Activision Blizzard Bought by Microsoft for $69 Billion

Microsoft MSFT plans to acquire Activision Blizzard ATVI for $68.7 billion or $95 per share in cash, a 45% premium to the target's Jan. 14 closing price. The deal would make Microsoft the third-largest video game company by revenue behind Tencent and Sony. For Activision Blizzard shareholders, we view the $95 price as fair, given our $92 fair value estimate and the ongoing challenges of the massive sexual harassment/misconduct scandal.

We expect that regulators will heavily scrutinize the deal, given the recent anti-Big Tech fervor on both sides of the aisle in Washington. Microsoft expects the acquisition won’t close until fiscal 2023 (ending June), implying that it agrees with our view on the level of regulatory oversight. However, we think the deal will be approved in the end as Microsoft is competing with other large foreign firms and will keep the Xbox platform open to third-party publishers. We are leaving our Activision Blizzard fair value estimate at $92, balancing our stand-alone valuation, the value of $95 roughly a year from now, the potential for regulatory intervention, and the possibility of a higher offer from another suitor.

While the press release says Activision Blizzard CEO Bobby Kotick will remain in his position, we view that announcement as a concession to close the deal and don’t expect he will remain in that position for more than a few months after closing. Not only is Kotick radioactive after the allegations made against Activision Blizzard and him personally over the last six months, but also he is superfluous in the Microsoft gaming structure. We don’t see any reason that the heads of Activision, Blizzard, and King--soon to be the three biggest studios at Microsoft gaming--should not directly report to division CEO Phil Spencer. Kotick has been a hands-off manager more focused on longer-term strategy and deals. This role is ably filled at Microsoft by Spencer, making Kotick redundant, in our view.

Microsoft will be on the lookout for sexual harassment and gender discrimination at Activision Blizzard during the transition to ensure the success of the merger, said Leslie Norton, Editorial Director of Sustainability at Morningstar. “Human capital management problems are a big red flag for investors,” she added.

Ruth Saldanha also contributed to this report.

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