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The Microsoft-Activision Blizzard Deal Is Done

Motley Fool - Tue Oct 24, 2023

In this podcast, Motley Fool host Ricky Mulvey and analyst Asit Sharma discuss:

  • What got Microsoft across the finish line of its acquisition of Activision Blizzard and an unexpected winner in the deal.
  • The latest memo from Howard Marks: "Further Thoughts on Sea Change."
  • The case for credit investing, and a bond fund yielding 9%.

Plus, Motley Fool personal finance expert Robert Brokamp and host Alison Southwick answer listener questions about money market funds, 401(k) rollovers, and automated investing.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct. 17, 2023

Ricky Mulvey: The Microsoft Activision saga is over, finally you're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Asit Sharma. Asit good to see him a man.

Asit Sharma: Ricky, good to see you as always.

Ricky Mulvey: Almost two years after announcing a deal to the public, Microsoft has finally completed it's $69 billion acquisition, A video game maker, Activision Blizzard, the largest in Microsoft's history. It's been a long fight. What got this deal over the finish line?

Asit Sharma: Ricky, when you really want something in mergers and acquisitions as well as in life, you got to make concessions. The two key concessions Microsoft made to get this deal over the finish line was first to agree that it would keep Call of Duty, this mega-franchise on Activision's part, available to other platforms, and they wouldn't make it exclusive on the Xbox. I believe you and I have talked about this as of others on Motley Fool Money. I'm sure most of our listeners are familiar with these dynamics. I don't spend too much time on that. The other major concession is a cloud streaming concession. Microsoft is going to grant a French gaming publisher named Ubisoft, perpetual streaming rights for Call of Duty, and all of their active titles, as well as those that will be released by Microsoft/Activision over the next 15 years. That's a key concession, a nice amount of revenue that they are foregoing, but it gives them all the resources they wanted to make this deal happen.

Ricky Mulvey: Cloud gaming is basically you're playing a game on your computer, TV, whatever, and then all of the graphics rendering is done on a separate server. You're basically outsourcing the heavy lifting. I think the concern was that by including that on the Microsoft platform, then you're going to have a little too much domination. What is it? Synergy has it into that space. But we've talked a lot about the fight, we've talked a lot about the roadblocks, the FTC being unable to stop true love. What will you be watching to see if Microsoft actually made a good deal in the years to come?

Asit Sharma: Ricky, I want to see if Microsoft will be effectively able to utilize all the creative potential that Activision Blizzard brings. Microsoft's gaming revenues are significant, and they were on a growth trajectory the last several quarters. Though growth has really slowed down Xbox sales, content services, etc. I think into the single digit range, they need a creative boost, they need these titles. But I want to see if Microsoft can merge its culture with Activision's culture, and produce some new great IP. What is the next great franchise that Activision Blizzard now, with Microsoft's backing, can produce that will keep them just a vibrant franchise producer for the next 15 years after those perpetual rights run out.

Ricky Mulvey: There's some excitement about basically bringing back like Guitar Hero, and Tony Hawk's Pro Skater. But I think you bring up a good point, which is that, it's so incredibly difficult to create a new franchise. They've tried it a little bit with a game called Starfield, which got more mixed reviews from gamers. But I think that's going to be ultimately how the pricing, and then also the introduction of new IP will ultimately determine if gamers get a good deal from this merger.

Asit Sharma: Well, I just want to see if Activision Blizzard can dip into Microsoft's balance sheet, have the resources it needs and use those constructively. This is an industry where actually ideas are almost as important as technical skill. We see companies come out of the blue with great games, and then they get backing, they start to turn a profit, they get big. Here we're coming into a situation where all the resources Activision needs are at hand via Microsoft. Whatever spark they need for that creativity to flourish, and then just massively distribute. It sounds like it should be a great combination. You could see though the opposite happened. There is a curse of having too much resources that can often kill creativity. I'm curious to see how it will play out.

