Microsoft/Activision: devil of a fight leaves duo on horns of a dilemma

Activision Blizzard recently said that in the first few days after its release, the video game Diablo IV had grossed sales of $666mn. It described that appropriately occult figure as “auspicious”.

The same day, the US Federal Trade Commission went to court in an effort to stop the big video game maker from closing its $75bn deal to sell itself to Microsoft. The agency had previously sued to enjoin the tie-up. But without an injunction, the companies could take the risk of completing the combination.

Microsoft described that action from the regulator as its own stroke of good luck. The software titan believes it can press its legal case sooner and that it will prevail in court. Activision and Microsoft are committed to the deal as merger contracts demand their “best” efforts to complete. But both sides will not be too broken up, as it were, if the government forces them to break up.

When the deal was struck 17 months ago, Activision was reeling from a corporate governance and internal culture scandal. Since then, the collective sense of shame has moderated. At the same time, Activision’s standalone prospects have rallied. 

Following the deal announcement, analysts’ consensus earnings estimate for 2023 bottomed at just over $3 per share. That figure has now rallied to around $4 per share on the strength of Diablo and other games.

As for Microsoft, its shares are up 40 per cent since the start of 2023. Its software machine seems unstoppable. It is riding a wave of hype around generative artificial intelligence.

The theory of the FTC is that Microsoft will use Activision’s gaming portfolio to force consumers to use its less competitive X Box console hardware. The two companies say that gaming, however, is migrating to mobile devices. This remains a fragmented and competitive area.

If the deal collapses, Microsoft would owe a $3bn reverse termination fee, though the sides could negotiate something lower if they are ready to move on. Closing the acquisition seems at the least complex and time-consuming, considering there is a legal fight in the US and the UK has blocked the deal.

Wall Street and Corporate America will quietly pray the two companies will keep up the fight. A win would chasten a Biden regime that has battled industry consolidation. But the partners may lack the devilry to persist, no matter how infernally Activision spins its game releases.