Microsoft-Activision Deal May Pay-off for Arbitragers
Microsoft’s (MSFT) $69 billion deal to purchase Activision Blizzard (ATVI) is currently held back by several factors. However, if the deal does go through, investors who are betting on the deal may be rewarded since Activision’s current stock price is still almost 20% below Microsoft’s offer price.
Activision’s stock price has fallen well below Microsoft’s $95-a-share bid for the stock due to stricter U.S. antitrust regulations, the series of international approvals needed, and the recent slump in technology stocks. Activision’s current stock price might fairly discount the probability of the deal going through, but there is still a potentially lucrative opportunity for arbitragers who have confidence that the deal will go through.
Microsoft announced the Activision Blizzard acquisition in January and said it expects the deal to be completed by June 30, 2023. However, the heightened attention that U.S. regulators are paying to large companies, especially in technology, has resulted in a longer period between when a deal is announced and when it finally goes through, raising the risk of a transaction falling apart.
According to data compiled by Susquehanna International Group, averaged annualized U.S. deal spreads, which offer a gauge of the risk of transactions collapsing, have jumped above 15% from about 10% at the beginning of the year. The higher risk spreads have occurred because of increased fears about deal collapses or repricings, and the higher costs for carrying risky positions.
Given the length of time before the expected closing of Microsoft’s Activision Blizzard purchase, the stock has to endure higher volatility for at least a few more quarters tied to company-specific news flow and general market performance. However, Jonestrading said there is “a relatively strong consensus that this deal should go through,” with 26 of 32 analysts covering Activision pegging their 12-month price target at $95 or more. Also, in late April, Warren Buffet bought a stake of about 9.5% in Activision in a merger arbitrage bet.
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