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Berkshire Hathaway's Activision Blizzard Arbitrage Play Gets Big Boost
Sanity might yet prevail in Microsoft's battle with regulators (and Sony) over the Call of Duty maker
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From almost the very first moment that Microsoft announced its $68.7 billion acquisition of Activision Blizzard back in January 2022, regulatory storm clouds filled the skies overhead.
Regulators across the world relished this high-profile opportunity to take a hard line against M&A activity, leading many to wonder if the deal would ultimately end up on the trash heap. As a result, ATVI 0.00%↑ spent much of the past year trading well below Microsoft’s offer price of $95 per share.
Enter those brave arbitrageurs — like Warren Buffett — who sensed an opportunity to make a few easy bucks.
Berkshire Hathaway (through Todd Combs or Ted Weschler) actually invested in Activision Blizzard for the first time in late 2021, before ratcheting up its stake after the merger was announced. Buffett made it clear that the arbitrage angle was his call.
But, even with the Oracle’s “blessing” of the deal’s prospects, Mr. Market remained a Doubting Thomas. Mostly because the news continued to go from bad to worse.
The EU is always a sticky wicket for big acquisitions. And the recent shift in sentiment against “Big Tech” hasn’t helped, either.
The 🇬🇧 Competition and Markets Authority (CMA) seemed dead set against the merger, publishing its provisional findings in February that approval “could result in higher prices, fewer choices, or less innovation for UK gamers”.
It wasn’t going any better in the United States. Back in December, the FTC filed an antitrust lawsuit to block the acquisition — with preliminary hearings to begin in August.
Regulators were elbowing each other out of the way to be the first to extract concessions (or worse). One particularly bizarre demand was for Activision to divest itself of the uber-popular Call of Duty video game series in order to win approval.
Like that would ever happen.
The steady drumbeat of bad news and ill omens seemed like it would never end.
Until it did.
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AN ABOUT-FACE FROM ACROSS THE POND: On Friday, the CMA updated its provisional findings on the Microsoft-Activision case and now says that the merger “will not result in a substantial lessening of competition” in console gaming.
What caused this change of heart?
Basically, Microsoft finally convinced the CMA that it has no financial incentive to make the Call of Duty series exclusive to Xbox.
The most significant new evidence provided to the CMA relates to Microsoft’s financial incentives to make Activision’s games, including Call of Duty (CoD), exclusive to its own consoles. While the CMA’s original analysis indicated that this strategy would be profitable under most scenarios, new data (which provides better insight into the actual purchasing behavior of CoD gamers) indicates that this strategy would be significantly loss-making under any plausible scenario. On this basis, the updated analysis now shows that it would not be commercially beneficial to Microsoft to make CoD exclusive to Xbox following the deal, but that Microsoft will instead still have the incentive to continue to make the game available on PlayStation.
The CMA just drove a stake through the heart of Sony’s crusade against the merger.
Sony, quite understandably, fears what an Xbox-exclusive Call of Duty might mean for the console wars. And I don’t blame them for trying to throw up every roadblock imaginable in front of a potential Microsoft-Activision merger.
But Sony’s case is really weak. Microsoft’s Xbox already brings up the rear in global console sales, with both Nintendo and Sony way out in front. Even an exclusive Call of Duty wouldn’t change the calculus that much. If anything, it would likely only serve to (somewhat) equalize the sales disparity between PlayStation and Xbox.
That’s irrelevant, though, because Microsoft already pledged to keep Call of Duty on all rival platforms for at least the next ten years.
Which also seems to be enough to allay the concerns of EU regulators, too. Reuters reports that “Microsoft is expected to secure EU antitrust approval” after agreeing to this concession.
All signs now point to “Yes!” from the CMA and EU.
NOT OUT OF THE WOODS YET: But let’s keep the champagne on ice for a little while longer, because this is still far from a done deal.
The CMA withdrew its biggest objection, but remains concerned about the cloud gaming aspect of the merger. Microsoft’s xCloud already accounts for 60-70% of the global cloud gaming market, far outpacing rival services from Sony, Nvidia, Google, and Amazon.
While this remains a very tiny part of the overall gaming market, it may necessitate a few more cloud-based concessions from Microsoft.
And let’s not forget the FTC, which is yet to soften its stance at all.
This feels a bit like bizarro world — with Europe flashing the green light while U.S. regulators dig in for a fight — but that’s 2023 for ya.
AN UNLIKELY BENEFICIARY: The biggest winner in all of this, oddly enough, might be Nintendo.
As Microsoft raced around trying to placate regulators and win approval for its acquisition of Activision Blizzard, it signed binding 10-year contracts with most of its rivals to bring Call of Duty to these platforms “day and date” and with “full feature and content parity” to the Xbox versions.
Which, for Nintendo, isn’t so much about preserving the status quo as having one of the biggest game franchises in the world drop into your lap out of nowhere. Activision had not released a Call of Duty game on a Nintendo system in over ten years — but now will be contractually obligated to do so for the foreseeable future.
Just as the aging Nintendo Switch was starting to slow down, it’s about to get fully-featured Call of Duty games for the first time since 2013. Not bad at all.
Microsoft reached similar deals with cloud gaming providers like Nvidia, Boosteroid, and Ubitus. And, in a further vote of confidence, dominant PC game service Steam refused Microsoft’s offer — saying that it doesn’t need a signed contract to trust that Microsoft will keep its word about a multi-platform Call of Duty.
Sony, meanwhile, is refusing for an entirely different reason. “I don’t want a new Call of Duty deal,” PlayStation CEO Jim Ryan reportedly told Microsoft in front of EU regulators. “I just want to block your merger.”
WARREN’S WORK-OUT: So how does Berkshire Hathaway fit into all of this?
Back in October and November of 2021, one of Warren Buffett’s investing lieutenants purchased 14.6 million shares of ATVI 0.00%↑ for about $1 billion.
Even before Microsoft started to sniff around the video game maker, Activision Blizzard caught either Combs or Weschler’s eye — perhaps due to its impressive library of intellectual property (like Call of Duty, Diablo, Overwatch, Candy Crush, etc.) or its ability to turn these games into long-term services rather than one-off releases.
Whatever the reason, Berkshire liked Activision Blizzard long before any offer from Microsoft was on the table.
But, when its share price languished in the mid-$70s throughout the first half of 2022, Buffett added 53.7 million more shares as an arbitrage play on the sizable difference between Activision’s then-current price and Microsoft’s offer of $95 per share.
(In his earliest partnership days, Buffett used the term “work-out” to describe these attempts at event arbitrage.)
Berkshire lessened its exposure to Activision Blizzard by selling 15.6 million shares in Q3/Q4 2022, but it’s not clear whether that was Buffett trimming back his arbitrage amount or Combs/Weschler exiting his original position.
Either way, Activision Blizzard still ranks as the ninth-largest holding in Berkshire Hathaway’s massive investment portfolio.
MR. MARKET CHANGES HIS TUNE: The CMA’s surprising update to its provisional findings — saying that the merger “will not result in a substantial lessening of competition” — seems to have turned the tide of public opinion.
On Friday, ATVI 0.00%↑ shot up to its highest price ($85) in nearly two years.
Sure, the FTC lawsuit might yet prove problematic — but smarter people than me are convinced that it’s more about extracting face-saving concessions from Microsoft than in scuttling the whole deal. Time will tell.
Nevertheless, things are looking up for Microsoft’s acquisition of Activision Blizzard. (And the $1 billion-ish in profit that Berkshire stands to make if the deal goes through as planned.)
It’s been a while since anyone could say that with any conviction.
What a difference a day makes.