Microsoft’s deal to buy Activision Blizzard has stalled, but some traders are betting the deal will eventually happen. If they’re right, buying the video game company could be a lucrative buy, given that it’s still trading nearly 20% below its takeover bid.
U.S. regulators have intensified their focus on big companies, especially tech companies, lengthening the time between announcements and eventual approval of mergers and acquisitions, increasing the risk of a deal falling apart.
“The sheer size of the deal, combined with heightened antitrust scrutiny of big tech companies, has resulted in a very widespread,” said investment firm Accelerate Financial Technologies Inc. Julian Klymochko, chief investment officer at , said.
Microsoft announced its acquisition of Activision Blizzard in January and said it expected to close the deal by June 30, 2023. Separately, Broadcom Inc. said it was preparing to complete its $61 billion acquisition of VMware Inc. announced in May by October 2023. transaction.
The average annualized deal spread in the U.S., a measure of the risk of a deal failing, has risen to more than 15% from about 10% at the start of the year, according to Susquehanna International Group. At the same time, investors are growing concerned about deal failures or repricings, and the rising cost of holding risky positions.
Of course, one of the biggest arbitrage spreads in tech M&A deals has nothing to do with regulatory hurdles.
Elon Musk is trying to back out of a deal to buy Twitter for $44 billion, and Twitter is suing Musk to force him to close the deal. With shares currently trading at $41 and trading at $54.20, holding Twitter stock would make a 32% gain if the deal goes through as planned.
The U.S. Federal Trade Commission (FTC), led by Chairman Lina Khan, has filed lawsuits to block two major acquisitions. She advocated for closer scrutiny of mergers and acquisitions by big technology companies, arguing that technology companies can use their dominance in one business area to gain influence in other markets.
A downturn in tech stocks also contributed to trading spreads. The Nasdaq 100 is down 19 percent this year, forcing investors to factor in the risk of a failed deal and a drop in Activision Blizzard shares, Krimochko said.
Given that the Activision Blizzard deal is still far from the expected closing, the stock will have to endure a few more quarters of wild swings related to company-specific news flow and broader market moves.
Still, “there is a relatively strong consensus that this deal should go through,” said Cabot Henderson, a market strategist at financial services firm Jonestrading. Wall Street seems to think so too, with 26 of 32 analysts setting 12-month price targets on the stock at $95 or above.
Investor Warren Buffett bought a roughly 9.5% stake in Activision Blizzard in hopes of a merger arbitrage. The 91-year-old billionaire has about 70 years of arbitrage experience, including tech companies: He bought Red Hat Inc. , which was subsequently acquired by IBM in 2019.
Last week, analyst Clay Griffin of investment firm MoffettNathanson LLC upgraded Activision Blizzard stock to outperform. “While we don’t think Microsoft will close the Activision Blizzard deal right away, we do see strong reasons why it should eventually,” he wrote.
