Especially when you look at the need to compete with foreign juggernauts like tencent. As far as “subscription service for videogames” Microsoft is not acquiring a company known for this. WoW is a subscription based service, but it isn’t like Microsoft is acquiring Stadia. I think that will be a really hard argument to make, especially when there is another bajillion dollar company like Google in the market (even if they are not particularly good at it). Additionally, Taketwo just spent 13 billion on Zynga, Microsoft is gettin King in this deal as well.
It is also difficult because Microsoft is not a publisher only. They are a hardware manufacturer in the games space, and this acquisition helps their hardware division.
I have no doubt there will be an investigation, especially with all of the negative press around ATVI at present, but there really just isn’t much there to grab onto as a monopoly, especially when you look at Microsoft’s hardware sales vs Nintendo and Sony. They are in 3rd place.
The admittedly huge corporation in third place in hardware sales acquiring a new publisher hardly seems like a monopoly to me.
That is… of course… based on past precedent. The new administration could change the definitions and precedents around monopolies for sure, but it seems like bit of a stretch.
To be clear, Opening Arguments predicted a slightly better than 50% chance of there being an investigation into the deal, not whether the whole thing would be blocked. I did raise an eyebrow at GamePass being the reason, but thought maybe I was too close to the details of it to see it as a separate market.
(One of the things I appreciate about the podcast is that they take an almost perverse delight in accounting for things they get wrong in past episodes, so it’ll be interesting to see how much push back they get for this one.)
Yeah I don’t see the antitrust angle tbh, for all that I’m generally violently opposed to the late-stage agglomeration of everything until we’re all living in megacorp-owned arcologies run by insane AIs.
I mean let’s be real, no one in government knows wtf Gamepass is. Someone will say “Netflix of Video Games” and they’ll just go with that, then base their decision on whichever lobbyist gives them the most money. I think Microsoft can outspend Sony there.
Sony also has Playstation Now, which sucks, but is the same thing as Gamepass? So, competition.
But it is not $95 now. It is $79. What can you put $79 into that is guaranteed to be worth $95 in a year? Especially in a market that is as unpredictable and downwards trending as that of today. I think nowhere, and I would take such a deal in a heartbeat if it was a credible one. Clearly the purchase vs. share price difference is not a time value of money issue, it is about there being a ton of uncertainty about the deal closing at all.
Activision Blizzard spokesperson confirmed that Activision chose not to voluntarily recognize the Game Workers Alliance: “At Activision Blizzard, we deeply respect the rights of all employees to make their own decisions about whether or not to join a union. We carefully reviewed and considered the CWA initial request last week and tried to find a mutually acceptable solution with the CWA that would have led to an expedited election process. Unfortunately, the parties could not reach an agreement.”
The statement continues that if the Game Workers Alliance does file for an election with the NLRB, Activision Blizzard “will respond formally to that petition promptly,” and that “the most important thing to the company is that each eligible employee has the opportunity to have their voice heard and their individual vote counted, and we think all employees at Raven should have a say in this decision.”
If more than 50% of the QA workers vote to ratify the union—which sounds likely, since they claim to have a supermajority of support—Activision Blizzard will be required to begin bargaining with the Game Workers Alliance. Activision Blizzard’s statement above, that “all employees at Raven should have a say in this decision,” may play a part in the election process. There are only 34 workers in the Game Workers Alliance, but more than 350 employees in the entire studio.
The point is not whether the Activision shares are up or down. What matters is what the price is in comparison to the fixed amount of money per share that MS is offering. If people actually believed the deal was guaranteed, those shares would be worth $95 totally independent of what is happening with other share prices.
Like, you’ve somehow managed to collectively convince each other of how there is no way this deal can be blocked because it is just games or whatever. But if that were the case, there is $11 billion just lying there on the ground that nobody is picking up. The people with actual money at stake rather than just talking on a gaming forum clearly believe this is nowhere near a done deal.
Yes, yes. I understand the concept. Again, the 17% discrepancy is really high and can’t be just due to time value of money. The yield of a 1 year US treasury bond is 0.58% – that’s the order of magnitude you could explain with just time value of money. Anything more than that is from uncertainty.
Cool. So now that we all agree on it being very possible for the deal not to happen, we can reason about just how likely that is. Given the price differences, the markets are clearly pricing the likelihood of the deal closing at only about 50%, so that number should be our default assumption. (Or alternatively we can say that the people with billions on the line understand this worse than a bunch of amateurs on a forum, but that seems a bit arrogant).
Where could that 50% chance be coming from? The odds of an Asteroid hitting the earth and destroying humanity in the next year is about 1/20000000. I think it is safe to say that none of the discrepancy is coming from that. The odds of Microsoft going bankrupt in the next year seem literally impossible give they have a year’s revenue in the bank. I think it’s safe to say the discrepancy is not coming from there either. (In fact, all of these sorts of reasons are probably already priced into the treasury yield, since they’d apply just as well there; what we’re looking for is justscenarios where the US continues paying its debts but the deal does not close).
