Microsoft-Activision Blizzard Deal Doubt Could Bring Big Reward: Tech Watch

The purchase of Activision Blizzard Inc. by Microsoft Corp. has stalled, but some traders are betting that the deal will eventually go through.

Microsoft Corp.’s Purchase of Activision Blizzard Inc. has stalled, but some traders are betting that the deal will eventually go through. If they’re right, there’s some serious money to be made as the video game company’s stock is still nearly 20% below the bid price.

Stricter U.S. antitrust regulators, the string of international approvals needed, a wide-ranging tech stock collapse and the size of the $69 billion deal have all contributed to tenaciously widening the gap between Activision’s price and Microsoft’s $95-per-share offer. to keep. That made it one of the most potentially lucrative opportunities for arbitrageurs speculating on takeovers.

The increased attention US regulators pay to large companies, particularly in technology, has resulted in a longer period between when a deal is announced and when it finally goes through, increasing the risk of a transaction falling apart. , increases.

“Given the sheer size of the deal and the heightened antitrust scrutiny against major technology players, that ultimately causes the very large diversification,” said Julian Klymochko, chief investment officer at Accelerate Financial Technologies Inc.

Microsoft announced the acquisition of Activision in January and expects to complete it in the year ending June 30, 2023. And Broadcom Inc. has said the acquisition of VMware Inc. worth $61 billion, announced in May, to be completed by October 2023.

According to data from Susquehanna International Group, average annual US deal spreads, which provide a measure of the risk of trades collapsing, have risen above 15% from about 10% at the start of the year. That came amid mounting fears of a deal collapse or price review, and increased costs of taking risky positions.

Certainly, one of the biggest arbitrage spreads in technology mergers has nothing to do with regulatory hurdles.

Elon Musk Is Trying To Walk Away From His Acquisition Of Twitter Inc. of $44 billion, and the company is suing him to force the deal. Twitter shares are trading at $41 at the deal price of $54.20, yielding a 32% gain if the trade goes through as agreed.

Led by Lina Khan, the Federal Trade Commission has already filed a lawsuit to block two major takeovers. She argued for a more vigorous approach to assessing big technology deals, arguing that companies in the industry can use their dominance in one industry to gain power in other markets.

The slump in the tech sector hasn’t helped with deal spreads either. The Nasdaq 100 Index is down 19% this year, forcing investors to price in greater downside risk to Activision stock if the deal falls apart, Klymochko said.

Given the long time until the expected closing of the Activision purchase, the stock should endure at least a few more quarters of higher volatility, coupled with company-specific news flows and general market performance.

However, there is “relatively strong consensus that this deal should go through,” said Cabot Henderson, a market strategist at Jonestrading. Wall Street seems to agree, with 26 of the 32 analysts covering the stock and fixing their 12-month price target at $95 or more.

And investor Warren Buffett has bought an approximately 9.5% stake in Activision in a merger arbitrage bet. The 91-year-old billionaire has about seven decades of experience in arbitration, including in technology companies: he bought shares of Red Hat Inc. before being acquired by International Business Machines Corp. in 2019.

Last week, MoffettNathanson LLC analyst Clay Griffin improved Activision to outperform. “While we would push back the idea that Microsoft Activision will close any time now, we see a strong reason why it should eventually,” he wrote.

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