Activision Blizzard: You Won’t Find Another Risk/Reward Like This (NASDAQ:ATVI)

Thesis

In my two previous articles, “Activision Blizzard: What If The Microsoft Deal Fails?” and “What Will Microsoft Lose If The Activision Blizzard Deal Collapses?“, I looked at Microsoft Corporation’s (MSFT) deal with Activision Blizzard, Inc. (NASDAQ:ATVI) more from a What-If perspective, as many investors see this proposed acquisition as a completed one. However, I still think that Activision has a fantastic chance of being bought out. ATVI stock has a brilliant Risk/Reward ratio and looks like one of the best opportunities in this market.

Current deal status

Regulatory pressure continues to haunt Activision, as the proposed transaction continues to attract the attention of the authorities who want to find out more detailed information on this issue.

This month, antitrust commissions increased the pressure on Microsoft as they see the possibility of the acquisition damaging the competition in the gaming market. Thus, CMA’s investigation has entered the second phase following the statement:

“...if Microsoft buys Activision Blizzard it could harm rivals, including recent and future entrants into gaming, by refusing them access to Activision Blizzard games…“

This position is quite understandable and predictable. This acquisition is not only the largest in the history of the industry but in the entire history of the IT sector. Regulators simply cannot leave such an event without a deep investigation.

But let’s be honest, although the regulators have formal grounds for blocking this deal, there are no clear indisputable reasons for this. I view the Microsoft-Activision case more as a bet on the common sense of the regulators.

Is Call of Duty too big to be in Microsoft’s hands?

Microsoft’s takeover of the Call of Duty franchise is a major source of dissatisfaction for regulators and competitors. They see the problem not only that the corporation will gain access to one of the most popular gaming franchises in the world, with over 425 million copies sold, but also that it will be used to gain a non-competitive advantage in the market.

Over time, Microsoft may make Call of Duty an Xbox exclusive. Phil Spencer, Xbox chief, claimed that they will keep Call of Duty on PlayStation for “several more years” beyond the current marketing deal. This scenario doesn’t sit well with Sony (SONY), as the company doesn’t want to lose such a game on its platform.

It is important to understand that if Microsoft takes this step, it will simply lose money because they are depriving Activision of an incredibly large part of the revenue. The reports show that the largest part of the Call of Duty community (42.1%) comes from PlayStation. The franchise has brought a total of $30 billion, and given that the PlayStation community is a more solvent one, I doubt that it accounts for less than 45% of the total game’s revenue.

Given Mr. Spencer’s statement, the assumption that the franchise’s games will only be available on one platform may be true. However, in this case, the obvious question arises: So what? Microsoft rightly stated that there is nothing unique about the Call of Duty (“CoD”) games. The only reason for the popularity of Call of Duty is the consumer habit and the reluctance to try something else. Strong gamers’ loyalty to the game will end when that game disappears from their platform. The franchise has Battlefield as an ardent competitor, which will easily attract PlayStation players, as this game is not inferior in quality to CoD and has similar gameplay. Therefore, the claim that Microsoft will gain some incredible influence in the gaming market if they make Call of Duty exclusive to their platform is simply not true.

But even if regulators decide that such a move is unacceptable, they will not block the deal, but will simply make the game’s multiplatform mandatory for the successful completion of the acquisition.

Everything else is great

Call of Duty is the main asset of Activision Blizzard and the only thing that raises questions from the authorities.

Everything else looks great. The corporation will become only second in terms of revenue with Activision in its gaming segment. The industry is filled with numerous players who will compete directly with Microsoft. This breaks the thesis about the possible monopolization of the market.

Therefore, the management has remained positive about the deal’s ultimate approval. Microsoft CEO, Satya Nadella says that they feel “very, very confident” that they’ll come out. Such statements are a very positive signal, as they allow us to look at the situation from the inside.

It’s important to understand that Microsoft can’t just walk away from the deal, as the IT giant would pay a hefty fine if the deal falls through.

All of this increases the chances of completion of the acquisition. It turns out that after resolving the issue with Call of Duty, the success of the deal will be almost guaranteed.

An amazing opportunity

As of 22 September, ATVI shares trade at the $77 level, which is far below the buyout level of $95. This is an incredibly attractive arbitrage opportunity.

As market sentiment is now full of uncertainty, the risks increase, and it’s getting harder to get a generous reward, while taking the same risks. However, the Activision Blizzard case provides such an opportunity. The potential upside is >20% on the horizon of a year, as Microsoft expects the deal to close in the summer of 2023. The only driver of growth or decline is the buyout or the failure of the acquisition. Thus, ATVI stock has an amazing Risk/Reward ratio, as the chance of the deal falling through is very low, while the upside is remarkable. I don’t think that there is another opportunity like this anywhere in the market.

Thus, I believe that Activision is a Strong Buy.