The only remotely realistic reason I can think of for the deal to not close is that it gets blocked by regulators. Given you weren’t able to provide anything but astronomically unlikely scenarios, it seems that it’s not just my lack of imagination. The prudent thing to do is to assign basically all of that expressed uncertainty into this reason.
I still think pointing to an overnight jump of 20% in an established stock’s value as indication that the market thinks the deal isn’t going through is a bit of a stretch. Especially when we’re talking about a stock that had been slumping badly all year.
But I am not “pointing at an overnight jump of 20%” as evidence of anything. I am pointing at the difference of Activision’s share price ($79) and the amount that Microsoft will pay in about a year ($95) + the dividends that Activision will pay in the meanwhile (about $0.50). If the deal happens, that difference is free money. Why do you think nobody is taking that free money?
Hint: it is not due to $79 now being worth more than $95 now, nor due to the chance of an asteroid hitting the earth.
Okay, so I’m looking at other acquisitions recently. I’m not familiar with this one, it just was the first thing I saw when I started looking for recent tech acquisitions. AMD announces October 27, 2020 that they would be purchasing Xilinx for $35 billion. The press release says:
XLNX.O closed at $105.99 on October 26th and jumped to $120.94 the day the acquisition was announced. A jump of around 20% in value and significantly below the estimated $143 per share, which is basically what we’re seeing here? As I said I’m unfamiliar with this acquisition and it’s not exactly an area of study for me so maybe this is apples and oranges, but the (admittedly brief!!) Googling I’m doing doesn’t make it look like a jump near the acquisition price is the norm? Is that wrong?
EDIT: Just to be clear, I’m not trying to be argumentative here, just discussing and sincerely asking questions!
You’ve made this “20% jump overnight” point a few times, but it’s kind of a random number and incidental to the whole question. Here’s an example: imagine Microsoft had decided to pay $200 / share instead of $95 / share. The share price would obviously have jumped by a much larger % than, but that larger jump would not have said anything about whether the deal is more or less likely to close. What matters is the difference between the share price now and what Microsoft is promising to pay. If the deal closes, that difference is free money. The larger the difference, the less likely the people with money on the line think that it actually happens.
Second, the example you dug up was not a cash purchase. Microsoft is promising to give a certain amount of money for each Activision share when the deal closes. AMD was promising to give a certain number of AMD shares in exchange for each Xilinx share. That’s harder to reason about, since the value of an AMD share in a year is much harder to predict than the value of a USD in a year :)
Even though the press release said $143 / share, that was just a snapshot. The actual effect was to lock the share prices of AMD and Xilinx togethe. As it happens, the markets felt AMD overpaid, so their share price fell. On October 30th, AMD’s share price was just $75.29, making the expected value for a Xilinx shareholder from the deal be $129 rather than $143. The actual Xilinx share price on the same day was $118.69. Why the difference between $119 and $129? Again, the deal might not go through. And given that the regulatory approvals have still not been given (they expected the approvals in Q4 2021), clearly those doubts were at least somewhat justified. As there’s news on progress with the missing approvals, the ratio between AMD and Xilinx share prices will get closer to the 1.7234 share exchange rate.
Let’s take an example that was all cash, has already closed, and went through some interesting stages: Fitbit. Google announced they’d buy it for $7.35 per share November 1st 2019. Their share price jumped from $4 to $7.19 because everyone expected closing the deal to be a formality. Then it ran into trouble with the EU regulators, and the price slowly drifted down to $6 as people were faced with the possibility of ending up holding the Fitbit shares that would be as valuable as toilet paper. 11 months later Google struck a deal with the EU, and the price was back up to $7, and $7.25 once EU formally approved it a couple of months later.
Does this show better what I mean? The % jump compared to before the deal leaked was massive, but that was because Fitbit was probably going bust unless bought out. While people thought the acquisition was just business as usual, they were valuing the shares almost exactly like the cash value being promised for those shares in an expected six months (no “money now is worth 17% more than money in a year” nonsense). Then when regulatory problems appeared, the prices drifted way down from the promised acquistion price due to the uncertainty. And the reverse when news came in that the deal would happen.
And note: The discrepancy between the Activision prices is worse than it was for Fitbit even at its worst.
Also there is no real reason that stock prices on the day of the finalization of the deal would magically be $95. They weren’t $95 at the day of purchase there is no reason they would need to be $95 on the day it finishes.
