Microsoft’s $69B Deal for ATVI Offers Merger Arbitrage Chance

At the beginning of this year, Microsoft (MSFT:US) announced it has agreed to a $68.7 billion deal to acquire Activision Blizzard (ATVI:US), the maker of popular video games like “Warcraft,” “Diablo,” “Overwatch,” “Call of Duty” and “Candy Crush.”

Microsoft agreed to pay $95.00 per share to Activision’s shareholders, hoping the takeover will help it become the world’s third-largest gaming company by revenue, behind Asian titans Tencent and Sony. On the day when Microsoft announced the deal, shares of Activision Blizzard opened at $86.77, before quickly paring some gains. In the months to come, ATVI stock traded between $70.94 and $83.06 per share.

One would ask why ATVI isn’t trading closer to the agreed price. The answer is that there’s a risk the deal won’t be completed due to regulatory issues. Recent media reports suggested that the U.S. Federal Trade Commission (FTC) is likely to file an antitrust lawsuit to block Microsoft's takeover of Activision. This report comes after both the U.K. and EU launched a deeper probe into the takeover.

Based on ATVI’s closing price on Monday, shares traded over 21% below the agreed price. This offers merger arbitrage opportunities to bet on the outcome of the M&A. For instance, legendary billionaire investor Warren Buffett accumulated a 9.5% stake in ATVI, which was reported back in April.

Joining Buffett is one of the most active traders among Congress members who seems to be betting that Microsoft will be able to complete the takeover. While Rep. Ro Khanna has been actively trading Activision shares throughout 2022, his latest 3 trades were all on the long side. Most notably, he invested between $15,000 - $50,000 in ATVI stock on September 29, when shares closed at $74.87.  

It is also worth noting that at least 3 sell-side analysts upgraded ATVI stock yesterday as they see an attractive valuation even in case the M&A deal falls apart.