Ricky Mulvey: It's been maybe a little bit of a problem at Disney lately asset. Talking about this acquisition, there is one, I would say, unexpected winner, and that is the Lulu Tribe. While one Lulu Tribe has been staring down the barrel of elimination a little too often and in fact dissolving this week. One Lulu tribe is gaining quite a bit of acceptance. LuluLemon, Stretchy Pants Maker is the newest member of the standard in Ports 500. The stock is up 11% over the past five days. Why are investors so excited to snap up shares after gaining admittance to this club?

Asit Sharma: Two stories are related here. Activision Blizzard pulls out of the S&P 500. You need to replace a company to keep the S&P 500 whole. That company happens to be LuluLemon. What's happening here is that institutional holders, those who buy companies as they are falling within indices, ETFs, exchange-traded funds, they've got to buy those shares to keep their proportions equal. To follow whatever the index composition is, if you've got an ETF exchange traded fund that tracks an index, S&P 500 index has a lot of ETFs that track it. Those institutional buyers, they have to really collect a mass shares. The ticker in question, and that this week is Lulu Lemon. A lot of excitement around that, and I think just some attention on the stock is also now pushing it higher.

Ricky Mulvey: I like the idea of having a buyer that has to buy at any price. You have a buyer in a little bit of not a desperate situation because it's institutional money. They're not going to skip a vacation because of this, but I'm a Lulu shareholder. When I see a huge spike like that, a synthetic spike, I like the idea of maybe trimming a little something, something. I haven't done it yet and I won't do it, at least in the next few days, because of regulatory concerns. But what say you?

Asit Sharma: It's pretty counter intuitive. One of the hardest things for those who manage money is to beat the index. Why is it so hard to beat the S&P 500 index? Because those who govern the index, they call out the losers over time, they add companies that are more representative of the economy, and those that they think will win and attract capital in the future. It is really hard to beat that game. I like myself as someone who professionally pick stocks to have part of my holdings in exchange-traded funds. Sometimes I take a look at a company that's being admitted to a big index like the S&P 500 and think, what am I missing about this long term thesis? Those who look at the whole universe of some 5,000 US stocks and then call those down as companies get added to different indices. They're doing it for a reason, and it's just another look into how investments get picked and elevated. I say there is something here with Lulu Lemon that, you've alighted on as a shareholder, so many others have. It's got an amazing brand. Technically their products are really great. They are on an expansion tear around the globe. I will say there's a little caution. One of the places that they're most keen to expand a growth engine for Lulu Lemon happens to be China. There's geopolitical risk there, there's risk of consumers not having quite the discretionary income they had in past years. There are some reasons to maybe not trim against that, I do like your idea to take a bit of profit, take some money off the table.

Ricky Mulvey: Fair enough, Asit. For our final topic, I want to dive into the new Howard Marx memo, the billionaire distressed debt investor. When he puts out a memo, the investment world listens up. His latest is called "Further thoughts on Sea Change". Inappropriately titled follow up to his memo that is called Sea Change. To recap asset in the first one, he basically points out that the period of ultra low interest rates from 2009-2021 was abnormal, and now we're entering a tougher time for corporate profits. "You shouldn't assume the investment strategies that served you best since 2009 will do so in the years ahead." The punch line of this one is that now with credit investments, you can get similar returns to equity investments. That Mark believes a significant reallocation of capital toward credit is warranted. Any reflections from the new memo you want to share, or is this a move worth making?

Asit Sharma: First of all, I'm a fan of Howard Marx. He's a value investor and a very sharp guy, understands markets. The macro picture is a great stock picker as well, and understands credit. I tend to listen to him as well. I think there are a few things to consider here for those who like to invest in the stock market that he would grant are entirely true. If you get a chance, read this memo, one of the great things about Howard Marx is. He is not afraid to punch holes in his own argument and tell you, hey, I could be wrong here. I love that way of thinking. One of the places that he may be wrong is this idea that now the easy money is off the table. We're in this perpetually higher interest rate environment, and thus the returns on stocks are going to pale in comparison. By large, I think that's a really valid way to look at the coming years, however, it can become more of a stock pickers market. It might not be that part of a game. The companies that survive in any kind of environment and advance are those that have very strong balance sheets and these markets that have a lot of demand. We just talked about one company like that, which is Microsoft.

