Activision Blizzard (NASDAQ: ATVI) was one of the strongest performers in the DFC Intelligence Video Game Stock Index for 2022. From January 2022 to January 2023, ATVI stock price increased 15% versus an average 30% decline in the index.
Of course, the reason for the increase was that Microsoft announced plans to buy Activision Blizzard at $95 a share for a valuation of about $69 billion. When the deal was announced ATVI’s stock price went from $65 a share on January 14, 2022, to $81 a share on January 18, 2022.
The stock price for Activision Blizzard started 2023 around $76 a share, within a range it has traded for most of the past year. It is all about how much risk investors are willing to place on the deal closing at $95.
Right now, the deal is being challenged on multiple fronts. On December 8, the FTC sued to block the merger. Reuters has just reported that the EU has issued an antitrust warning, but may not make its decision until April 11 (the deadline set by the EU) The U.K. Competition and Markets Authority (CMA) is also doing an investigation.
A major focus of the FTC complaint was on the potential damage to rival consoles (ie Sony PlayStation). A big point made by the FTC in its complaint was that after Microsoft acquired ZeniMax, they broke a promise to European antitrust authorities by making Bethesda Softworks games like Starfield and Redfall Microsoft exclusives. Keep up with the case at the FTC site.
It is worth noting that on December 22, the CMA published a summary of responses from members of the public document. During the last two weeks of October, the CMA invited public comment on the merger. They received 2,100 emails with about 75% broadly in favor of the merger. The document and other filings can be found on the CMA website.
The public response is probably the best argument for why the merger should go through. The FTC and other regulators have expressed concern that Sony will be harmed instead of worrying about the harm to consumers. Consumers feel they will actually benefit from the merger.
The weak argument the FTC makes is one of the reasons DFC Intelligence believes the merger can survive these challenges. As DFC has discussed government entities have not focused on the larger issue of whether Microsoft can use its operating system advantage to control PC and mobile game distribution.
Given the weak FTC arguments, DFC Intelligence continues to include Activision Blizzard as an initial stock in the DFC Intelligence Video Game Stock Portfolio. There is some concern that the stock has declined the past couple weeks as Google and Nvidia look to join the complaint. The main concern is that the FTC could expand its scope of the investigation. If that occurs the deal could be in trouble.
However, even if the deal falls through Activision Blizzard has some potential to justify its current valuation. Call of Duty continues to perform across multiple platforms, including more expansion into mobile. Blizzard has had some downtimes but has some new products in the pipeline.
If the merger is blocked, ATVI stock will go down in the short term. However, for those willing to hold long-term there could be growth as Activision beats expectations. The consensus analyst target price is $92. DFC Intelligence will likely look to get out of ATVI stock at $85.