQ:ATVI), a lot of interesting developments are taking place. We’re seeing changes on the regulatory front that, for the most part, should bode well for those hoping the deal will be completed. But we’re also seeing some changes when it comes to who’s betting on what and to what extent. The greatest example here involves Berkshire Hathaway (BRK.A) (BRK.B) and its investment in Activision Blizzard. The short version of the story is that, with a deal almost ready to close, Warren Buffett’s conglomerate has decided to significantly reduce its exposure to the video game giant. Based on my own understanding of the facts at hand, I believe that this is a smart move that other investors should consider making.

My opinion has changed

The last time I wrote an article involving the pending marriage between Microsoft and Activision Blizzard was back in the middle of June of this year. In that article, I talked about how shares of the video game giant plunged because of heightened concerns that Microsoft might not be able to complete its purchase of the company for an estimated $69 billion. At that time, I argued, downside for shareholders of Activision Blizzard would likely be limited and, if not, short lived, should the deal not ultimately be consummated. This was based on how strong the fundamental performance of Activision Blizzard had been up to that point, particularly with its most recent launch of a game called Diablo IV.

Since then, a lot has changed. And as an investor, it’s important to change your opinion as the facts change. For starters, Activision Blizzard has gotten far more expensive. Since the publication of that article, shares of the company have shot up 14.2%. That compares to the 4.2% increase seen by the S&P 500 over the same window of time. Now the spread between the $95 that shares are supposed to be bought out for and the $92.74 that the stock is currently trading for implies a spread of only 2.4%. This is rather limited.

Likely understanding that the merger arbitrage opportunity has narrowed substantially and that there is still a non-zero chance of the deal falling through, Warren Buffett, or at least his conglomerate Berkshire Hathaway, has decided to substantially reduce exposure to Activision Blizzard. When Berkshire Hathaway last filed a form 13 detailing the ownership stake that the company had in the gaming giant in May, it boasted control of 49.4 million shares. That translated to 6.24% ownership over the enterprise. Well, on July 17, a new filing was made that showed a reduction to 14.66 million shares. All combined, that’s about 1.85% ownership over the company.

Investors should not construe this to mean that Berkshire Hathaway expects the deal to fall through. Even though that’s a possibility that’s in their mind, it’s more likely that they view the risk profile as having changed. Now, instead of limited downside with significant upside, the deal has transformed to be limited upside with potentially painful downside. This is especially true when you consider how pricey shares of Activision Blizzard have become. In the chart below, you can see how shares are priced (assuming the $95 buyout price) using data from 2020, 2021, and 2022.

Of course, those who still believe in the transaction going through and those who like the idea that this basically gives them the ability to buy shares of Microsoft at a discount of about 2.4% compared to what the stock is trading for, picking up units of the company could still make sense. I, myself, am of the opinion that the transaction probably will be completed. After all, in just the past couple of days, it became clear that the company would almost certainly succeed in muscling through the regulatory process in the US. On Tuesday of last week, for instance, the Federal Trade Commission was denied a request by a federal judge in San Francisco for a preliminary injunction aimed at blocking the transaction. And on Friday of last week, the 9th Circuit Court of Appeals denied their request to halt the deal why are the FTC goes through the appeals process.

Technically, regulators here in the US could try to continue the fight. But given how successful Microsoft has been in the courts, it’s highly probable they will not succeed in any meaningful way to stop the deal. This is especially true after Microsoft announced that it would make its most popular game franchise, Call of Duty, available on Sony’s (SONY) PlayStation for at least the next 10 years. And on July 18, the US Supreme Court denied a request by a collective of gamers that hoped to stop or at least slow down the acquisition.

With regulators here at home pretty much out of the way, the only roadblock for the company are regulators in the UK. This kind of transaction falls under the purview of the CMA (the Competition and Markets Authority). A positive development regarding this has also come in the past couple of days. On July 17, a judge in the UK stated that the Competition Appeal Tribunal will allow the CMA’s challenge to the deal to be “paused” while regulators and the two firms in question talk about a potential settlement. Nothing has been set in stone yet. But reports have said that the two companies are considering a scenario where they might sell some or all of their cloud gaming rights in the UK in order to appease regulators.

It’s really interesting that the regulatory hang up here involves what’s currently a very small market segment in the gaming industry. For those who don’t know, the cloud gaming market basically involves the ability to play video games with very little to no data actually being hosted on the server or servers of the individuals playing it. A great example could involve the Game Pass subscription offering provided by Xbox, which is a property of Microsoft, that allows users, for a fee, to play around 100 different games without having to acquire them. Globally, Game Pass had about 25 million subscribers in January of 2022. We don’t know what that number has grown to since then, but it most certainly is larger than it was back then.

