Yesterday (26.04), we learned that the UK Competition and Markets Authority (CMA) has blocked Microsoft's $69bn acquisition of Activision Blizzard over concerns that it would harm competition in the cloud gaming industry. Regulators believe Activision's titles, such as Call of Duty, would have strengthened Microsoft's lead over cloud gaming service rivals, threatening growth in the sector. The companies plan to appeal the decision. However, this could preclude a deal if Microsoft does not win the appeal. The Activision acquisition appears to be central to Microsoft's future plans, with titles such as World of Warcraft and Overwatch important to the cloud gaming services giant's competitive offering. What can we expect to see in the future
Impact of the decision on Activision Blizzard shares
As a result of the decision, Activision Blizzard's shares fell by 11.5 per cent. Martin Yang, senior analyst at Emerging Technologies and Services, in an interview with Yahoo Finance, believes that Microsoft will still try to reach an agreement, but that the appeals process could take one to two years. Yang also argues that the CMA's argument about Microsoft's benefits from the exclusivity of Activision Blizzard's games on its own cloud platform is unconvincing because the market for cloud services for games is still relatively small and there is not enough data. Yang believes that if the deal is scrapped altogether, Activision Blizzard's stock will still be healthy, but investors will certainly change their attitudes towards big publishers such as Take Two and EA. Yang says that one of the biggest events for Activision Blizzard in the near future will be the June release of the game 'Diablo IV'. Regulatory processes are currently underway in the EU and US. The Federal Trade Commission in the US is the suitor to block the deal. Microsoft has announced an appeal against the UK regulator's decision and called it discriminatory to technology innovation and investment in the UK.
It is important to remember that an investment in Activision Blizzard from an investment perspective is akin to writing a call option, meaning the possibility of a limited gain with an unlimited loss (up to a takeover price of US$95 per share). Completing the acquisition by the end of last year proved impossible. Even so, the chance that none of the 13 regulators would object seemed small. So far, however, agreements have been reached by signing deals with Microsoft's competitors. Nevertheless, further down the line, Activision Blizzard's shares seem to have limited upside potential, only a considerable distance away. This seems likely to deter investors in the medium term.
Source: Conotoxia MT5, Blizzard, Daily
Why are Microsoft shares rising?
Following the announcement of the CMA's decision and better-than-expected Q1 results, Microsoft's shares rose 7.2 per cent, bringing them closer to their historic highs. Investors seem to have perceived the postponement or cancellation of the acquisition as an opportunity to use the funds to develop what is currently the company's most growing segment, artificial intelligence. On the other hand, the possible postponement of the acquisition at a fixed price offers the opportunity to buy Activision Blizzard, which could expand even further at an unchanged price. However, it is hard to augur at this point what the tech giant will do. It seems to depend on the potential that the acquisition would give and the plans for it.
Source: Conotoxia MT5, Microsoft, Daily
Grzegorz Dróżdż, CAI, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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