Activision Blizzard Inc (NASDAQ: ATVI) stock is more than 25% up on the news of the bid from Microsoft Corporation (NASDAQ: MSFT). The trading opportunity here is that this still leaves a 16% gap between that Activision share price and the Microsoft bid. This is a profit that, subject to a certain amount of risk, is easy enough to lock in. Simply buy Activision stock.
However, if things really were that simple then everyone would already be doing it and the profit opportunity wouldn’t be there. As Milton Friedman liked to point out, $100 bills don’t stay on the sidewalk that long.
The thing to realize about the Microsoft bid for Activision Blizzard is that it is in cash. So, we’re entirely outside those usual bid dynamics of the stock of the bidding company falling as there’s about to be so much more of it around. Microsoft is not trying to pay in something that it falling in value that is. MSFT also doesn’t need to go borrow the money, issue stock themselves – they’ve got the cash right now. So, in one sense we know what the minimum value – in time – of one piece of stock in Activision Blizzard is, that $95 in cold hard cash. So, why is the price at $82 and change then?
Part of it is that there’s still risk here. While the bid is agreed and there’s little likelihood of a change of heart (another bidder of course only increases the value of Activision stock) it is, in the way of these things now, a hugely bureaucratic undertaking. There are so many jurisdictions that might have a say here that it could take 18 months to fully close the deal. Any one of those jurisdictions could derail the deal too. So, there’s risk that the deal won’t go through.
It’s also true that 16% over 18 months isn’t all that grand a profit. Especially with inflation at 7%, we could roughly enough call this just standing still. If we think there’s a profit to be had more immediately in the market, cover that inflation, why would we tie up cash for 18 months for a mere 16%?
Then there’s that third set of thoughts. Which is that this is a cash bid and as long as Microsoft doesn’t walk away that cold hard $95 is likely to arrive. So, we’ve got an underwriting of the Activision stock price whatever else the market does in the meantime. It’s almost like we’ve got a stop loss against a general market price decline here in Activision stock.
There’s a 16% profit in the difference between the Activision stock price and the Microsoft cash offer at $95. The risks are that the deal doesn’t go through either because MSFT changes its mind or for regulatory reasons. It’s also true that the time to fruition of such an Activision arbitrage – 18 months in a time of inflation – might make that risk not worth bearing. But that takeover arbitrage profit in Activision stock is there. Simply buy and hold and hope.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.