The concerns offered up by the CMA center around the fact that, by their estimates at least, Microsoft already has a 60% to 70% share of the cloud gaming market in the UK. By acquiring a major video game publisher that produces what they refer to as “AAA” games, the fear is that anti-competitive forces would develop because either Microsoft will be able to deny other gaming platforms access to these games and/or that it would be able to charge exorbitant fees for access to them. Microsoft has offered up its own proposal on how these matters should be addressed. But according to the CMA, it’s proposal was too limited in scope, and there were other issues that could create potential anti-competitive forces moving forward. In the image below, you can see the three points that the CMA pushed back on.

As I mentioned already, the cloud gaming market is incredibly small. If the CMA is correct in its assessment, the space could grow to $13.7 billion globally by 2026. But by that time, its size in the UK will only be around $1.25 billion. To put this in perspective, that was the size of the recorded music industry in that country in 2021. And with a total value of $6.25 billion today, the gaming space is the largest entertainment industry in the UK. So it would be understandable for them to have concerns when Microsoft already controls so much in that sphere.

Personally, I don’t think the transaction between Microsoft and Activision Blizzard will fall through. The worst case scenario is that Microsoft decides to divest itself of its cloud gaming business. Immediately, that would translate to only a few hundred million dollars’ worth of revenue being lost. But in exchange, they get to pick up the video game behemoth with all the benefits that it will offer. Even if the company had to make some other concessions, there could be an opportunity there. We don’t know how much revenue Microsoft’s video gaming operations generate from the UK. But we do know that, in the most recent fiscal year, only about 11%, or $828 million, of the revenue generated by Activision Blizzard came from there.

Takeaway

The way I see it, things are getting rather interesting. As I type this on July 18, the two companies are supposedly negotiating an extension in terms of when the deal must close before otherwise falling apart entirely. Because technically, the deal faces a July 18 deadline. Obviously, a failure to follow through on the transaction would justify shares of Activision Blizzard falling from here. But there is also some non-zero probability that the deal could fail in the event that an extension is agreed upon. I view this probability is incredibly small. But when you consider the limited upside that still exists for shareholders should the deal be completed, and consider that a failure of the deal going through would probably result in downside of 10% to 20%, I understand why Berkshire Hathaway decided to reduce its exposure to Activision Blizzard. I myself have decided to downgrade the company given these circumstances from a “buy” to a “hold” to reflect the change in risk that’s now on the table relative to the potential upside that remains.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Buffett: Not Playing Games With The Merger Between Microsoft And Activision Blizzard appeared first on Up2info.com.

• The UK’s Competition and Markets Authority might need to initiate a fresh probe into Microsoft Corporation’s proposed merger with Activision Blizzard, Inc.
• Microsoft could push to complete the merger before the July 18 walk date, potentially disregarding the CMA’s block, despite the risk of future fines or investigations.
• The deadline coincides with a period of strong business performance for Activision, potentially strengthening their bargaining position in the merger negotiations and increasing the pressure on Microsoft.
• Despite the recent appreciation of Activision’s stock, the spread remains attractive, as the likelihood of the merger making it through have never seemed higher.

Things are moving fast in the Microsoft Corporation (NASDAQ:MSFT) acquisition deal for Activision Blizzard, Inc. (NASDAQ:ATVI) saga. The latest news that I’m aware of is that the UK’s Competition and Markets Authority (“CMA”) may need to do a new probe into the deal if Microsoft wants it to work. That sounds a lot to me like the standard CMA process for if a company successfully appeals a block (which is quite rare). It very much looks to me like Microsoft is currently in a strong position in the U.K. (given its merger is actually blocked), and it clearly is in the U.S. with the judge coming out on its side vs. the FTC.

I wouldn’t be surprised if Microsoft pushes hard to close this deal ahead of the July 18 walk date. I understand that the company could ignore the CMA’s block while doing so. In most circumstances, this isn’t very wise because it opens up an acquirer to fines or investigations at a later date, while a lot of expenses associated with a merger have been incurred.

However, Activision can officially walk away from the deal on July 18. The timing of this deadline is a bit awkward for Microsoft. Activision is doing quite well business-wise; as I’ve argued in several articles on this deal, Microsoft picked it up on the cheap, the market is very strong, and sentiment is starting to be much more bullish.

