BMO: Activision Purchase Is “A Face-Saving Exit For Embattled CEO”

On January 18th, Microsoft (NASDAQ: MSFT) announced that they would be buying Activision Blizzard (NASDAQ: ATVI), which “will accelerate the growth in Microsoft’s gaming business across mobile, PC, console and cloud and will provide building blocks for the metaverse.” The purchase price is $95 per share or roughly $69 billion, one of the largest all-cash deals ever. The deal is expected to close in Microsoft’s fiscal 2023.

The deal brings titles such as Warcraft, Diablo, Call of Duty, StarCraft, and Overwatch under Microsoft’s control. Satya Nadella said, “Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.”

Additionally, Microsoft will pay a $2.5 billion termination fee if the notice is between January 18th and April 18th, 2023, the fee will go up to $3 billion if the deal is terminated under specified circumstances after April 18th, 2023.

Activision Blizzard currently has 33 analysts covering the stock with an average 12-month price target of US$93.32, or slightly below the proposed purchase price. Notably, analysts’ average 12-month price target for the last three months has been around the US$93 range. Out of the 33 analysts covering the stock, 8 have strong buy ratings, 10 have buy ratings and 15 analysts have hold rating on the stock.

In BMO Capital Markets’ note, they reiterate their outperform rating and raised their 12-month price target to US$95, saying that although there is regulatory uncertainty around this deal, they expect the deal to go through and the companies stock price to slowly close the gap.

BMO says that this deal makes sense on multiple levels, first and foremost, that the deal offers “a face-saving exit for ATVI’s embattled CEO Bobby Kotick.” They believe that Mr. Spencer, the EVP of Gaming, offers better credibility and will fix the cultural and workplace issues at Activision.

Secondly, they say that content is king, with Activision owning a number of household titles such as Call of Duty, World of Warcraft, Candy Crush, and Overwatch. There should be inherent synergies with Microsoft’s other gaming franchises and development assets.

These titles will help improve Microsoft’s Game Pass which is $9.99 a month, while potentially making the Xbox console look more attractive if any of these titles become Xbox exclusives. BMO believes that cloud-based gaming is the future for gaming, the ability to not need to pay for hardware but only a subscription model to run games seamlessly through a virtual machine, these games should make their Microsoft xCloud a more attractive platform.

Lastly, they believe that the Investor’s fears of regulator interference are a little overplayed as from a video game standpoint Activision only holds 5% of the market, with the combined business only holding 8%. Though they say that if Call of Duty does get packaged into the Game Pass, it could bring up the same issues that happened to Microsoft prior to bundling Internet Explorer with Windows back in 1988.

Information for this briefing was found via Sedar and Refinitiv. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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