Risk-reward not attractive: Take profit as deal may be blocked.
Activision Blizzard (ATVI US) is currently trading at $81.23, up 22% from where we recommended it on 5 Jan 2022. Shortly after our recommendation, ATVI agreed to a takeover proposal from Microsoft (MSFT US) at $95.00/share. If the deal completes, investors would make an additional 17%. That is substantial, but we believe there are substantial risks. The Federal Trade Commission (FTC) may block the takeover of ATVI on anti-trust grounds, which will likely send ATVI’s share back to its pre-announcement level, or 19.5% below today’s price. We believe that investors should take profit now.
The FTC may view a takeover of ATVI by MSFT as an anticompetitive "vertical merger," where one company acquires another company in the same industry but a different part of the supply chain. MSFT creates gaming platforms and consoles (Xbox) and ATVI makes the games to play on those platforms.
Under new FTC Chair Lina Khan, US anti-trust regulators are getting more aggressive. Khan has pledged to crack down on companies consolidating power and reducing competition. Recently, the FTC voted unanimously to sue to block arms maker Lockheed Martin’s (LMT US) proposed purchase of rocket engine maker Aerojet Rocketdyne (AJRD US). The FTC has also successfully blocked Nvidia’s (NVDA US) purchase of chip designer ARM.
Given the substantial risk that the FTC blocks MSFT from acquiring ATVI, the risk-reward ratio is not attractive. It is pretty standard among risk arbitrageurs to assume a stock will return to its pre-bid price if a takeover bid is blocked or a merger fails to complete. The premerger price of ATVI was US$65.39 per share.
We would be more comfortable with taking the deal risk if ATVI’s share price was at $75. The downside would be lower, and the upside greater