If a company announces that it is buying another, and there isn’t any uncertainty as to whether or not the deal will be completed, investors usually have little reason to stay put. The stock price of acquired companies soars, with a minimal gap between it and the deal price.
Microsoft‘s (MSFT -0.55%) Acquisition of videogame giant in the works Activision Blizzard (ATVI 1.34%) This is not a typical acquisition. Investors never believed that the company behind Xbox could successfully acquire it. Call of Duty You can also find a number of mega-franchises. Microsoft is expected to pay $95 per Share in Cash if the deal goes through. Activision stock, however, trades for $75 per share. Activision shares have fluctuated between $80 and $95 throughout this year.
It seems likely that Activision will challenge the acquisition before the U.S. Federal Trade Commission. Therefore, there is a significant gap between the stock price of the deal and the stock price. The stock is compelling because of the size gap and Activision’s prospects in the event that the deal falls through.
It is a big win if the deal goes through
Activision shareholders will get $95 per share if Microsoft can close the deal without any lawsuits or if it wins any legal challenges from government agencies. This is about 25% more than the Activision stock price.
It may take some time. According to the merger agreement the deadline for closing the deal can be extended until July 18, 2023. It is possible that Microsoft will have to go to court to challenge the merger agreement. This could mean that it could take several months. It is unlikely that the deal will be closed soon, unless there are miracles in which all regulatory agencies around world agree to let it go without a fight. It’s possible but not likely.
Still, 25% is a good gain, especially when you consider the beating many stocks have received this year.
If the deal fails, it’s a solid investment
Activision may be rescinded by Microsoft if it fails to acquire Activision. Depending on the termination date, Activision could receive a refund fee from Microsoft of $2 billion to $3Billion. This is a substantial consolation prize.
Activision stock will likely decline temporarily as investors who only own it to make a bet that the deal will go through sell their shares. However, the price of $75 per share seems reasonable in the long-term.
The video game market is still uncertain after the pandemic boom. Activision however has one of the finest collections of franchises that have been tested and proven successful in the past. Call of Duty, World of Warcraft, Diablo, StarCraft, Candy CrushThe company’s longevity will be assured regardless of industry conditions by having a variety of franchises across consoles, PCs, and mobile devices.
Activision stock doesn’t seem too expensive when it comes to valuation. Analysts expect adjusted earnings per share to be $3.04 and $3.91 this year respectively, so the stock trades at 25 and 19 times these estimates, respectively. Those price-to-earnings ratios don’t seem unreasonable.
Activision stock may suffer some for a while if this deal falls apart. So if you invest in Activision, be ready for some volatility. The long-term risk-reward tradeoff looks favorable for investors. Either the deal goes through, which will give you a 25% gain in less time than one year, or it won’t. In either case, you have a piece of one if the top video game companies for a reasonable cost. This seems like a worthwhile bet.
Timothy Green holds positions in Activision Blizzard. The Motley Fool holds positions in Activision Blizzard. The Motley Fool follows a disclosure policy.
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