Microsoft’s Activision deal has on virtual goggles

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NEW YORK, Jan 18 (Reuters Breakingviews) - Microsoft (MSFT.O) Chief Executive Satya Nadella’s deal to splash out $69 billion for Activision Blizzard (ATVI.O) makes a lot of sense, virtually. The software giant is paying a huge premium for its gaming rival, which should help it take on other technology giants in the metaverse. The problem is that in real-life, the deal is likely to catch the attention of watchdogs, who have mostly let the $2.3 trillion company skate by.

Microsoft on Tuesday agreed to pay $95 in cash for each Activision share, a 45% premium to the target’s closing price on January 14. The extra value being handed to Activision certainly comes with risk given the “Call of Duty” publisher is fighting California regulators who sued the company for gender bias and a toxic environment.

Still, the offer price is less than where Activision’s shares traded a year ago and the publisher slots in with Microsoft’s larger narrative of building out its version of the metaverse read more . It also complements read more Microsoft’s gaming platform Xbox and it opens the door for mobile given Activision also creates “Candy Crush.” So Microsoft in some ways is being opportunistic.

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Just how opportunistic is the sticking point. Microsoft didn’t say how much it would save by combining the two businesses, and it didn’t give analysts the opportunity to ask questions on its call discussing the deal. Wedbush estimates it could save $1 billion annually, which, taxed and capitalized on a multiple of 10 times, would cover only a third of the premium. That may be one reason the tech titan’s shares were down on Tuesday.

Microsoft might have also undersold the deal. More disclosure that validates a big premium could help, but that also leaves Microsoft exposed. Touting big synergies like the ability to cross sell, raise prices, or cut staff could suggest its gaming business has too much control over the market. Microsoft did say that the deal will make it the third-largest gaming company by revenue behind China’s Tencent (0700.HK) and Japan’s Sony (6758.T).

For two decades, Microsoft has largely avoided the regulatory crosshairs that tech peers Meta Platforms (FB.O), Alphabet (GOOGL.O), and Apple (AAPL.O) are experiencing. Though its market capitalization dwarfs Activision, this would be Microsoft’s biggest deal ever. It’s hard to see Nadella rolling the dice on both an acquisition and regulators. Still his ambitions may look less appealing once the virtual goggles come off.

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CONTEXT NEWS

- Microsoft said on Jan. 18 it plans to acquire Activision Blizzard for $95 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision’s net cash.

- The price represents a 45% premium to Activision’s closing stock price on Jan. 14.

- Activision Chief Executive Bobby Kotick will continue to serve as Activision CEO. Once the deal closes, that business will report to Phil Spencer, CEO of Microsoft Gaming.

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Editing by Lauren Silva Laughlin and Sharon Lam

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