Activision's risk-reward trade-off defies Microsoft deal doubt

(Bloomberg) — For analysts who follow Activision Blizzard Inc., it’s almost as if the video game company never decided to sell itself to Microsoft Corp. for $69 billion.

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As investors grow increasingly doubtful that the deal will survive antitrust scrutiny, Wall Street brokerages are growing optimistic about Activision’s standalone prospects. Their 12-month average price target for the stock is $92.17, almost identical to their forecast of $91.95 on January 17, the day before Microsoft shocked the market with the takeover announcement. control.

Activision shares climbed 1.2% on Monday, while Microsoft edged down 0.7%.

If Microsoft’s $95-per-share cash offer fails, arbitrageurs tend to see the stock fall back toward $60, where it was trading before the offer, said Aaron Glick, arbitrage mergers specialist at Cowen. & Co., starting at $75.76 on Friday. Still, it might not stay there long: Analysts raised earnings estimates last month, citing prospects for its Call of Duty and World of Warcraft franchises. And the stock would jump more than 20% if the deal was struck.

“You can see why people would see this as a favorable risk-reward ratio, deal or no deal,” said Ralph Rocco, portfolio manager at Gabelli Funds, which owns Activision stock. “We see limited fundamental downsides and a decent amount of upside if the deal goes through.”

Since announcing the deal in January, Activision stock has weakened from $80 to mid-$70. The transaction is the subject of extensive antitrust investigations in the European Union and the United Kingdom, as well as an extensive review by the Federal Trade Commission in the United States, which Politico says is likely to take legal action 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. Microsoft, which said it expects to complete the transaction by June 30, declined to comment on the prospect of an FTC lawsuit. Separately, the New York Post reported that there was disagreement within the FTC over the deal that could help get it approved.

Not much of a buyout premium remains: In the five years leading up to the acquisition, investors valued Activision at an average of 23 times estimated earnings, though that multiple weakened to 16.8 just before the takeover. intervention by Microsoft. Activision shares are now priced at 20 times earnings.

The market is pricing in about a 35% to 40% chance that the deal will close. “If this breaks down, some event-driven traders will need to trim or exit positions and this selling pressure could cause the stock to fall below investors’ fair value estimates,” Cowen’s Glick said. There is a difference “between fair value and where something is trading due to a technical dislocation,” he added.

At least six analysts updated the stock in November, including Wells Fargo Securities, which wrote that the market “undervalues ATVI on both results (deal or disagree)”. Analyst Brian Fitzgerald cited Activision’s intellectual property portfolio, PC gamer base and growth opportunities in mobile games.

The view was echoed by Truist Securities, who wrote that based on a strong release slate, Activision “should have a great 2023.”

Today’s Technical Chart

Recent gains in the Nasdaq 100 index have led to a growing number of components trading above their 200-day moving average, a sign that the recent rally is accelerating. As of Friday’s close, about 55% of stocks in the benchmark are above that closely watched level, close to the highest since January. For comparison, less than 8% of the constituents were above their 200 days at the end of September. The overall index needs to rise about 4.5% to reach its 200-day level, which it has not exceeded since April.

Activision’s risk-reward trade-off defies Microsoft deal doubt

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