- Speculation arises that Morgan Stanley was hired by Activision for activism defense.
- CNBC anchor suggests Activision is a target of activist investors who want to reshape the deal.
- Activision could end up divesting parts of its business, even including its Call of Duty studios.
Microsoft is embroiled in drama in its bid to acquire Activision Blizzard. The $69 Billion deal has hit the brakes as regulators around the world scrutinize the deal. So far, Microsoft is facing an antitrust warning in Europe, a suit by the FCC in the US, and is facing scrutiny from UK authorities over the deal.
The issue concerns that the deal is anti-consumer. Particularly, regulators are concerned about the availability of the Call of Duty franchise on competing consoles if the deal were to close. Despite assurances from Microsoft that they would not make the Call of Duty franchise exclusive, regulators are not convinced.
Amidst the drama, speculation has risen that investment bank Morgan Stanley was hired by Activision for activism defense, an advisory service that deals with defense against activist investors who wish to change a company, strategic divestitures, and other situations where a companies management or strategy are challenged by outside forces.
The rumors arose after Activision Blizzard was restricted by Morgan Stanley last week. This speculation only continued to grow after CNBC’s David Faber spoke on Tuesday of the potential for the need for activism defense by Activision and that an activist investor may be preparing to make a move against Activision, specifically naming Elliot Management.
Elliot is perhaps the most experienced of all activist firms, having launched activist campaigns against companies that dwarf Activision Blizzard. Activists are investors who seek to take a stake in a company in order to shake up the company or change its direction and often use their stake in the company to carry out these campaigns.
Banks are hired for activist defense services from companies that are targets of these activist campaigns. Banks will advise companies on how to defend themselves against activists and help to develop a strategy to shake off a campaign.
Activist defense bankers sometimes do other work, such as helping to divest a company’s assets if it is strategic to do so. UK authorities have floated the idea of Activision Blizzard selling off the Call of Duty franchise, including its studios. The UK’s Consumer Markets Authority suggested it would have no objections to the deal if Activision Blizzard sold off the Call of Duty franchises.
If Morgan Stanley was hired to protect against an activist campaign, an activist may be seeking to change the terms of the deal. An activist investor like Elliot Management may also seek to divest the Call of Duty franchise in order for Microsoft to gain the trust of regulators and pass the deal.
The deal may not be worth as much in this scenario, but Elliot could still profit through merger arbitrage, a strategy where one profits from the change in a stock price as a result of mergers and acquisitions, something that Elliot Management is known for.
Selling off the Call of Duty franchise is obviously not going to happen, Microsoft would never allow it. The Call of Duty franchise is specifically the reason for Microsoft’s record deal to buy Activision (Microsoft did not pay $69 billion for Crash Bandicoot).
Call of Duty would significantly boost Xbox’s Game Pass subscription as well as its cloud streaming service.
While Microsoft acts like the underdog in front of regulators, the company has certainly considered the value of making Call of Duty exclusive to the Xbox ecosystem. When Microsoft finalized the acquisition of Bethesda, Starfield, and Redfall were announced as exclusive to the Xbox ecosystem.
Microsoft has also made sequels to previously multi-platform games exclusive, such as Outer Worlds 2, which will be an Xbox exclusive. There are rumors from industry insiders that the Elder Scrolls 6 will also be exclusive to the Xbox ecosystem. Previously, Microsoft had promised that legacy franchises would continue to be multiplatform.
This flip-flopping and history of making acquired IP exclusive is what is worrying regulators. Microsoft wants this deal to close, while they may be secretly considering the benefits of Call of Duty being exclusive to the Xbox ecosystem If regulators demand the divesture of the Call of Duty franchise, consider the deal dead.
Morgan Stanley’s job here would be to advise Activision on divesting the Call of Duty franchises and their respective studios. Alternatively, Activision Blizzard could draw up a plan to divest dormant IP and underutilize studios in a bid to gain favor from regulators.
If an activist investor is involved, it would be hard to shake off, especially if the activist is the reported Elliot Management. An activist play by Elliot would further delay the already stonewalled deal.
At the end of the day, there is no solid confirmation that MS is working with Activision Blizzard, and there is no confirmation that Elliot is planning an activist campaign against the company.
For the deal to go through, Microsoft must make legal guarantees that top Activision Franchises such as Call of Duty will continue to be multiplatform forever.
Microsoft will be presenting its case to EU regulators on February 21st during a closed hearing. Other regulatory authorities are expected to make their decisions regarding the deal over the next couple of months.
All of the Microsoft x Activision Blizzard drama truly makes us wonder whether monopolies are something that’ll kill the gaming industry off. Let us know what you think in the comments ahead.
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