If we're moving into a world where there's a higher burden on the money that corporations borrow, it almost makes sense to look at companies that aren't debt reliant to grow, that have a lot of resources on their balance sheet. If those companies, which are, in some cases, large caps, mega caps, can distribute money back to shareholders, that's actually an edge and even a hedge against inflation because that dividend component that you're getting is another way to account for the inflation, or to hedge against the inflation of your returns. Yes, he's right. The credit sort of looks good here. The jump in yields means that bond prices have crashed across a lot of flavors. Theoretically, buying now means as interest rates normalize many years into the future, the asset prices of bonds will come up. It's a great investment in that sense. But I don't think that's the only place investors should look. I think there is a persuasive argument that you should keep investing in the market. For some people, it might end up being a third, third, third. A third in ETFs that follow the market, a third in individual stock picks, and a third invested in longer duration credit.

Ricky Mulvey: Speaking of longer-duration credit, it's more appealing than it was just a couple of years ago. There's one, it is a broad USD high-yield corporate bond ETF. It's from iShares. The ticker is USHY. Asit, this yields 9%. That was unheard of a few years ago. When you're talking about a third, third, third, it does seem to make some sense to put an investor's safer money into something like this fund. The argument is more persuasive than a couple of years ago, but I mean, is there anything investors should know? especially, as equity folks who are less used to looking at the credit markets or risks to be aware of?

Asit Sharma: Sure. Here, I don't invest in this ETF, and I really have only seen it glancingly until you mentioned it, Rick. I pulled up the fact sheet just so we could you take a look. Yes it's got a great yield on it, looking like it's close to a 9% yield, when you look at the holdings, most of these, of course, high yield equals what we call junk bonds in popular parlance. Most of this is well or well below BBB rating. Anything below BBB is considered junk debt or risky debt. More than half of it is BB-rated and a good 40% is rated. This is a little bit higher on the risk spectrum. The maturities, if you look at them, you've got somewhere between 3 and 7 years is where most of the maturities are falling here. Then I looked at some of the issuers, a lot of these have already a lot of debt on their balance sheets. You see what the fund is doing, it's trying to identify in the high yield universe, so looking at corporations that are issuing bonds, which of these are good bets? We'll still get our money back, we'll still get repaid and allocate funds there. This isn't without risk, but it has the potential maybe to be a great return with that 9% yield and an eventual, I think, reflourishing of longer-term debt, where you start to see yields come down, but then the asset price increases. This could make an interesting play, Rick. I just advise anyone who wants to buy it, take a look at their top holdings, maybe pulp a few of the balance sheets and see if you're comfortable. Again, if you're looking at that third, third, third ratio we've been talking about today, this would be a part of that third. This wouldn't be the whole third. A fund like this would be part of that fraction. Maybe look at some others that are a little bit lower yield, a little bit safer. But this is an interesting idea.

Ricky Mulvey: Yeah, it's a contractually obligated return, Asit. He's our friend. Howard Marx would point out.

Asit Sharma: Mark points out later in his memo that one of the risks of a contractually obligated return is that you might not get your money back, someone might break their contract. Which is what I love about Howard Marx. He always looks at the counter side of his own argument. That's why we as investors learned so much from reading the writings of investors like him.

Ricky Mulvey: Asit Sharma. Thank you for the conversation and the insight.

Asit Sharma: Thanks so much, Rick.

Ricky Mulvey: If you've got a question or maybe there's a company you'd like us to shine the spotlight on, shoot us an email at That is podcasts with an s, Next up are some of those questions. Alison Southwick and Robert Brokamp open up the mailbag and take on your questions about 401 (k's), money market funds, and automated investing.

Alison Southwick: Our first question comes from Mike from Ohio. I had some large unexpected home expenses that caused some trimming of funds in my brokerage account earmarked to college, ie, not my 529. I did some research on exceptions for a Roth IRA withdrawal before 59.5, IRS publication 590 Pro. probably one of your favorites.

