The proposed $69 billion deal between Microsoft Corporation (NASDAQ:MSFT) and Activision Blizzard Inc (NASDAQ:ATVI) isn’t dead yet, according to analysts at Wedbush.
Analysts are bullish despite an earlier ruling by the UK’s competition regulator blocking Microsoft’s takeover bid of the Call of Duty maker Activision Blizzard.
The regular said it believed the company would be commercially motivated to make Activision’s games exclusive to its own cloud gaming service, adding that Microsoft had failed to address its concerns.
Wedbush maintains that reasoning is flawed, however.
The ruling “presumes that several new compelling services will emerge that can make the economics of the business model work, when success thus far has been limited in our view,” Wedbush noted.
“The fact that competitive services like OnLive and Gaikai were never profitable (each was sold to Sony as they were in decline) seems to have no bearing on the CMA’s thinking.”
The broker also noted that the CMA failed to consider the landscape in video streaming services, citing the merger of Warner Bros. and Discovery in April 2022 and Disney and Fox in March 2019 as similar examples that were able to go ahead.
“We think the CMA’s failure to object to these mergers reflects a correct assessment of the competitive landscape in video streaming, which is highly competitive and limits any party’s ability to raise pricing,” analysts wrote.
“The CMA’s decision on Microsoft’s merger with Activision is inconsistent with its pre-existing view that video streaming can remain competitive following mergers of rivals with much higher market share (10 – 20%) of the video market than Activision’s 5% share of the games market.”
'Inconceivable'
Analysts also noted that only a small portion of Activision’s revenue comes from purchased games. As Wedbush noted, Activision’s free-to-play titles like Call of Duty Warzone, Diablo Immortal and Call of Duty Mobile, along with its King portfolio, could be made available for free on any streaming service.
“It is inconceivable that Microsoft would refuse to revenue share on any of these games (comprising over half of Activision’s expected 2023 revenues), given that they already share as much as 30% of revenues generated on Sony’s PlayStation, Apple’s App Store and Google’s Play storefront,” analysts wrote.
Microsoft does bear some of the blame for the CMA’s decision, though, according to analysts: the technology company never fully committed to maintaining pricing for the Game Pass system.
Microsoft can easily satisfy the CMA by committing not to raise the price of Game Pass at higher than the rate of inflation for the next 10 years, analysts maintained.
Microsoft could win this issue on appeal once it addresses each of the CMA’s concerns, they added.
Wedbush expects the deal to be approved by the EU and the FTC sometime later this year, but the CMA has “thrown a wrench into the process.”
“The timing remains uncertain until Microsoft gets the CMA back to the bargaining table, so we must wait till we see progress on that front before we can call a date for completion of the merger,” analysts wrote.
In the meantime, Activision is expected to earn $4.25 this year and $4.50 next.
Contact Angela at angela@proactiveinvestors.com
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