Sentiment may be a contraindicator for the market in the medium term, but with short-term merger negotiations going on it strengthens Activision’s position to ask for more. It doesn’t have to fear as large a drop if the acquirer balks at its demands. Meanwhile, Microsoft has spent incredible effort to try and close this deals and has invested a lot of time and money into it. It has also been clear throughout the process its rival Sony (SONY) doesn’t want the deal to happen, and last but not least, Microsoft likely desires to demonstrate not every tech deal can or will be blocked.

This is as I’ve argued since being interested in this merger. Here’s an example from the fall of 22′:

To look at competition through the lens of console makers seems very narrow to me. Being a leader for 20 years in consoles is great and all, but there’s a lot of gaming going on outside of consoles (PCs, tablets, smartphones). There are even board games and trading card games that increasingly compete for attention with console games. I’m skeptical that Microsoft is interested in limiting rivals’ access to top Blizzard titles. That would bring down the profits of the acquired company. There’s tremendous value in having a console platform with a wide-ranging supply of titles available (why competition doesn’t take hold in consoles or Mobile OS), but I doubt there’s as much value in restricting content to Microsoft devices. High-end gaming revolves around building enormous and enduring franchises with loyal fan bases. Making titles less available breaks trust and franchises start to deteriorate. It also seems to me that regulators should be able to be appeased by certain promises not to ring-fence assets.

The question is what to do now with Activision stock having appreciated meaningfully. I think ATVI stock is actually still quite attractive. Over the last week, things hardly could have gone better for the merging parties, and yet the target is still trading at ~$90 with the possibility the acquirer is going to bump the bid if the July 18 deadline is exceeded. If the deadline isn’t exceeded, this looks like a 5.5% return but within a matter of weeks. The annualized return is quite ridiculous, although somewhat balanced out by the likely significant short-term downside if the deal is broken off(think $60-$70). If it goes longer, there is a good chance the deal gets a bump. The annualized return is probably a bit lower, but in absolute terms, it could be very attractive.

The odds for this deal to close have never before looked this good to me. The price may have gone up, but the odds have improved as well. It is nerve-wracking to buy in here or hold a position here, but I think it is still one of the attractive mergers to hold. I like a vanilla long position as well but for subscribers of The Special Situations Report I’ve included a short-term higher-risk/higher-reward alternative.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ATVI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Activision Blizzard stock has reached a new 52-week high following a federal court ruling that Microsoft can continue with its planned acquisition.
• The court ruling dismissed the FTC’s claim that the merger could lessen competition, suggesting instead that it could increase consumer access to Activision content.
• While the Microsoft deal is likely to close, it is not guaranteed, and the remaining takeover spread is slim, suggesting that locking in gains could be a sensible move for investors.

Article Thesis

Activision Blizzard, Inc. (NASDAQ:ATVI), which Microsoft Corporation (MSFT) seeks to acquire, has jumped to a new 52-week high in the low $90s following news that a federal court has decided that Microsoft can continue with its planned acquisition. At the current price, the remaining takeover spread is rather slim, which is why I believe that locking in gains could make sense.

What Happened?

In a deal that was announced around one and a half years ago, Microsoft Corporation plans to take over gaming company Activision Blizzard. There were many hurdles to this deal from the beginning, such as some politicians not liking takeovers by huge tech companies, while competitors to Microsoft and Activision Blizzard, such as Sony Group Corporation (SONY) also argued against this deal.

The United States and the United Kingdom were two of the biggest hurdles country-wise, but it looks like things are taking a turn in favor of Activision Blizzard and Microsoft in both countries.

Starting with the United States, we got news on Tuesday that a federal court has decided that the deal may proceed, as reported here on Seeking Alpha. The judge in this case, Jacqueline Scott Corley, argued [see link above, emphasis by author]:

The Court finds the FTC has not shown a likelihood it will prevail on its claim this particular vertical merger in this specific industry may substantially lessen competition. To the contrary, the record evidence points to more consumer access to Call of Duty and other Activision content. The motion for a preliminary injunction is therefore DENIED”

The court’s argument that evidence suggests that more gamers/consumers will have access to the games developed and marketed by Activision Blizzard is highly important, as this essentially means that the main argument against this takeover — consumers presumably being hurt — is wrong. The FTC had tried to block this deal due to reasons such as a presumed impact on consumers, but with this court ruling, it does not look like this will actually hold up.