Robert Brokamp: Well, only second to 590A, if I'm correct.

Alison Southwick: In reading the sections on qualified higher education expenses, it sounds like if you make a withdrawal from your IRA for higher education expenses, it will have to be in the same tax year you paid the expense. I'm assuming that I can't withdraw the money and move it right into my 529, I am still about two years from having my child in university and I had some money in cash in my Roth and thought if I could just move that over to my 529 and let it grow there, that would fall under this exception.

Robert Brokamp: Well, so according to the laws of personal finance multimedia, I'm supposed to say that this is why you have an emergency fund, so you're not forced to sell money that you're using for some other goals. But man, I've had to spend so much money on my house, Mike, I have total sympathy for you in that sometimes it costs so much money to repair whatever is going on wrong, you might have to dip into some other goals. Yes, IRS publication 590 B is the great place to go for distributions for your IRA. Another one is Publication 970 which talks all about the tax benefits for education. I point that out because there are a lot of rules about this and you definitely want to go to the IRS Publications to make sure that you have everything right. Now, as for using your Roth IRA for education, there are a few things to know. First of all, contributions to a Roth IRA can be taken out at any time for any purpose, tax and penalty-free. You can do that anytime you want.

If however, you start dipping into the earnings in the account and you're not yet 59.5, generally you would pay a 10% early distribution penalty, but that is waived for qualified higher education expenses but not taxes. If you use your Roth IRA to pay for higher education expenses and you're not 59.5, then you will still pay taxes. For this reason alone, I think what you're considering may not be something to do and along with the other point that you make in that. Yes, the money does have to be taken out in the year that the expenses are paid, so you can't take it out now and then bypass that 10% early distribution penalty. Since you mentioned that you got a couple of years till you have to pay for any college expenses, it's time to start thinking about financial aid if you think you're going to be eligible. Because when you fill out the free application for Federal Student Aid, otherwise known as a FSA, it's not based on your current tax year, or not even the prior year but the prior prior year, so two years ago, and you don't want to do anything that will increase your income and that could include withdrawals from your Roth IRA even if they're not taxed or penalized.

Alison Southwick: All right. Our next question comes from Nate. My wife recently started a new job, so I've been looking into rolling over her 401 (k) from the previous employer to her new plan. It's a little bit of a process, so it had me wondering if it was even necessary to do the rollover. Aside from the organizational benefit of having fewer retirement accounts to keep track of, are there other advantages to rolling over the account? Would it be bad to just let the old 401 (k) sit separately until it can be touched in retirement?

Robert Brokamp: My preference is generally to roll over old 401 (k) money to an IRA because you're generally going to have lower costs and more investment choices. Although it does make sense to consider the choices in the old plan as well as the new plan, sometimes 401 (k's) have unique investments or particularly low cost investments. that's certainly something to consider. I suppose given our previous question, it makes sense to consider your options if you think you'll need the money before retirement. Because in some circumstances you can access the money before you're 59.5, not pay that 10% redistribution penalty. Some of those circumstances are the same for both 401 (k's) and IRAs, but some are unique to one or the other. For example, we just talked about taking money out of an IRA for qualified higher education expenses. You can't do that for a 401 (k) or 303 (b) or the federal TSP. On the flip side, you can borrow money from your 401 (k). I'm not saying that you should, but in some situations it might be the thing to do temporarily as long as you pay it back. You cannot borrow money from your IRA, so I guess that could also factor into the equation here on what you decide to do. I'm also going to point out that you may not have a choice in terms of leaving it in the old 401 (k), because some plans will kick you out depending on the account balance. If it's less than $1,000, it can be just a check that you get in the mail and you've got to get that money into the new 401 (k) or an IRA within 60 days, or it's going to be considered a distribution and you'll be taxed and penaltized. If that amount is between $1000 and 5 thousand, the company can move it to an IRA all on its own. They're going to choose the IRA provider and they're going to choose what to invest that money in. Probably something safe, like a money market account, something low risk, then I should point out that that figure is going up to $7,000 next year, so for anyone who leaves their employer in 2024 or later. You may not want that to happen. You want to make a proactive choice, you definitely don't want the old plan to make a choice for you.

