“This represents Microsoft’s largest acquisition ever and the largest M&A deal (Dell/EMC $67 billion) in tech history.”
From a note to Wedbush clients that landed on my desktop Tuesday:
This morning in a landmark acquisition Microsoft announced it is acquiring Activision for $95 per share in an all cash transaction valued at $68.7 billion. This represents Microsoft’s largest acquisition ever and the largest M&A deal (Dell/EMC $67 billion) in tech history. Microsoft buying Activision is an aggressive consumer acquisition that includes core franchises such as Call of Duty, Warcraft, and Candy Crush among many others now integrated into the Redmond ecosystem and streaming endeavors. The deal is expected to close in MSFT’s FY23 (June) and will be accretive to earnings once closing. There is a $3 billion breakup fee and while we expect this deal to ultimately clear regulators, however there will be some inherent speed bumps navigating both the Beltway and Brussels on a tech deal of this size.
We note that while Microsoft’s cloud business led by Azure and Office 365 has been the gold standard of success over the last five years under Nadella, the consumer strategy at MSFT has been on a treadmill approach. Acquiring Activision will help jump start MSFT’s broader gaming endeavors and ultimately its move into the metaverse with gaming the first monetization piece of the metaverse in our opinion. With Activision’s stock under heavy pressure (CEO related issues/overhang) over the last few months, MSFT viewed this as the window of opportunity to acquire a unique asset that can propel its consumer strategy forward.
From a regulatory perspective, MSFT is not under the same level of scrutiny as other tech stalwarts (Amazon, Apple, Facebook, Google) and ultimately Nadella saw a window to make a major bet on consumer while others are caught in the regulatory spotlight and could not go after an asset like this. From a stock perspective, MSFT needs to give investors comfort around the broader strategic view of Activision and make sure integration and taking its eye off the prize of cloud computing will not come into play. Another issue at play will be Activision’s relationship with Sony PlayStation console and future streaming efforts. We maintain our OUTPERFORM rating and $375 price target.
My take: Ives’ other top tech pick, of course, is Apple. From a note published earlier Tuesday:
Into earnings season, our favorite tech names to own are below:
- Favorite large cap names: Apple and Microsoft
- Favorite cyber security names: Zscaler, Palo Alto Networks, Tenable, CyberArk. We are adding Palo Alto and Tenable to the Wedbush Best Ideas List this morning.
- Favorite value names (which could be safety blanket names during the storm): Pega, Progress, Checkpoint, Consensus, NICE Systems, and Ziff Davis
- Favorite EV names: Tesla and Li-Cycle