In the United Kingdom, there were some positive developments as well for Activision Blizzard and Microsoft. Regulators in the UK could be okay with Microsoft making some small divestments, and it does not look like the deal will get blocked in the country. A trial has been paused following an intervention by the Competition and Markets Authority. An unnamed source has suggested that Microsoft is okay with a divestment, although it has not yet been announced what asset Microsoft would divest — presumably, it is not one of Activision Blizzard’s core assets such as the CoD franchise or the Diablo franchise — otherwise, Microsoft would not be willing to agree to such a divestment, I believe.

Why It Matters For Activision Blizzard And Microsoft

Following the release of these two news items, shares of both companies reacted. Activision Blizzard surged by a hefty 10% on Tuesday, soaring to the highest level in more than a year, at a little more than $90. The reaction has been less pronounced for Microsoft, which makes sense, as the deal is less impactful for the latter. Still, Microsoft saw its shares rise slightly as well.

For Activision Blizzard, things are pretty clear: When the United States and the United Kingdom are okay with the acquisition, then the likelihood of this deal closing is pretty high. This, in turn, means that current shareholders would eventually receive the promised cash payment for the deal, which is $95 per share. In other words, when the deal closes, Activision Blizzard’s current shareholders will get a premium of around 4% versus where shares are trading today. That’s nice, but not an especially hefty return, I would say. And since it is likely but not guaranteed that this deal will close, there is some remaining risk that the deal falls through — in this case, Activision Blizzard’s shares would likely drop meaningfully, as the current share price, and the recent share price increase, is driven by the deal being seen as likely to close. Fundamentals were not the deciding factor for ATVI’s recent positive share price performance. For shareholders of Activision Blizzard, the positive news from both the UK and the US is thus important, as it means that they can now either exit their position at a pretty attractive price in the low $90s, or, alternatively, they can wait for the deal to close to capture the additional 4% of upside, although that comes with some risk as it is still not guaranteed that the deal will work out.

For Microsoft, the increased likelihood of this deal closing is positive as well, although not a game-changer. Microsoft is a huge and very profitable company that is active across many different end markets. This includes gaming, and management seemingly sees potential in this space, hence the decision to go for Activision Blizzard in the first place. But gaming is not the most important growth driver for Microsoft, and it most likely won’t turn into that in the future — with or without the acquisition of ATVI. Microsoft’s performance in cloud computing and AI (via its stake in ChatGPT developer OpenAI) will be more important for its future business and earnings growth. Microsoft’s exposure to the AI theme, which has been getting a lot of attention in recent months, is also the reason for Microsoft’s strong share price performance so far this year. If the acquisition of ATVI goes through, this should have a positive impact on Microsoft’s long-term growth, but the impact will be of an incremental nature, I believe. This will not have a huge or drastic impact on Microsoft, one way or the other. The positive deal news is thus way more important for the owners of Activision Blizzard, versus the less pronounced impact for the owners of Microsoft Corporation.

Should You Sell ATVI Stock Now?

In retrospect, Activision Blizzard was a great investment a couple of months ago, when shares were trading in the low $70s. Investors that bought at that price paid a reasonable multiple for Activision Blizzard on a standalone company basis, I believe, as Activision Blizzard was valued at around 17x profits back then. Also, those that bought in the low $70s had a lot of upside potential toward the deal price of $95 per share. Clearly, those that bought back then have seen pretty nice returns so far.

But buying today is very different — if the deal were to fall through, ATVI’s shares would likely head lower, as the valuation on a standalone company basis is pretty high, at around 23x net profits today. Also, the remaining upside toward the deal price is limited.

While some investors like merger plays and will find a good way to play the remaining upside of around 4% towards the agreed-upon deal price, I believe, that this is not a very attractive investment for most investors. Those that have been holding Activision Blizzard shares in the recent past might be better off selling their investment, thereby locking in their gains. The remaining upside is not overly appealing, and while the risk of the takeover falling through has declined meaningfully, the risk isn’t zero. Exiting the position here in order to lock in one’s gains and in order to avoid the downside risk — which is now larger than it was a week ago, when shares were trading at a significantly lower price — could make sense. Even if the deal goes through, we don’t know when exactly that will happen. There thus is some opportunity cost for holding onto ATVI now, where the upside has a hard limit while putting one’s money to work in a different investment could result in more generous returns over the remaining time until the takeover closes.

Takeaway

There was some positive news regarding the pending takeover of Activision Blizzard by Microsoft. It is now more likely that this deal will close compared to a week or a month ago, although it is still not guaranteed that this will happen. ATVI’s shares have reacted very positively to this development, and are now trading pretty close to the deal price.

