Activision’s risk-reward trade-off challenges Microsoft deal skepticism

news7f12/05/2022

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Activision's risk-reward trade-off challenges Microsoft deal skepticism

(Bloomberg) — To analysts who follow Activision Blizzard Inc., it seems the video game company never decided to sell itself to Microsoft Corp. for $69 billion.

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As investors increasingly doubt whether the deal will survive antitrust scrutiny, Wall Street brokerages are growing more optimistic about Activision’s independent outlook. Their 12-month average price target for the stock is $92.17, roughly the same as their $91.95 prediction on Jan. 17, the day before Microsoft shocked the market with takeover announcement.

Shares of Activision rose 1.2% on Monday, while shares of Microsoft fell 0.7%.

Aaron Glick, a mergers expert at Cowen & Co., said that if Microsoft’s $95-a-share cash offer fails, arbitrageurs tend to see the stock fall. back to $60 where it was trading before the auction. It might not be there for long, though: Analysts have raised earnings estimates over the past month, citing outlooks for the Call of Duty and World of Warcraft franchises. And shares will rise more than 20% if the deal goes through.

“You can see why people see this as a favorable risk/reward, with or without it,” said Ralph Rocco, portfolio manager at Gabelli Funds, which owns Activision stock. agree. “We see limited fundamental downside and a fair amount if a deal goes through.”

Since announcing the deal in January, shares of Activision have weakened from as low as $80 to an average of $70. The transaction faces intensive antitrust investigations in the European Union and the United Kingdom, as well as close scrutiny from the Federal Trade Commission in the United States, which Politico has reported likely Ability to file a lawsuit to block the sale.

Microsoft is ready to fight if the United States sues to block the deal, Bloomberg News reported late Friday, citing a person familiar with the matter as saying. Microsoft, which said it expected to close the transaction by June 30, declined to comment on the prospect of an FTC lawsuit. Separately, The New York Post reported that there is a rift in the FTC over the deal that could help it get approved.

No more acquisition fees: In the five years leading up to the acquisition, investors valued Activision at an average of 23 times estimated earnings, although that multiple had dropped to 16.8 just before Microsoft entered. family. Activision shares are now worth 20 times earnings.

The market is pricing in about a 35% to 40% probability of closing the trade. “If it crashes, some event traders will have to reduce or exit their positions and selling pressure could push the stock below fair value estimates,” Cowen’s Glick said. investment,” said Cowen’s Glick. He added that there is a difference “between fair value and where to trade something due to technical deviations”.

At least six analysts who upgraded the stock in November, including Wells Fargo Securities, wrote that the market “is undervaluing ATVI relative to both outcomes (deal or no deal).” Analyst Brian Fitzgerald cited Activision’s intellectual property portfolio, PC player base, and growth opportunities in the mobile game space.

This view is echoed by Truist Securities, which wrote that based on a strong issuance vehicle, Activision “will have a successful 2023.”

Technology chart of the day

The recent rally in the Nasdaq 100 Index has resulted in more and more components trading above their 200-day moving average, a sign that the recent bull run is picking up momentum. As of the end of Friday, about 55% of stocks in the benchmark were above this closely watched level, near their highest levels since January. By comparison, less than 8% of the component was above the 200-day level at the end of September. The overall index needs to gain about 4.5% to hit the 200-day mark, which it hasn’t closed above since April.