Alison Southwick: The next question, comes from Darren. I have been pondering dollar-cost averaging automation with an app called Purler. If you set the feature to auto-rebalance your newly deposited funds into the investment furthest from its target percentage, and if you have conviction in your chosen assets, making up that portfolio. In this case, assume a bunch of low cost, broad-based index funds. Could the statement be made that on average and over time, this feature is picking assets that are the lowest price in comparison to the rest of your portfolio. Basically, can I automate buying low?

Robert Brokamp: We've all heard about rebalancing our portfolio. You make a decision about how much you have a different assets: Cash, bond stocks, different types of stocks. Large cap, small cup, and so forth. You set that allocation, but then as time goes on, some will do better than others, your allocation gets a wax. You rebalance your portfolio by selling what has done well to buy what is not done so well. Some people do it annually, although most studies indicate it's probably better to do it maybe every two or three years. What Darren is talking about is like pre balancing because he's going to be putting money into the assets that are lagging, and from a risk management perspective, it's a great idea. You want to be actively maintaining the allocation that you think is appropriate for your situation, your risk tolerance, how far you are from your goals, so on and so forth. That's fine. Will it lead to higher returns? Maybe or maybe not. It depends a little bit on what's in your portfolio and of course, the future which is unknowable. But if your portfolio is made up of assets that have similar long term returns but dissimilar short term returns, then it could help, because after a few years, something does better. You sell that, you buy something that has lagged. But due to reversion to the mean, which happens in the stock market.

What has done well eventually slows down. What has underperformed eventually catches up, so it could be a way of selling high and buying low. The problem is, it doesn't always work out so cleanly and sometimes you have to wait a really long time for it to happen. In the examples nowadays, as if you have made any allocation to international stocks or maybe even value or small cap stocks which have been lagging US large cap growth stocks for well over a decade. If you've continually rebalancing out of the good stuff into the not so good stuff, it probably has not enhanced your returns. Then there's the question of whether you put in some assets into this portfolio that are almost definitely going to under perform and of course, we're talking about cash and bonds. In this case, you're pretty much regularly going to be adding money to the cash and the bonds because in most years will be the lagging asset in your portfolio. Now depending on your situation, that might be exactly what you want. Think of someone who's within a decade of retirement, and they want to be adding to these safer assets. They don't want their portfolio to be get gradually more aggressive as they approach retirement. But then in the years like last year where the stock market is down, then they might be adding a little bit to the stocks while they're at lower prices. The bottom line is, Darren, that I would say, generally what you are doing or what this app seems to be doing makes a lot of sense from a risk management perspective. But it's no guarantee that you're going to get any return enhancement.

Alison Southwick: Next question comes from Tom in Maryland. If a money market funds yield goes down, would my initial investment go down too? In other words, suppose I invest $1,000 in the Vanguard Treasury money market fund ticker VUSXX, and overnight the yield falls 5%-2%. Do I now have less than $1,000?

Robert Brokamp: Well, the quick answer is no.The main benefit of a money market is that it is historically very unlikely to drop in value. Generally, most of these want to maintain $1 per share. There have only been a couple of instances where money markets have so called broken the buck, meaning that they have fallen below $1 share. In those instances were back like during the Great Recession of 2007, 2009. I think there are maybe two funds that broke the buck. There are many more that came close, but they got bailed out either by their firm or by the government. In your example, you wouldn't have less than $1,000 if the yield, and also, by the way, you wouldn't see such a big drop from 5% to 2% overnight. This particular money market fund is particularly safe because it invests mostly in treasury bills. Still considered very safe. The average maturity is around 30 days, so little to no interest rate risk and that's the case for most money market funds. Since this is a treasury one, it's also mostly going to be free of state income taxes. These days money market funds are very compelling. Many like this one are yielding over 5% and are considered very safe. The only thing is important to know is there's a difference between a money market fund and a money market account. Money market account is offered by a bank, FDIC insured, money market funds are not. They're still safe. But read the fine print because some money market funds say that they can, basically, limit withdrawals during times of economic distress. You want to make sure you don't have one of those, and then the final thing I'll just point out that is specific to this one. You talked about putting $1,000 into this. Like most Vanguard, traditional open-end market funds, the minimum initial investment is $3,000, so I just wanted to make that final point.

