Microsoft, Activision Blizzard shares react to FTC merger threat

The biggest video gaming takeover in history could be blocked by the FTC’s competition bureau. Shares of Microsoft gained on news of the intervention, while those of the company it hopes to acquire for $68.7bn, Activision Blizzard, slipped, in a mirror image of their moves after news of the possible merger first emerged.

- Federal Trade Commission commissioners voted three-to-one to oppose the planned merger between Microsoft and Activision Blizzard

- Gaming sector forecast to grow globally at 8.4% CAGR

- VanEck Video Gaming and eSports ETF has Activision Blizzard as its fourth-largest holding

In the latest chapter of Microsoft’s [MSFT] $68.7bn bid to take over Activision Blizzard [ATVI], the US Federal Trade Commission (FTC) has filed a lawsuit that aims to block the deal. However, Microsoft, which owns Xbox, has said it’s prepared to fight to keep the merger with the gaming giant on track.

Last Thursday, regulators voted three-to-one in favour of preventing what would be the biggest acquisition in video game history, due to concerns over suppressing competition. Activision makes immensely popular games including World of Warcraft and Call of Duty.

On 18 January, when the possible deal was first announced, Microsoft’s share price reacted by falling 2.4%, while Activision’s jumped by 25.9% by the close of trading.

This week, after news of the FTC’s intended lawsuit, the share prices moved in sync, with Microsoft gaining 1.2% and Activision falling by 1.5%.

This moved inversely in the longer term: in what has been a tough period for tech shares, Microsoft’s share price tumbled by 24.2% year-to-date by the close on 12 December while Activision bucked this trend, with its stock up 17%.

The FTC toughens up on tech mergers

The FTC is taking a tougher stance on mergers, especially in the technology and digital arena.

“Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets,” said Holly Vedova, director of the FTC’s Bureau of Competition.

However, Brad Smith, president of Microsoft, said the company was prepared to challenge the decision: “We have complete confidence in our case and welcome the opportunity to present our case in court.”

Nonetheless, the deal appears to be on shaky ground. John Freeman, vice president of equity research at CFRA, told Yahoo! Finance he believed there was now less than a 50% chance the deal would go ahead.

In his opinion, Microsoft was still a “fantastic company” but they should focus on acquisitions in cloud migration instead of the video game space.

Gaming sector outlook

Gaming is an entertainment sector that’s expected to continue expanding, with global video games revenue projected to grow at a compound annual growth rate (CAGR) of 8.4% until 2026, to $321.1bn, according to research from PWC.

Social and casual gaming are expected to grow in particular, with immersive experiences “paving the way to the metaverse”. The pandemic “accelerated changes in consumer behaviours", the report said, and “formerly niche sectors, such as gaming, will barrel their way into prominence” as previously dominant sectors fade.

China and the US accounted for about half of global gaming and esports revenues in 2021, while Turkey was forecast to be the fastest-growing video games market from 2021 to 2026 with a 24.1% CAGR, closely followed by Pakistan at 21.9% and India at 18.3%. 

In September, Morgan Stanley analysts said video game stocks would stage a comeback in 2023, as publishers release a roster of new games to a larger base of users who already have next-generation consoles.

Funds in focus: VanEck Video Gaming and eSports ETF 

As the tech sector’s performance has been knocked off track in 2022 with a perfect storm of macroeconomic headwinds, so have some of the key funds holding Microsoft and Activision shares.

The fund with the largest share of Activision stock is the VanEck Video Gaming and eSports ETF [ESPO], which has the gaming stock as its fourth-largest holding at 6.26%. It sits behind Nvidia [NVDA], Tencent [TCEHY] and Unity Software [U]. The fund is down by 31.4% year-to-date, but up 3.5% in the past month. 

The fund with the largest exposure to Microsoft shares is the Technology Select Sector SPDR Fund [XLK]. The tech giant is the fund’s largest holding, with a portfolio weight of 21.91% as of 12 December, just ahead of Apple [APPL], which also makes up a large slice of the fund, at 21.67%.

The fund is down by 22.5% year-to-date, flat over the past month.