Activision bulls expect to enjoy more deal-driven gains

Activision Blizzard Inc. shares, one of the world's most popular video-game makers, are showing fresh signs of life more than a year after Microsoft Corp. proposed its acquisition of the company for $69 billion.

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Since the deal has been announced in January 2022, Activision shares have gained 8% in the past three weeks as optimism has risen that the deal will overcome a major hurdle posed by a UK antitrust review. This has taken the stock above the range it had occupied since then and narrowed the discount to the current offer price.

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Moreover, the fact that Activision is performing so well, which has been encouraging for investors, has prompted some of them to speculate that Activision might be able to negotiate a higher price should Microsoft require more time to close the deal.

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“There is a very strong fundamental case for the shares, that gives you a really strong floor in the shares,” commented Doug Clinton, managing partner at Deepwater Asset Management.

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There seems to be no doubt that Activision is going to have a very busy month in April. Aside from the anticipated financial results, the UK Competition and Markets Authority is expected to make its final decision by the 26th of April.

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Even though the CMA approval will remove a big hurdle from the transaction, Microsoft still needs to get approval from the European Commission as well as the Chinese government, along with approval from the Federal Trade Commission. The deal must be closed by July 18th if it is to be approved.

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Last month, the UK's Competition and Markets Authority (CMA) narrowed the scope of its investigation to focus solely on cloud gaming, which sent Activision's stock prices soaring as a result of the review. In light of the gains, the spread between the stock price and the $95 a share acquisition price has narrowed to the slimmest since the deal was announced. 

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On March 31, Activision reached a closing peak of $85.59 and it has largely held steady ever since. It was a positive day for the stock on Thursday as it rose 0.7%. 

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A merger arbitrates strategist at Cowen & Co., Aaron Glick, says that last month's move by the CMA significantly boosted sentiment about the deal closing as a result of the move. It is estimated that the market is pricing in a 50% to 60% chance that the deal will be completed based on the assumption that Activision's standalone value is approximately $70 to $75 per share, versus 30% before the regulator made its announcement, he said.

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As for Activision, the outlook for the company's business continues to improve. It was reported by the Santa Monica, California-based company in February that net bookings exceeded Wall Street expectations and that expectations are running high for Diablo IV, an action role-playing game that is scheduled for release in June.

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"There is a strong argument to be made that Activision's short-term prospects are "one of our most compelling video game coverages," Wells Fargo analyst Brian Fitzgerald argued in a note last week. It is also believed that Diablo IV will be released in the coming months along with Warzone Mobile, and Fitzgerald expressed optimism that Activision could use its cash holdings for acquisitions or share repurchases if the Microsoft deal fails.

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Certainly, it's not going to be an easy ride for everyone. There has been a lawsuit filed by the FTC to halt the transaction, and the trial is set to begin on Aug. 2. That is the beginning of a lengthy process that could take months to complete.

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Nevertheless, if Activision fails to resolve the lawsuit by the termination date, there is a school of thought that suggests it would be well suited to negotiate a higher price in exchange for extending the merger agreement with Cowen, according to Glick of Cowen.

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The bet has a very low probability, but there is a precedent to support it. After regulatory approvals took longer than expected, Cisco Systems Inc., in conjunction with Acacia Communications Inc., agreed to increase its offer for Acacia Communications Inc. by more than 60% from its original deal price in order to close the acquisition.

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The stock remains attractive for bulls like Deepwater's Clinton despite the fact that the deal with Microsoft might not go through.

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“If the stock wasn’t in this deal, it might be trading near the offer price on its own,” he said.

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There have been steep gains for Intel Corp. since November when the stock hit a nearly eight-year low. There is a comfortable margin between the average analyst price target of $29.51 and the closing price of $32.02 on Wednesday. Among all the Nasdaq 100 components, the shares are the ones with the lowest return potential compared to the other shares.