Alison Southwick: Next question comes from a 27-year-old happy Fool. A company I am interested in as a long term clean energy play is Brookfield Renewable or ticker BEP or BEPC. I am even interested in holding some of it in my Roth IRA due to the long term prospects and strong dividend growth. My question is about the structure. Brookfield Renewable is a limited partnership. How is this different than owning a regular stock? Are there any tax considerations I need to know?

Robert Brokamp: I don't know enough about this company to give you a definitive answer, but I have a general recommendation and that is to visit the investor relations page on the company website. It's actually a good idea for anyone who owns any company. But for this company, you'll see an explanation between two tickers and from what I can tell, BEP is indeed a limited partnership and when you buy those things, you don't buy shares. You can buy what they call units, and BEPC is a more traditional stock and you own shares. The site does provide some tax information about each type of ownership, and this is important especially if you're going to own this outside of retirement account because owning shares as a limited partnership can indeed be more complicated. You'll get something instead of a 1099 DIV, or DIV like you would get from a normal stock, you'll get a K1. Fortunately, at least according to the website for BEP, it's not considered a master limited partnership or an MLP. The issue with MLPs is that they sometimes distribute what's known as Unrelated Business Taxable Income, or UBTI, which is a rare case in which income realized inside an IRA might actually be reportable on your tax return. Regardless, definitely do more research into how this might be taxed before you invest. Then the final point on this is, from what I could tell, it's essentially a Canadian company. But each of those different tickers are headquartered in different places. The regular stock type of investment in New York, the other one in Bermuda. But you may notice that if you do invest in this, that Canadian taxes are withheld from your distributions, and that's often the case when you hold shares in foreign companies. If it's held to taxable brokerage account, you usually can claim a credit or deduction for the taxes that you paid to another government. But you can't if the investment is held in a retirement account, which seems to be the case that you said you were going to hold it in a Roth IRA. Despite that fact, it still generally makes sense for a younger person to hold an income-producing investment in an IRA and these definitely have higher yields, 5-6%. But since I don't know much about Brookfield and I certainly don't know your tax circumstances, it might be something for you to look at.

Alison Southwick: Our last letter comes from Brian. It's more of a comment and a visit to Corrections Corner as opposed to a question. Brian writes, Hi Allison, huge fan of the entire show and especially your embrose informative segments. Just a little correction on the recent OBA point. Although they did of course win Eurovision back in 1974 and are almost certainly the most successful winners in history, they were not the first winners, which was Swiss singer, Lise Asia, back in 1956. Keep up the great work and the fun segments from a Motley Fool Money and Eurovision lover in seven-time winner Ireland. That's Brian and he writes, my favorite Oba song has to be. The winner takes it all. Yes, I absolutely 100% misspoke. They are not the first Eurovision winner. They are the first winner from Sweden. Brian, thank you so much. It's so nice to know that you're listening, and I appreciate you writing and letting me know that I was wrong because I'm not purpose, unlike Oba.

Ricky Mulvey: As always people on the program may own stocks mentioned and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

Alison Southwick has positions in Lululemon Athletica and Walt Disney. Asit Sharma has positions in Microsoft and Walt Disney. Ricky Mulvey has positions in Lululemon Athletica and Walt Disney. Robert Brokamp, CFP(R) has positions in Walt Disney. The Motley Fool has positions in and recommends Brookfield Renewable, Lululemon Athletica, Microsoft, and Walt Disney. The Motley Fool has a disclosure policy.

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