Is Activision Blizzard's 23% Upside Worth the Risk?

With the acquisition of Activision Blizzard by Microsoft on the table, investors are left weighing potential rewards against regulatory uncertainty and deal risk. Could a 23% upside justify placing this acquisition bet in your portfolio?

Understanding the Acquisition Landscape

Every week in the Learn By Example investor community, we dissect pressing market events and share practical insights. A few weeks ago, a member asked how to navigate special situations when a company you own is being acquired. Today’s focus is Microsoft’s pending acquisition of Activision Blizzard—a deal that offers a roughly 23% spread between the current stock price and Microsoft’s $95 per share offer. Hanging in the balance is not just billions of dollars but also a test of regulatory approval and strategic foresight.

The Activision-Microsoft Deal Breakdown

Microsoft announced its intent to buy Activision Blizzard for $95 per share, valuing the deal at about $67.7 billion on a net cash basis (after factoring Activision’s ~$7 billion in cash and debt). This strategic acquisition aligns with Microsoft’s ambition to expand its Game Pass subscription service and secure valuable gaming intellectual property (IP). In essence, Microsoft aims to position itself at the heart of a cloud-based gaming future—mirroring the streaming revolution seen in video and music entertainment.

By folding Activision’s popular franchises—such as Call of Duty, World of Warcraft, and Candy Crush—into its ecosystem, Microsoft hopes to boost subscriber growth while erecting high barriers to entry for rivals. As bandwidth improves worldwide, cloud gaming will remove the need for specialized consoles, making subscription libraries like Game Pass the central battleground for consumer attention.

The Value Investing Perspective

Warren Buffett often classifies these merger-arbitrage opportunities as “workouts,” where returns hinge not on market sentiment but on the probability of deal completion. Rather than hunting volatile price swings, investors must estimate whether the announced acquisition actually goes through—and price the stock accordingly.

“The idea here is to estimate the probability of a corporate event occurring.” — Warren Buffett [verify]

This mindset shifts focus from market noise to corporate governance, deal structure, and regulatory headwinds. At today’s share price, an investor is effectively betting on the odds that Microsoft will successfully close the acquisition at the agreed price, rather than on broader market trends.

Navigating Approval and Regulatory Hurdles

Following shareholder approval from Activision Blizzard investors on April 28, the key barrier now lies with antitrust regulators—particularly the U.S. Federal Trade Commission (FTC). Authorities worry that Microsoft’s control over marquee franchises could stifle competition and limit consumer choice. Critics note that owning both the platform (Xbox/Game Pass) and exclusive rights to blockbuster titles risks cutting out rivals like Sony.

Regulatory review timelines can stretch months or even years, and outcomes are far from certain. While Microsoft has deep pockets to pursue legal appeals, prolonged scrutiny could delay deal closure, increase financing costs, or force divestitures. Such uncertainties directly affect the stock’s merger spread and demand careful probabilistic assessment.

Mitigating Risks with Scenario Planning

Investors should adopt a scenario-based framework to gauge potential outcomes:

• Deal closes as planned: Stock converges to $95, locking in a ~23% gain.
• Conditional approval with remedies: Divestitures or commitments might reduce value to $85–90, narrowing potential upside.
• Deal blocked: Activision’s shares could fall 20–30% to reflect standalone valuation and sector sentiment.

By assigning probability weights to each scenario (for example, 60% chance of approval, 30% chance of conditional remedy, 10% chance of blockage), you can calculate an expected value for Activision shares today. This structured approach highlights how downside scenarios sharply impact return expectations.

Investment Strategy: Applying the Kelly Criterion

Position sizing becomes critical when betting on such corporate events. The Kelly Criterion is a formula that calculates the optimal fraction of your portfolio to risk based on win probability and payoff ratio. In practice, however, estimating precise probabilities for regulatory approval is extremely difficult.

Rather than striving for a point estimate, many experienced investors prefer to commit only when they have high conviction—say, a strong 70–80% confidence level. If lacking that conviction, they reduce position size or pass altogether. The key is to:

• Evaluate management credibility and depth of financial resources.
• Understand potential legal and political challenges.
• Remain comfortable holding the shares as a standalone investment if the acquisition fails.

This disciplined approach blends quantitative sizing with qualitative judgment, ensuring you never overexpose to an event whose outcome remains uncertain.

Conclusion: The Expected Value of Activision

When you invest around an acquisition, remember the deal may collapse or change. Always be prepared to own the company at today’s price with the acquisition option factored out. If you wouldn’t mind holding Activision Blizzard as a standalone business—because you appreciate its IP portfolio, recurring subscription revenue, and long-term growth potential—it may be worth a small position.

Actionable Takeaway:
• Before placing a merger arbitrage bet on Activision Blizzard, ensure you’re equally content owning the stock if Microsoft’s acquisition falters.

Perform your due diligence, apply core value investing principles, and ask yourself: does the expected 23% upside fully compensate for regulatory and execution risks? Each acquisition story brings its own twists—what’s yours going to be?