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After months of regulatory hurdles, Microsoft stands on the cusp of completing its record-shattering $69 billion acquisition of gaming giant Activision Blizzard. This development could spark a rally for Microsoft’s stock (NASDAQ: MSFT), which has already outperformed major indices in 2023 amid enthusiasm for artificial intelligence.
The Redmond tech titan may clinch approval from antitrust authorities in the coming weeks. On September 22nd, the UK’s Competition and Markets Authority (CMA) stated that Microsoft’s latest concessions could address competition concerns over its Activision buyout first proposed in January 2022.
Specifically, Microsoft has agreed to license Activision games like Call of Duty to French game publisher Ubisoft for 10 years. This allows a key rival to distribute blockbuster titles on cloud platforms, preserving competition in the nascent market.
“This is a new and substantially different deal, which keeps the cloud distribution of these important games in the hands of a strong independent supplier, Ubisoft, rather than under the control of Microsoft,” said Colin Raftery, a senior director of mergers at the CMA.
The regulator will finalize its ruling by October 6th. Clearing this last major hurdle would seal the largest gaming acquisition in history, capping an 18-month quest by Microsoft.
The Potential Catalyst for Microsoft’s Stock
Microsoft stock has already climbed nearly 33% year-to-date, handily beating the S&P 500’s 17% decline over the same period.
The share price rallied from around $240 in January 2023 to over $330 in August before pulling back recently. MSFT last closed at $319.53, down 0.39% over 24 hours.
Analysts cite Microsoft’s cloud computing strength and forays into AI as bullish catalysts. Acquiring Activision would expand Microsoft’s gaming footprint across mobile, console, and personal computer platforms.
Activision’s stable includes blockbuster franchises like Call of Duty, World of Warcraft, Candy Crush, and Overwatch. The deal would vault Microsoft to the number three spot in the $175 billion gaming market.
“This deal will break new ground in game development and distribution, and unleash new gaming opportunities for players around the world,” said Anshu Sharma, a venture capitalist at Storm Ventures.
The merger would also boost Microsoft’s mobile ecosystem and advertising capabilities. But most importantly, gaining Activision’s 400 million monthly users would strengthen the company’s metaverse ambitions.
“Owning well-known titles like Call of Duty is key to jumpstarting its own metaverse,” noted Wedbush analyst Dan Ives. “This remains a major building block for the company’s consumer strategy.”
Overcoming Regulatory Resistance
Microsoft stunned the tech world when it announced plans to acquire Activision for $95 per share last January. However, global antitrust regulators quickly challenged the proposal over concerns that Microsoft could restrict access to Activision’s catalogue.
In September 2022, the U.S. Federal Trade Commission sued to block the deal on competitive grounds. This marked a major setback, even as Microsoft CEO Satya Nadella expressed confidence it would close.
“We feel very, very confident that we’ll be able to complete this acquisition,” said Nadella.
The UK’s CMA emerged as another thorn in Microsoft’s side. In December, the regulator said the buyout could hurt rivals by suppressing competition in cloud gaming. By January 2023, the CMA recommended fully blocking the merger.
But Microsoft pulled off a turnaround through months of negotiations. In a February 2023 filing, Microsoft proposed a 10-year licensing agreement to allay the CMA’s worries.
Under this proposal, Microsoft would continue distributing Activision games like Call of Duty to Sony’s PlayStation console post-merger. The latest Ubisoft arrangement goes further by allowing Activision titles on non-Microsoft cloud platforms.
Antitrust approval in the UK and EU could pressure the FTC to settle its U.S. lawsuit. Microsoft and Activision now aim to finalize the deal by June 2023 before the contract expires.
What Does This Mean for Microsoft?
The Activision acquisition would dramatically enlarge Microsoft’s gaming segment, which pulled in $7.7 billion in FY2022 revenue. Investors hope integrating these new titles onto Xbox and Game Pass will boost engagement.
Microsoft could also leverage Activision’s expertise to accelerate metaverse and Web3 efforts. The merger theoretically strengthens Microsoft’s advertising business as well.
But the deal’s implications extend beyond gaming. Microsoft gains deeper access to mobile, a weak spot versus Apple and Google. Securing Activision’s 400 million monthly users brings mobile into focus alongside PCs and the cloud.
“Mobile remains a missing piece in Microsoft’s big picture strategy,” explained Baird Equity Research’s David Koning. “Owning top mobile titles will be an important step to build up that presence.”
Microsoft expects the deal to close by early 2023. If the company clears the final antitrust reviews in the coming weeks, bulls could jump on Microsoft’s stock in anticipation of consummating this milestone transaction.