Microsoft Corp.'s (MSFT, Financial) planned acquisition of Activision Blizzard Inc. (ATVI, Financial) has garnered significant interest from investors due to its impressive potential for increasing Microsoft's market share in the gaming industry. However, the deal has faced uncertainties and regulatory scrutiny in multiple countries as it has been reviewed by the EU, the U.K., Japan, China and the U.S.
Regulatory authorities such as those from the U.K. and the U.S. have indefinitely delayed the merger and may even block it if Microsoft fails to convince regulators of its ability to avoid harming competitors' chances. This raises the question of whether Microsoft can bring itself to put proper safeguards into place to satisfy regulators. All of this uncertainty has left investors interested in this deal feeling worried, though we can at least take comfort in both companies being strong on their own merit.
The U.K. blocks Microsoft's takeover of Activision Blizzard
Regulators in the U.K. have moved to block Microsoft's proposed acquisition of Activision Blizzard. According to the U.K.'s Competition and Markets Authority (CMA), the deal would give the company excessive power in the industry, as it already possesses a substantial share of the cloud gaming market.
The CMA's decision has sparked legal battles, with Microsoft naturally appealing the ruling and claiming that it will put in place agreements to prevent itself from making anti-competitive moves.
Global approvals and opposition
Outside of the U.K., regulators in the U.S. also have expressed opposition to the deal. However, other countries and regulatory regions, including the European Union, Japan and China, have approved the merger. The European Commission stated the deal was competitive due to Microsoft's plans to license Activision's games to rival gaming platforms. These approvals have sparked speculation that Activision Blizzard might consider relocating its operations to Europe to resolve the U.K.'s opposition.
Activision Blizzard's strengths shine amidst merger uncertainties
Investors may be worried that Activision Blizzard won't do well without the Microsoft deal. Activision Blizzard faced significant challenges last year, including a disappointing release of its flagship franchise, Call of Duty, declining user trends for "Call of Duty: Warzone" and delays in titles from its renowned Blizzard studio. However, the situation has turned around dramatically for Activision Blizzard more recently. The release of its latest Call of Duty title, "Modern Warfare II," has set purchase records for the franchise, and another iteration is scheduled for release later this year.
The company has also started releasing more new games, with "Overwatch 2" launched in October 2022 and the highly anticipated "Diablo IV" set to release this month. "Diablo Immortal" and "Call of Duty: Mobile" have been well-received in the mobile gaming category, with the latter consistently ranking among the top-grossing games on the App Store.
Activision's subsidiary, King, owns "Candy Crush," the world's top-grossing mobile game, contributing to the company's consistent growth.
Based on these successes, Activision Blizzard's management predicts a significant increase in free cash flow in the coming years. Initially, they forecasted free cash flow of $3.4 billion in 2023 and $3.9 billion by 2026.
A compelling opportunity regardless of a Microsoft deal
Despite the regulatory hurdles, the Microsoft management team is not walking away from the merger. There has been a lot of time and resources invested in this merger. Microsoft's Xbox division has struggled to compete with other gaming platforms, and the acquisition of Activision Blizzard would help enhance its position in the console/PC gaming market. Personally, I don't think that making Call of Duty exclusive to Xbox would be commercially feasible, so the anti-competitive concerns may be overblown.
Additionally, I think Microsoft's limited presence in the mobile games market offers an opportunity for competition enhancement through the merger. Microsoft aims to leverage Activision Blizzard's properties to launch its own mobile games store, which could facilitate regulatory approval.
Thus, I believe Activision Blizzard's future is bright regardless of the outcome of the merger. The release of "Diablo IV" has achieved record-breaking sales, surpassing previous games from the company and boosting the stock's performance. The share price has risen significantly since the merger announcement, so it may pull back in the short term if the deal falls through, but the company's financials have shown positive growth.
Also note, due to the ongoing merger process, Activision Blizzard cannot utilize its accumulated cash for share buybacks, and it is limited in its reinvestment prospects. Nonetheless, the company should be able to utilize more of its funds when things settle down.
Takeaway
In conclusion, Microsoft's proposed acquisition of Activision Blizzard has faced significant regulatory scrutiny and challenges in key markets. The U.K.'s decision to block the deal throws everything into question.
Despite the uncertainties, I believe Activision Blizzard's strengths as a standalone company make it an attractive investment opportunity. Investors who are interested in the stock should continue to closely monitor the latest developments to see if the outlook changes.
