{"id":1051,"date":"2022-12-21T14:04:41","date_gmt":"2022-12-21T14:04:41","guid":{"rendered":"https:\/\/tradersontrend.com\/?p=1051"},"modified":"2022-12-21T14:04:41","modified_gmt":"2022-12-21T14:04:41","slug":"activision-blizzard-deal-to-push-through-and-the-market-agrees","status":"publish","type":"post","link":"https:\/\/tradersontrend.com\/h\/2022\/12\/21\/activision-blizzard-deal-to-push-through-and-the-market-agrees\/","title":{"rendered":"Activision Blizzard Acquisition Secures Market Approval and Proceeds to Completion"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"1051\" class=\"elementor elementor-1051\" data-elementor-post-type=\"post\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-773f248 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"773f248\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-7c8365e8\" data-id=\"7c8365e8\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-349d2160 elementor-widget elementor-widget-text-editor\" data-id=\"349d2160\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t<style>\/*! elementor - v3.21.0 - 26-05-2024 *\/\n.elementor-widget-text-editor.elementor-drop-cap-view-stacked .elementor-drop-cap{background-color:#69727d;color:#fff}.elementor-widget-text-editor.elementor-drop-cap-view-framed .elementor-drop-cap{color:#69727d;border:3px solid;background-color:transparent}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap{margin-top:8px}.elementor-widget-text-editor:not(.elementor-drop-cap-view-default) .elementor-drop-cap-letter{width:1em;height:1em}.elementor-widget-text-editor .elementor-drop-cap{float:left;text-align:center;line-height:1;font-size:50px}.elementor-widget-text-editor .elementor-drop-cap-letter{display:inline-block}<\/style>\t\t\t\t<p>The market is having some heavy betting on whether the Activision Blizzard deal would actually push through. What are the odds that it won&#8217;t?<br \/><br \/><span style=\"font-family: inherit;\">Activision Blizzard (NASDAQ: <\/span><a style=\"font-family: inherit;\" href=\"https:\/\/www.google.com\/finance\/quote\/ATVI:NASDAQ?hl=en\">ATVI)<\/a><span style=\"font-family: inherit;\"> is in limbo while authorities sort through worries about the company&#8217;s impending takeover by Microsoft (<\/span><a style=\"font-family: inherit;\" href=\"https:\/\/www.google.com\/finance\/quote\/MSFT:NASDAQ?hl=en\">MSFT<\/a><span style=\"font-family: inherit;\">). <br \/><br \/>ATVI shareholders overwhelmingly accepted the terms of the deal in April, but the Federal Trade Commission (FTC) recently launched a lawsuit to block the acquisition due to worries that the merger of the two companies would be anti-competitive. <br \/><br \/>If the deal is approved, Microsoft will pay $95 per share for ATVI, a 25% increase over the current share price of $76.08. <br \/><br \/>Following the <\/span><a style=\"font-family: inherit;\" href=\"https:\/\/investor.activision.com\/news-releases\/news-release-details\/activision-blizzard-announces-first-quarter-2022-financial\">acquisition announcement<\/a><span style=\"font-family: inherit;\"> on January 19, 2022, ATVI soared rapidly, peaked at roughly $80, and has been trading continuously below $80 since mid-August. <br \/><br \/>The stock is trading slightly higher than it was immediately prior to the FTC lawsuit notice on December 8th.<\/span><\/p><p>The corporation is currently faced with significant legal concerns, including serious sexual harassment and discrimination issues. Simply put, the company culture appears to be dysfunctional. <br \/><br \/>Microsoft&#8217;s acquisition should help to spur fundamental change in the company.<\/p><p>Interestingly, since the potential transaction was publicized, Berkshire Hathaway has increased its holdings in ATVI. <br \/><br \/>According to the most current Form 13F, Berkshire owned $4.47 billion in ATVI shares as of September 30th.<\/p><p>This gain was not sustainable after experiencing a significant increase in earnings during COVID, as video game sales rose among people with scant entertainment options outside of their homes. <br \/><br \/>EPS for the first and second quarters of 2022 were much lower than for the corresponding quarters in 2020 and 2021. <br \/><br \/>The consensus forecast is for earnings to rebound over the following year, with EPS predicted to expand at a rate of 7.4% per year over the next three to five years. <br \/><br \/>The significance of these forecasts is, of course, dependent on the likelihood of the transaction closing.