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Bet on the Microsoft-Activision Deal… With Two Ways to Win

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Microsoft (Nasdaq: MSFT) is planning to close its agreed-upon $68.7 billion acquisition of Activision Blizzard (Nasdaq: ATVI) on June 30 of this year.

This deal was announced way back in January 2022 and has already been approved by Activision shareholders.

The purchase price will be $95 per Activision Blizzard share.

Microsoft – being the juggernaut that it is – will of course be paying cash. (It is, after all, only $68.7 billion!)

Despite the closing date quickly approaching, you can still buy shares of Activision for $78 today. That is a big discount to the $95 acquisition price.

If this deal closes in just over three months, anyone who buys Activision shares today could be cashing out with a gain of 22%.

On an annualized basis, that’s a 98% return rate! That is a pretty sweet return for owning shares for only a few months…

So what gives? Why aren’t Activision Blizzard shares trading closer to Microsoft’s acquisition price?

The answer is that the market isn’t certain that the deal is going to close. And neither am I…

In December, the Federal Trade Commission (FTC) announced that it was seeking to block the deal on antitrust grounds.

The FTC believes that if Microsoft gets access to the Activision Blizzard gaming library, it would be too powerful to allow for adequate competition in the gaming market.

Microsoft is, of course, fighting the FTC on this.

The deal is also contingent on approval from multiple entities in Europe.

I’ve read quite a few analyst takes on it, and I’d say the odds are better than 50-50 that the deal will close.

If it does close, buying shares of Activision Blizzard today is obviously going to provide a wonderful return.

But what if you were to buy shares of Activision Blizzard today and the deal doesn’t close?

Well, I’d say that you’d still have made a pretty darn good long-term investment in a great company at a nice valuation.

Activision Blizzard is the largest premier global video game creator in the market.

Plus, the company is going to reap a nice little $3 billion cash breakup fee from Microsoft if the deal fails to close.

That $3 billion would be added to the $12 billion in cash and investments that Activision Blizzard already has on its balance sheet.

With $15 billion, that would equate to almost $15 per share of highly liquid securities on Activision’s balance sheet.

If someone bought shares today at $78, they would really be paying only $63 for the Activision business if the deal fell through. I calculate that by taking the $78 share price and deducting the $15 of cash and investments.

For $63, an investor is getting a company that analysts believe is going to earn $3.85 per share this year.

That is a valuation of just 16 times earnings, which is very nice for a dominant, growing business that generates tremendous free cash flow every year.

It is also a nice discount to the 20 to 30 times earnings that the company has historically traded for.

What this essentially boils down to is that we are looking at a coin flip.

If the coin comes up heads and the deal gets approved, anyone buying shares today is going to bank a quick 22% gain in just over three months.

That’s a big win.

If the coin comes up tails and the deal gets squashed, anyone buying shares today gets to own a great company at a very, very reasonable valuation.

Yes, the stock will likely slide if the deal gets called off, but over the long term, I think this stock is a winner at this price in the “no deal” situation.

And for what it’s worth, Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) has more than $4 billion riding on Activision Blizzard and owns almost 7% of the company.

The Value Meter ranks Activision Blizzard as “Slightly Undervalued,” with two ways to win.

The Value Meter
One is fast; one is slow. Both are lucrative.

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