Microsoft is not buying these shares on the open market, they are not even the same class of share that typical retail investors are purchasing. The deal could finalize tomorrow and the price. of the stock could stay the same, or even go down. It has absolutely zero bearing on the purchase. This is Microsoft privately making an arrangement with Activision for the ownership stake of the company, represented by transfer of a set amount of shares. Microsoft isn’t getting these from the NYSE, but from whatever entity internal to AB holds those shares privately.
Edit: @jsnell you are mixing up concepts. There is only a tenuous connection between stocks sold on the open market and these kind of boardroom deals. Not only is the purchase price at a premium to stock price not just possible, its normal and expected.
Huh? There is a very real reason the share price will be $95 on the day the deal closes, because that is literally how the deal is structured: anyone who has a share will have it exchanged for $95. The shares will not be priced $96 on the market, because anyone buying them on the open market will lose money, guaranteed. They will not be priced at $94 because anyone selling them for that price on the open market could have gotten more by waiting and having them be bought by MS instead.
That doesn’t make a lot fo sense. Of course there is a premium over what the share price was before the deal was announced. That is normal, that is how Microsoft convinced the board to recommend the deal. But at this point, once the deal has been done, there is a very direct connection between the real shares sold on the open market and the offer made by Microsoft. How could there not be? If the deal is approved by the shareholders (who will of course approve it) and the regulators (who might not), every one of those shares will convert to exactly $95. That’s all there is to it.
If the shares on the open market are selling at a discount, it’s proportional to the level of uncertainty about the deal actually closing. See the Fitbit example.
The math on this is extremely wrong. The situation is much, much more complex than you are making it out to be.
First of all, you are heavily discounting the time value of money. Even if the sale was guaranteed to go through ti’s not guaranteed to go through in any specific time frame. Sure I could invest $1B into activision today (lets assume that didn’t affect the price) and thus be “guaranteed” a $16.22 price per share profit some time in the future. So that’s over 12 million shares I’m buying today for a stock that has an average volume of 15 million (so one purchase almost a whole day’s worth of volume). If the sale goes through in a year from now that’s a profit of $205m, which is a ~20% profit.
From data I can find, the 20th largest hedge fund has $19B assets under management. So a $1b purchase of activision stock to gain $250m would constitute tying up almost 1/20th of their complete AUM. Looking up info that fund would generate double their revenue in profit alone.
However, since they can’t guarantee when the sale goes through (even if they could guarantee it would go through) it’s not a simple calculation. The Nvidia/Arm acquisition was announced in September 2020 and it’s still going on. So what happens if Activision/Microsoft closes but it takes 1.5 years? Well you’ve now locked up $1b AUM for an average of $166m per year profit. You might say “yeah but it’s still $250m in profit” but that discounts any other way the money could be deployed since at 1.5 years your now yearly ROI is an average of 13% instead of 20%. In that case, deploying their money elsewhere to get 20% of actual per 1 year profit is better.
But these are also asset management funds who have investors and clients to manage. Most of these funds are highly diversified and thus they don’t have $1B to spend on activision shares to lock up. So even if they wanted to spend $1B they can’t because of where their money is currently allocated, so if they wanted to make a bet about this they would have to commit a much, much smaller amount of their discretionary money to deploy. Smaller amount of money means smaller amount of profit where the hope is that you’d be able to get more than 20% yearly profit.
Likewise, since most of these funds are investing client money, clients get the majority of the profits while the fund only gets a percentage of the profit. As far as I can tell the average is a 2% annual fee and 20% of the profit generated. So the asset management fund would only get 20% of the $250m for tying all that client money up and taking a giant one shot risk.
Furthermore, you can’t ignore the current economic environment. There’s a lot of uncertainty with how the economy will handle the fed’s rate increases, as well as what happens if Russia invades Ukraine. This could cause a lot of uncertainty and cause clients of the fund to pull their money into safer funds which wont’ include activision. Therefore any money that gets pulled out by clients and is no longer allowed to be used for activision stock purchases now lost out and has no ROI, or very little ROI. Thus the fund tied up a lot of money for something that was not able to be paid off.
This point is very very important, because the large funds are what move prices, not retail investors. The large market movers are moving their investments wholesale from categorically high risk asset classes to low risk asset classes, and just because an acquisition seems like a sure thing does not make it classified as a low risk asset class.
There are too many variables to simplify it as saying the current price represents a 50/50 idea of if market makers think this is a sure thing, and the time value of money is extremely in play even for a guaranteed outcome (but not guaranteed duration).
I generally agree with what @jsnell is saying. The market consensus is that it isn’t a done deal. It doesn’t take a genius to figure out that there are lots of moving parts in this deal, e.g. regulatory approval, MS get cold feet and pull out, etc. and the market has priced in those moving parts going wrong.
People are free to disagree with market consensus, it is wrong all the time anyway, but the price/consensus is what it is.