I believe that it could be a good idea to lock in the gains for ATVI shareholders, as the remaining upside is not very pronounced and since the potential downward risk in case the deal falls through is now a lot higher with ATVI trading at more than $90 compared to the past, when it was more reasonably valued on a standalone basis.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Trading North of $90, most of the Activision merger-arbitrage gains have been realized.
• The additional $3-$4 that investors can make holding for an additional week are more than matched by the amount of uncertainty caused by regulatory objection to the deal.
• Other merger arb targets might be worth of investors’ time and money, given this deal will have implications for them as well.

I have fond memories of the Microsoft-Activision (MSFT)(NASDAQ:ATVI) merger. My first article on the topic is still my most-read article on Seeking Alpha. Back in June of 2022 there was serious doubt over whether this deal could obtain regulatory approval. The argument I made was that the deal would likely pass based on the 2020 Vertical Merger Guidelines, which is one of the document regulatory agencies would use in evaluating the merger’s impact on the gaming market.

Now with the stock trading above $91 a share, there is a bit more clarity, but not enough to justify holding on for the additional $3-$4 per share. That is especially true given the Microsoft’s acquisition bid expires in July 18, just a week from today. Note that the deadline does not mean the acquisition will close in a week, it simply means that both parties to the acquisition could choose to walk away from it after that date. In other words, waiting that extra week doesn’t impact the regulatory process, doesn’t increase the chances of making the additional $3-$4 and only increases the risk of renegotiating this deal. The latter is almost certainly won’t happen, but why take my word for it when investors can sell now for a sizeable beat of the S&P 500. Not only did this investment outperform the S&P 500 when it is up double digits, it provided protection to the drawdown the S&P 500 endured in the second half of 2022. It was truly one of those rare convex opportunities, and its simply time to say thank you and good bye.

Why Selling Now Makes Sense

The stock is up more than 11% today on reporting from CNBC’s David Faber that the deal could close sooner than the deadline on July 18. That built on earlier reporting that the company sealed a legal victory in the US, with a US court rejecting a request from the FTC for a preliminary injunction to block the deal.

It makes all the sense in the world for investors to rush and buy ATVI when the stock was selling at fractionally more than $82 a share. There might be some sense in holding on for an extra week to get those extra $3-$4, though I consider that greedy. But there is certainly no need to buy it now on the hope of making 3% to 4% a week when the downside can be drastic.

Microsoft, Activision, and the United Kingdom’s Competition and Markets Authority (CMA) agreed to request pausing litigation, which the market took to mean that the parties are close to an agreement. According to Faber’s reporting, that agreement involves Microsoft making a divesture of one of Activision’s properties, which we don’t know what it is. Regardless of the details, investors who bought the stock should look to cash in now.

One thing that might be worth investors time however is researching other merger arbs that will be somewhat affected by the Microsoft-Activision merger. One example is Amazon’s acquisition of iRobot Corporation (IRBT). The verdict of the Microsoft-Activision merger is likely to be an indirect verdict on the fate of the iRobot acquisition, given both deals share similar characteristics. That will be something worth looking deeply into once there is more clarity on the position of regulatory bodies.

Lessons Learned from the Activision-Microsoft Saga

I’d say I learned two lessons from the Activision investment. The first was the importance of patience in investing. ATVI was essentially flat to slightly down for the entire period since my first recommendation, and it was only in late March 2023 that it began breaking out.

The second lesson is that lesson one is really is to understand in theory but hard to implement in practice. The amount negative headlines that investors had to endure throughout the period would have made it very hard not to sell. That was even more true given the investment gave opportunities for tactical risk management (selling out of the shares when they were down given the S&P 500 was down even more).

So it seems to me that forming a thesis is the easy part (there are dozens of fantastic writers on Seeking Alpha and may be hundreds of great ideas on a monthly basis). It is sticking to the thesis and having firmness of heart and mind to know when to hold on and when to sell is where investment returns are made.

The story might not be over for Activision however, its acquisition by Microsoft will surely bring its own research and theses on the future of the gaming industry.

Conclusion

Investors who bought ATVI before July 11, 2023 in general should look to take their gains and move on now. For other investors who are looking to buy the stock now with the coast seemingly clear, beware because there were countless occasions were solid reporting turned out to be inaccurate, or that facts simply changed after. Regardless, it seems unnecessary to buy now given the risks and reward. Investors can’t make more than 4-4.5% in a week, but can lose may be more than 20% in the same period if things go south for Microsoft and Activision.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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