<\/p><p>I last wrote about ATVI on May 30, 2022, which was approximately 6 months ago, when I raised the company from a hold to a buy. <br \/><br \/>The shares were trading at $78.20 at the time, compared to $76.08 now. ATVI has announced one quarterly earnings miss (Q2) and one earnings beat since this publication (Q3). <br \/><br \/>My ATVI upgrading was principally motivated by Microsoft&#8217;s impending acquisition for $95 per share. <br \/><br \/>I got my information about the chances of the deal closing from two sources. The first was the Wall Street analyst consensus perspective, and the second was the market-implied outlook, which is a probabilistic price estimate based on the options market&#8217;s consensus opinion. <br \/><br \/>With a consensus 12-month price forecast of $95.56, Wall Street plainly backed the acquisition going through. <br \/><br \/>The highest and lowest analyst price targets were $95 and $100, respectively, indicating a very narrow range. <br \/><br \/>The inferred market view suggested that option purchasers and sellers were, on average, assigning a significantly higher likelihood of the deal closing than the alternative.<\/p><p>A quick explanation is required for readers who are unfamiliar with the market-implied outlook. The market&#8217;s consensus estimate of the probability that the stock price will increase above (call option) or fall below (put option) a certain level (the option strike price) between now and when the option expires determines the price of an option on a stock. <br \/><br \/>It is feasible to create a probabilistic price projection that reconciles the options prices by comparing the prices of call and put options at a range of strike prices, all with the same expiration date. <br \/><br \/>This is the market&#8217;s forecast. I recommend the CFA Institute&#8217;s monograph for a more in-depth discussion and background.<\/p><p>I wanted to re-evaluate my rating after more than 6 months and the just publicized FTC complaint. <br \/><br \/>As I said in my last post, I produced revised market-implied outlooks for Activision and compared them to the Wall Street consensus.<\/p><p>ETrade estimates the Wall Street consensus outlook for Activision by collecting the views of 13 ranking analysts who have given price targets and ratings in the last three months. <br \/><br \/>The consensus recommendation is a buy, as it has been for the last year, and the consensus 12-month price objective is $92.50, which is 21.7% higher than the current share price but slightly lower than the projected acquisition price. <br \/><br \/>The analyst price target range is much larger than it was in my last piece, but it is still modest in comparison to most of the stocks I have looked at. <br \/><br \/>The wider spread suggests a lower level of confidence in the deal&#8217;s completion.<\/p><p>Wall Street consensus is that the stock is a buy, with a 12-month price target that is extremely close to Microsoft&#8217;s acquisition price. <br \/><br \/>Since my previous report, the spread between individual analyst price targets has risen, indicating that some analysts now give a lesser probability to the deal closing. <br \/><br \/>A further consideration, of course, is whether a 21% &#8211; 22% gain merits the risks, given the firm&#8217;s troubled management and culture, as well as the acquisition&#8217;s uncertainties.<br \/><br \/><strong style=\"font-size: 24.5px; font-family: inherit;\">ATVI&#8217;s Market Expectations<br \/><br \/><\/strong><span style=\"font-family: inherit;\">I estimated ATVI&#8217;s market-implied prognosis for the 5.9-month period ending June 16, 2023, and the 13-month period ending January 19, 2024, using the prices of call and put options expiring on each of these dates. <br \/><br \/>I chose these expiration dates to provide a look ahead to the middle of 2023 and for the entire year.<\/span><\/p><p>The usual market-implied perspective is represented as a probability distribution of price return, with probability on the vertical axis and return on the horizontal.<\/p><p>The market-implied prognosis until the middle of 2023 is qualitatively similar to the data I estimated in May in that the probability distribution has two distinct peaks. <br \/><br \/>This, in my opinion, represents two distinct outcomes: one in which the acquisition closes and one in which it does not. <br \/><br \/>The higher-probability peak corresponds to a return that brings the share price to $91.50, which is a little less than the $95 acquisition price. <br \/><br \/>The secondary high translates to a -12.5% price return. If the deal appears to be in trouble or is blocked, the options pricing indicates that Activision will decline by anything close to this amount. <br \/><br \/>This forecast implies that the overall odds favor the deal going through, hence the shares are expected to rise significantly from their current position. <br \/><br \/>This gives me a positive outlook. The predicted volatility derived from this distribution is 29% (annualized), which is fairly low\u2014particularly for a stock with this level of uncertainty.