Activision / Microsoft – Buyer’s remorse.

FTC may end up doing Microsoft a favour.

• If Microsoft had delayed its bid for Activision, it probably would have been able to get it for half of the price it has committed to pay, meaning that an FTC blocking lawsuit may well do Satya & Co. a big favour.
• However, at the same time, there are some simple remedies that would satisfy the concerns of the deal’s critics (Sony) meaning that there is 30% for anyone who takes the bet that the deal will close.
• At the time, Microsoft said that it was buying Microsoft to accelerate its entry into the Metaverse (see here) and it is very interesting to see how this line has completely vanished from its commentary now that the public Metaverse companies have been hammered.
• Hence, I suspect that the reality is that Microsoft wanted to buy Activision for other reasons and just said that because it was in vogue at the time.
• Furthermore, I also think that deep down, Microsoft will be quite happy to have the deal blocked given that Activision’s peer group has fallen in value by 50% or more since the announcement meaning that there is little doubt that Microsoft is now paying way too much for this asset.
• This is exacerbated by the fact that Microsoft is paying in cash meaning that the decline in its share price has not had any effect n the real price being paid.
• The main problem with the deal is Sony to whom Activision’s Call of Duty game is of paramount importance.
• It is one of the biggest console games available today with over 400m players and has been a stable franchise for 20 years.
• Hence, if Microsoft was to make Call of Duty an Xbox exclusive, the appeal of the PlayStation would take a substantial hit.
• Microsoft has promised not to do this and for once, this old cynic is inclined to believe it.
• This is because Microsoft has fought with Sony for years to open up its platform so that Xbox and PlayStation players can play together, and I think that it wants Call of Duty and the other Activision games to be freely available everywhere.
• Microsoft also has form in this area since its acquisition of Minecraft (via Mojang), the title has gone from strength to strength on all platforms.
• This brings us to the question of why Microsoft wants to buy Activision and there I draw a blank.
• None of the arguments on its website make very much sense (see here) as all of the benefits could be delivered with decent management in charge of Activision and not necessarily being owned by Microsoft.
• Hence, I think Microsoft won’t be too upset if the deal gets cancelled given that the Metaverse has taken a nose dive, its own Metaverse offering is very uncertain and Microsoft is increasingly all about the enterprise and leaves consumer to others.
• Furthermore, given the deterioration in Activision’s performance, the deal now looks much more expensive than it did in January 2022.
• At $95 per share, Activision is trading on an EV / 12-month trailing revenue of 8.7x and a PER of 44.6x and it looks like earnings are declining and will continue to do so during this downturn.
• This looks extremely expensive to me and if I was Microsoft, I would be having an acute case of buyer’s remorse.
• However, there is a relatively easy solution to this as all the fuss seems to be about the availability of Call of Duty on non-Microsoft platforms which is a relatively easy fix.
• Hence, I think the deal could be cleared by regulators but only if Microsoft still has the will to fight for the transaction.
• There is an easy 30% to be made if you think it does but the deal is now so expensive, one has to wonder whether Microsoft would not prefer to quietly let this one go.