Microsoft Faces Tougher Path to Closing Activision Deal

A fight with regulators could make the deal more trouble than it is worth for Microsoft, some Wall Street analysts said Friday.

CFRA Research Vice President John Freeman said he hopes executives at Microsoft “take the hint and give up the deal that, if completed, might end up a Pyrrhic victory of executive distraction and expensive regulatory concessions.”

While Microsoft might have a strong chance of beating the FTC’s challenge, the odds of the company also coming out on top in potential challenges from regulators in the U.K. and Europe are slim, Cowen analysts said. They said similar moves from authorities in the U.K. or Europe—and maybe both—are likely to follow that of the FTC.

“At a certain point, Microsoft may decide that the total litigation, distraction, and public relations costs are too high, and choose to walk away from the transaction,” they said.

Shares of Microsoft slipped 1% to $245.48 in morning trading. Activision stock also fell almost 1% to $74.24, about 22% below the $95 a share in cash that Microsoft agreed to pay for the company.

While the FTC’s suit will likely extend the timeline for closing the deal, Clay Griffin, an analyst at MoffettNathanson, said “we’re not so sure it’s the death knell that one might assume.” He said Microsoft can now fight the challenge in court, offer more concessions or walk away from the deal and pay the breakup fee of up to $3 billion.

“Microsoft, in our view, has expended enough PR and management time to be committed to giving it a go. We’ll see,” he said. Analysts at Benchmark said the market is pricing in a 38% chance of Microsoft closing the deal, though on a potentially delayed timeline.

By filing its complaint, the FTC has given Microsoft a path to resolving all of the regulator’s issues with the deal through concessions, Wedbush Securities analysts said. The company could make concessions such as agreeing not to offer reduced prices for Activision games on Xbox and committing to keeping games available on all platforms.

“Unfortunately for the FTC, by showing its cards, Microsoft now has a road map to respond,” they said.

The law-enforcement agency said the deal is illegal because it would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. The company could raise prices for people who don’t use Microsoft’s hardware to access the games, or even cut off access entirely, the FTC said.

If the deal were to collapse, it would be the first time regulators have blocked a deal in the videogame space, D.A. Davidson Vice President Franco Granda said.

“We believe the outcome of the ensuing legal battle could redefine the gaming landscape as we know it and dictate dynamics in emerging opportunities such as subscription and cloud gaming,” he said.

In the aftermath of a scrapped deal, focus could shift back to Activision’s workplace harassment issues that came out in 2021, Mr. Granda said. He also noted that Activison’s stock has been shielded this year from the downturn in the videogame market, in which lower engagement from wanings pandemic trends has weighed on the sector.

Activision “would likely be the biggest loser in the case of the deal collapsing,” Mr. Granda said.

Write to Will Feuer at [email protected]