Microsoft should play antitrust game well

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Microsoft is making a big wager with its record-setting proposal to buy videogame giant Activision Blizzard, but fears that the $69 billion deal will be spiked by regulators are probably overblown.

Those fears have kept Activision’s stock at a significant discount to the deal price since the proposed transaction was announced last week. The shares closed Wednesday at $78.78—17% below the $95 cash price Microsoft is offering. That is even steeper than the 13% discount reflected in Activision’s closing price the day the deal was announced.

Price gaps are common in sizable deals with long windows to close, but this one still looks excessive. Nuance Communications, which Microsoft agreed to acquire last April, has averaged just a 1.5% discount to the offer’s $56 a share cash price over the past three months, though Microsoft warned in its late October earnings call that the $19.7 billion deal would take longer than expected to close. In its latest call Tuesday night, Microsoft confirmed that it now expects the Nuance deal to close by the end of March.

There is risk, of course. Washington is on heightened alert for Big Tech deals and, at more than three times the size of the Nuance deal, the Activision transaction will undoubtedly draw more scrutiny. But regulators would have a hard time making the case that the combination would give Microsoft disproportionate control of the videogame market. The software giant generated a little over $16 billion in gaming revenue in calendar year 2021. Activision’s revenue for the same period is estimated at $8.7 billion. That adds up to less than 14% of total global spending on videogames last year, according to estimates from Newzoo.

Microsoft itself noted that the combined company would rank only third in the market, behind China’s Tencent and Japan’s Sony Group. That itself is a clever bit of posturing, given the current focus among U.S. lawmakers on boosting domestic tech companies against foreign rivals. And Microsoft is sending early signals that it won’t use Activision’s portfolio of blockbuster games to simply advantage its own Xbox platform. The company said as it announced the deal that it would honor Activision’s existing game contracts. Bloomberg reported Tuesday that those contracts call for PlayStation versions of the next three installments of Activision’s blockbuster Call of Duty franchise.

Such a move would seem counterintuitive, since keeping Activision’s titles exclusive could theoretically help the Xbox better compete against its rival console. But Microsoft’s ultimate vision for a cloud-enabled gaming service that spans different devices gives it the relative luxury of being flexible now. The company also has enjoyed the luxury of not being lumped in with the many political controversies of its big tech rivals of late. The fact that the deal will ultimately bring a management change to Activision, which has been reeling from reports of its hostile workplace problems, could score some additional bonus points.

That doesn’t mean no sabers will rattle. Jason Bazinet of Citi predicted a “lengthy antitrust review given heightened scrutiny on big tech firms” in a report last week. But he added that the deal has a “relatively high likelihood of approval.” Mark Moerdler of Bernstein also says the deal is “extremely likely to occur,” given Microsoft’s strong relationships in Washington.

“You have to believe Microsoft has spent a lot of time thinking this through,” Mr. Moerdler said in an interview. Having survived the government’s attempt to break the company up more than 20 years ago, Microsoft has learned how to play Washington’s game well.

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