Microsoft Stock Attractive Whether or Not Activision Deal Goes Through

The U.S. Federal Trade Commission announced it intends to block wide-moat Microsoft’s $69 billion acquisition of Activision Blizzard. While we think Activision would strengthen Microsoft’s gaming division, we do not believe the health of the business unit, let alone the overall company, hinges upon the acquisition. Further, we think it is still more likely than not that the deal closes, even if more concessions are required.

We are maintaining our fair value estimate for Microsoft at $320 per share and view shares as attractive with or without Activision. We note that shares of Microsoft have held up considerably better than the software group overall, as it is already highly profitable, has well-established franchises, and is likely viewed by many as a harbor in the hurricane that is the current software landscape.

An intention to block doesn’t mean the deal is not happening. It simply means Microsoft and the FTC will meet in court and argue the merits of the case in front of a judge. Microsoft’s response to the FTC’s announcement is it believes this acquisition expands competition and creates more opportunities for gamers and developers. In a press release, Activision CEO Bobby Kotick reiterated that he was confident the deal would still close. Microsoft has already announced an agreement to bring the Call of Duty franchise to Nintendo for 10 years after the Activision acquisition closes and has offered a similar deal to Sony. We think it makes no sense for Microsoft to discontinue popular titles on other platforms and note Minecraft is still available in all formats eight years after the Mojang deal closed.

Lastly, we note that the deal carries a $3 billion breakup fee, which would be immaterial to Microsoft’s $107 billion cash hoard and $70 billion in annual free cash flow generation. In fact, despite the substantial selloff in Microsoft shares this year, the $69 billion acquisition remains immaterial to the firm’s $1.8 trillion market capitalization.