<\/p><p>According to theory, the market-implied outlook is likely to be negative since investors in general are risk averse and hence pay more than the fair value for downside protection. <br \/><br \/>However, there is no way to quantify the degree of this bias, or even whether it exists at all. <br \/><br \/>Given the greater likelihood of a small-magnitude (but high-probability) negative return versus a positive return, the anticipation of a negative bias enhances the bullish interpretation of this view.<\/p><p>The market-implied prognosis for the following 13 months, from now until January 19, 2023, likewise exhibits a bimodal probability distribution, but the likelihood of the deal closing is significantly higher. <br \/><br \/>The peak probability corresponds to a 25.5% price return, bringing the share price to $95.87. <br \/><br \/>This forecast implies that the options market consensus significantly favors the transaction being completed at $95 per share at some point in the next year. <br \/><br \/>The secondary, far lower likelihood peak correlates to a 17.5% price decrease. This is a positive assessment based on the likelihood that the deal will be completed. If it does not, the shares are projected to fall by around 20%. <br \/><br \/>The calculated volatility from this distribution is 26%. (annualized).<\/p><p>The market suggested outlooks favor Activision being purchased by Microsoft during the next 13 months and the shares rising significantly in the following 6 months. The predicted volatility is fairly low, implying that even if the deal fails, ATVI would not fall drastically.<br \/><br \/><strong style=\"font-size: 24.5px; font-family: inherit;\">Summary<br \/><br \/><\/strong><span style=\"font-family: inherit;\">Investing in ATVI is a bet on Microsoft&#8217;s takeover. <br \/><br \/>Wall Street analyst consensus is in line with the closure of the purchase, with a buy rating and a consensus 12-month price target that is $2 to $3 lower than the $95 acquisition price. <br \/><br \/>Individual analyst price target spreads have widened in the last 6 months, indicating that some analysts are allocating a lesser likelihood to the purchase. In contrast, market-implied forecasts place a larger relative probability of the deal closing than in my earlier research. <br \/><br \/>Aside from the acquisition, the good news is that the consensus forecast for earnings in the future year or so is for a moderate recovery. <br \/><br \/>Despite recent rumors that the FTC is attempting to stop Microsoft&#8217;s acquisition of Activision, Wall Street analysts and the options market remain bullish on the deal. <br \/><br \/>For a buy recommendation, I look for a projected return that is at least 12 times the expected volatility. Analysts anticipate 20%+ gains, bringing the share price to $95; this is substantially above half of the predicted volatility of 26%-28%. <br \/><br \/>Taking all of these into consideration, Activision remains an ideal buy in my opinion.<\/span><\/p><p><em><span style=\"font-family: inherit;\">For More Stocks And Investment Related News, Click <\/span><a style=\"font-family: inherit;\" href=\"https:\/\/tradersontrend.com\/\" target=\"_blank\" rel=\"noopener\" data-saferedirecturl=\"https:\/\/www.google.com\/url?q=https:\/\/tradersontrend.com\/&amp;source=gmail&amp;ust=1671704548527000&amp;usg=AOvVaw3Zixw_BdXPXmnnFODMagsw\">Here<\/a><span style=\"font-family: inherit;\">.<\/span><\/em><\/p><p>\u00a0<\/p>\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>The market is having some heavy betting on whether the Activision Blizzard deal would actually push through. What are the odds that it won&#8217;t? Activision Blizzard (NASDAQ: ATVI) is in limbo while authorities sort through worries about the company&#8217;s impending takeover by Microsoft (MSFT). ATVI shareholders overwhelmingly accepted the terms of the deal in April,&#8230;<\/p>\n","protected":false},"author":1,"featured_media":1975,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[7,8,320,402,567],"class_list":["post-1051","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-newsletter","tag-activision","tag-activision-blizzard","tag-investing","tag-microsoft","tag-stock-market"],"_links":{"self":[{"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/posts\/1051","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/comments?post=1051"}],"version-history":[{"count":0,"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/posts\/1051\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/media\/1975"}],"wp:attachment":[{"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/media?parent=1051"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/categories?post=1051"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/tradersontrend.com\/h\/wp-json\/wp\/v2\/tags?post=1051"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}