Microsoft’s $69 billion takeover of Activision Blizzard has faced many antitrust hurdles since its announcement in January 2022, but the legal challenges now seem to be easing. In the US, a federal judge rejected yesterday the Federal Trade Commission’s (FTC) request for a preliminary injunction to block the deal, considering that the FTC had not demonstrated that the «merger in this specific industry may substantially lessen competition”. And in the UK, Microsoft and the Competition and Markets Authority (CMA) agreed to pause litigation as the two evaluate ways the transaction could be modified to address the CMA’s competition concerns.
Even if the legal proceedings are not totally over (potential appeal from the FTC and/or no agreement between Microsoft and the CMA), the chances of success of the Activision takeover (a 4.6% position in our portfolio) are now high, with the discount on the $95 bid price narrowing to only 5%.
These developments have serious implications for the future of M&A in the gaming industry and, more globally, the M&A policy of Tech giants. Under Chair Lina Khan, who has been vocal about her ambition to rein in Big Tech, the FTC has adopted an aggressive antitrust enforcement approach, seeking to scrutinize M&A deals of all sizes involving Tech giants. Notably, the FTC attempted to block Microsoft’s takeover of Activision but also rebuffed Meta’s acquisition of Within, a tiny gaming company active in the nascent VR fitness market.
With both legal challenges introduced by the FTC rejected by US judges, it is clear that the FTC’s credibility is going to be undermined and that the Tech giants could use this opportunity to resume large-scale M&A transactions in gaming… and in other industries (software, cybersecurity, healthcare…).
We then stick to our view that game publishers that own open-world environments (that could easily turn into Metaverse worlds) or large intellectual property libraries that can be monetized on a streaming platform are likely to attract at some point M&A interest (Take-Two, CD Projekt, Square Enix, Ubisoft…) from the likes of Netflix, Amazon and Google that have made some moves in gaming but still have very limited exposure to the industry.
Interestingly, these regulatory developments come at a time when valuations of game makers are compelling (16x EPS next fiscal year) and when game software revenue are showing signs of life as we expected, with game content sales up 9% in May (vs. -2% year-to-date). With many blockbusters on their way (Cyberpunk expansion pack, Assassin’s Creed, Avatar…), we are confident that the current revenue recovery will keep going and sustain valuations across the board.
