Microsoft's Activision Acquisition Set To Close Today

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Microsoft (Nasdaq: MSFT), one of the world’s most well-known software, technology, and artificial intelligence companies, is two steps closer to sealing its acquisition of Activision Blizzard (Nasdaq: ATVI) in what could be the biggest acquisition in the gaming industry ever. 

First announced in January 2022, the deal between the two companies would bring beloved game franchises like Call of Duty, Starcraft, Warcraft, Diablo, and the beleaguered Overwatch under Microsoft’s banner, giving it access to Activision Blizzard’s significant revenue streams from its GaaS (games as a service) or Live Service model. 

Antitrust concerns

The $69 billion deal had two significant roadblocks. First, the Federal Trade Commission attempted to block the acquisition for fear of anti-competitive practices. In a press release dated December 8, 2022, the agency declared its intention, stating that: 

“The Federal Trade Commission is seeking to block technology giant Microsoft Corp. from acquiring leading video game developer Activision Blizzard, Inc. and its blockbuster gaming franchises such as Call of Duty, alleging that the $69 billion deal, Microsoft’s largest ever and the largest ever in the video gaming industry, would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business. In a complaint issued today, the FTC pointed to Microsoft’s record of acquiring and using valuable gaming content to suppress competition from rival consoles, including its acquisition of ZeniMax, the parent company of Bethesda Softworks (a well-known game developer). Microsoft decided to make several of Bethesda's titles, including Starfield and Redfall Microsoft exclusives despite assurances it had given to European antitrust authorities that it had no incentive to withhold games from rival consoles.”

However, California Judge Jacqueline Scott Corley has ruled in favor of Microsoft, stating that the court had found no legal basis to block the acquisition. The FTC filed an appeal to temporarily halt the deal, but the U.S. Appeals Court for the 9th Circuit denied the motion late on Friday, July 14. This allows Microsoft to close the deal before its July 18, 2023, contracted deadline.

Call of Duty and the Console Wars

Another noted focus of the case is Activision Blizzard’s most prominent IP, the Call of Duty franchise, and Microsoft’s planned future for the property. Sony, one of the big three manufacturers of current-gen gaming consoles, had raised concerns about the possibility of 

Microsoft making CoD an Xbox exclusive or sabotaging the PlayStation versions of the game, therefore eating away at its player base and profits. 

Call of Duty's latest release, Modern Warfare 2 and Warzone 2 has been estimated to rake in more than $5 million daily across consoles and PC versions, making it one of the most profitable games in existence. The franchise as a whole has earned Activision more than $31 billion in lifetime revenue.

This dispute was seemingly resolved when Sony finally agreed to a 10-year deal to keep Call of Duty on its platform. The offer had been on the table as early as December 2022, with Sony and Microsoft completing negotiations and announcing their mutual agreement on July 16, 2023. No doubt, investors will have a cause to break out the champagne!

Microsoft’s history of anti-competitive behavior

This is not the first time that Microsoft has come face to face with the FTC for antitrust concerns. In the late 90s, the agency had raised alarm bells about Microsoft, alleging that the tech company was attempting to create a monopoly in the personal computing space, particularly in the fledgling market for internet browsers. 

Microsoft began offering its flagship browser, Internet Explorer, for free as part of its Windows 95 Plus Pack. This move is thought to be the origin of the slow collapse of Netscape, Microsoft’s primary competitor between 1995 and 2001, dubbed “the browser wars.” Netscape, a once-promising software company, had an IPO price of $28 per share in 1995, skyrocketing to $174 by the end of its first year. 

Microsoft lost the case, with the initial penalty supposedly being the company's division between its operating system production and its other software products. However, that decision was repealed in favor of a settlement. This came too late for Netscape, which fell from prominence and was eventually disbanded in 2003. The browser’s legacy lives on in Mozilla Firefox. 

In more recent news, Alphabet Inc., Google’s parent company, has accused Microsoft of anticompetitive practices surrounding their cloud computing service in March 2023, especially with Microsoft Office 365 and Azure. Microsoft has offered to change its policies regarding its dealings with smaller cloud computing vendors, but Alphabet Inc. is still pushing through with the complaint. The case is still ongoing. 

What does this mean for shareholders?

The announcement of the acquisition broke news in December 2022. Microsoft is now trading at $345.73, a significant upside from its recent low of $214.25 on November 3, 2022. The announcement has bolstered investor confidence despite the setbacks and early predictions of eventual denial. This new set of wins will further boost the company’s profile among investors with the looming close of the deal. 

Meanwhile, Activision Blizzard experienced a 10% jump from $82.70 to $90.99 on July 11, 2023, putting it closer to Microsoft’s proposed $95 per share price and further signifying increased investor regard. In anticipation of the deal’s completion today (July 18, 2023) Nasdaq pulled ATVI from its Nasdaq 100 index and replaced it with digital ad firm The Trade Desk (Nasdaq: TDD). Some analysts have noted that the move is “premature,” stating that everybody is not yet on board with the acquisition. 

Despite the acquisition looking like a done deal, Microsoft still has hurdles to overcome. Government antitrust regulators from Saudi Arabia, Brazil, Serbia, Chile, South Africa, China, South Korea, Turkey, Japan, and the European Union representing Germany, France, and Italy have already approved the deal, but the U.K.’s Competition and Markets Authority is still withholding approval. 

Microsoft has offered concessions about the acquisition, like signing 10-year agreements to keep cloud-based services and games available on rival companies’ platforms, similar to their PlayStation deal, but the CMA is still holding renewed negotiations with the company. 

Most analysts are moderately optimistic about the deal, with most waiting for the CMA’s approval and the FTC’s next move. In the event of failure to agree upon extensions by both companies, Microsoft is slated to pay $3 billion if the deal is not completed on or before EOD July 18, 2023. 

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