Microsoft’s acquisition of Activision Blizzard may have ‘more bumps in the road’: analyst


CFRA Vice President of Equity Research John Freeman joins Yahoo Finance Live to review Activision Blizzard’s second quarter earnings report, stock price target and acquisition prospects. video game developer by Microsoft.

Video transcript

RACHELLE AKUFFO: Okay, Activision Blizzard shares, as you can see, are still in slightly positive territory, up about 1/3% after the earnings release after the bell. Well John Freeman, vice president of equity research at CFRA, is here to break down the numbers. It’s so good to have you on the show. So what are your key takeaways from this revenue report?

JOHN FREEMAN: Thank you for having me, first of all. Yeah, you know, it wasn’t surprising. It was interesting for me to see how the spread, with… you know, the consensus numbers, was all over the place, which happens with video game stocks. There’s, you know, usually a bigger variance than you normally would have. But it was…you know, it certainly met expectations, but it’s still a pretty substantial drop. I mean, they made $2.3 billion in — in net bookings last year in the second quarter, and now it’s down to 1.64. It’s a pretty big slide.

And I think it’s — it’s really the result of two things. One is the console refresh halo or glow, which affects, you know, games like “Call of Duty,” which, you know, drives a lot of Activision’s revenue. And then, of course, you know, the – kind of a glimmer of – the afterglow of the engagement bump that we had with – post-COVID, okay, because of the lockdowns and all that.

So those two kinds of hits the– you know, the hits that– hit that number. But of course, you know, what’s really going to boost the stock, is Microsoft going to be able to complete its acquisition? And as you mentioned earlier, you know, at $80, it looks like investors think maybe Microsoft, you know, is going to have more bumps – there’s going to be more bumps in the road, or maybe a lower offer. You know, it’s hard to say. But the acquisition definitely won’t be… you know, we won’t get any clarity on that, I think, for at least a quarter or two.

DAVE BRIGGS: Yeah, and just to refresh everyone’s memory, Microsoft’s $95 price guarantee, what do you expect from the FTC? And do you expect to hear anything in Activision’s earnings call about this merger?

JOHN FREEMAN: So I… you know, it’s hard to say. I don’t think they’re going to venture to, you know, comment a lot on what the SEC is going to do. I don’t know — the FTC, rather, will do. I do not know. To me, it looks like Microsoft is going to have to make some concessions. That’s why I went from buy to hold, because that’s the kind of thing that’s really hard to figure out. And you know, it’s the kind of risk arbitrage that, you know, it’s – it’s fun for play money, but you know, it’s best left to the professionals, you know, it’s kinda my point of view because it’s hard to get a point of view on, like, what the FTC is going to do.

It seems to me that they are going to ask for concessions. And maybe Microsoft says, at some point, you know, it’s too much. The concessions are too big and they pay that $3 billion break fee, which they can do because they have a lot of money, right? So it’s– you know, I– with this kind of spread, it seems like there’s a lot of doubt about whether the acquisition will go through.

DAVE BRIGGS: Yeah, that’s fascinating, right? You talk about 17%, 18%, that seems like an easy arbitrage bet to make. What kind of concessions are we talking about? Are we talking about Call of Duty exclusivity or potential exclusivity?

JOHN FREEMAN: Right. I think you’re probably going to have a number of, you know, keeping the Xbox platform as open as possible, you know, with, you know, not the kind of preferential treatment that has today, that sort of thing . Or you know, maybe divesting some of their game… their previous acquisitions, like “Minecraft.” You know, is this on the table for– you know, for– for surrender, for forced surrender? That’s certainly, I think, what the FTC is probably considering. And you know, remember these acquisitions are– they face and– and hit the consumer.

So rather than acquiring some kind of enterprise software where, you know, the FTC doesn’t have as much political motivation to act, things that hit the consumer, okay, they’re going to pay more attention and probably asking for a greater degree of — Microsoft’s concessions is — is kind of my thinking on that.

SEANA SMITH: Hey, John, we just had our tech reporter, Dan Howley, say that Activision has a huge lineup of titles coming. And that includes a new “Call of Duty.” When we look at the slowdown that’s happening in the games business, I guess, how much will that help Activision offset some of that slowdown that we were maybe expecting to see in the second half?

JOHN FREEMAN: Yeah, I think, you know, the– the next “Call of Duty”, I think there’s a “Modern Warfare”, and then there’s– there’s also a “War Zone” title and I’m thinking an “Overwatch”– an “Overwatch” upgrade as well. So that’s kind of all – I think, it’s all integrated. They had talked about it, before, in the fourth quarter.

But you know, it’s kinda — it’s kinda hard when you’re, you know, crunching some pretty incredible numbers over the last — in 2021 for “Call of Duty,” isn’t- it not? So, you know, it’s– I don’t think they’ll be able to do anything with these stocks that, you know, are blowing– you know, blowing the numbers in the fourth quarter to the point where, you know — maybe, you know, where that moves the stock, you know, way above, you know, where it is now.

I think– and I think, of course, you have that cap. Like the Microsoft acquisition, you know, if you take that out, I think the stock is probably reasonably priced where it’s right. So it’s about this arbitration between Microsoft – you know, if the Microsoft deal is at $95 and what concessions, you know, Microsoft is going to have to make to make the deal.

RACHELLE AKUFFO: And with Activision having these huge titles – because, as you mentioned, ‘Overwatch’, ‘World of Warcraft’, ‘Call of Duty’ – what are some of the nuances? As you look at the whole industry and you look at how — compared to Activision’s performance, what are your expectations there?

JOHN FREEMAN: Well, that’s rather interesting. So the video game industry oscillates between the big publishers, you know, dominating the top 10 titles, which you can see NPD releasing this month. And since the beginning of the year, “Call of Duty” was the only one. It was number six, wasn’t it, whereas last year I think it was by far number one.

So that was the only title. And there were a lot of – there are a lot of new, smaller studios that had titles in that top 10. And so you know, it comes and goes. So now, you know, as a member of Microsoft, you know, I can see Microsoft maybe real – rethinking this deal, you know, as the industry comes and goes. And it seems, right now, indie – the smaller indie studios seem to be doing really, really well at the expense of the bigger ones, Activision being the biggest, right?

SEANA SMITH: It’s gonna be really interesting. John, lots of good comments there on the deal, because that’s the big thing investors want to know at this point. Very soon, however, before you let go hire at Activision, headcount was up 25% year over year, even in a very tough economic environment. What does that tell you, I guess, about the strength of the company and the position it is in?

JOHN FREEMAN: That… I found that a little weird too. As they prepare to be bought out, they will increase their workforce by 20%? You know, was Microsoft okay with that? Right? You know, it kind of makes you wonder what prompted this. And so it’s just a question mark. And I think, you know, obviously, in a normal situation, that would be a very bullish sign, saying, hey, we’ve got a lot going on. We have to bring everything to the finish line. And you know, we have…and that shows confidence in the company.

But now, with Microsoft’s deal hanging over it, does it seem like it’s really showing that kind of trust, or are they just trying to get bigger before they’re bought? It’s–it’s kind of an interesting–interesting dynamic that’s–it’s a question mark. I will have to say it.

SEANA SMITH: It jumped out at me, 25% year-over-year growth, something you don’t really see every day, especially when a company is potentially acquired by Microsoft.

JOHN FREEMAN: And with declining revenues.


JOHN FREEMAN: And with declining revenues.

SEANA SMITH: Yeah. Good point. Alright, John Freeman. Always great to have you. Thank you very much for joining us.


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