CFRA Vice President of Equity Research John Freeman reacts to the outlook of Microsoft's long-awaited acquisition of Activision-Blizzard when weighed against the FTC's latest antitrust lawsuit against the tech company.
- All right. A big news day. The Federal Trade Commission now suing to block Microsoft's $69 billion acquisition of Activision-Blizzard. We're joined by John Freeman, CFRA Vice President of Equity Research for a reaction on this. Good to see you, sir. Let's just give you a blank slate to begin-- your reaction to the FTC blocking this. Is this what you expected?
JOHN FREEMAN: Yes. And I'm surprised that there was-- apparently, it was 3-1. So there was actually a dissenter. I thought that's surprising. I mean, you know, I'm a big fan of the free market, but the law is written such that it says, you know, if you're a monopoly or if you have monopolistic power, you're not allowed to use that power to gain an unfair advantage in an adjacent or potential market. This looks like that would be the case, here. In fact, it's kind of the whole justification for the purchase.
So you know, I think Microsoft, too-- I'm trying to-- gave it a good shot. You know, I don't know. They might be able to pull it off. Even now, they might be able to pull it off through appeals. But you know, I don't know. I'm not surprised by the outcome from the FTC perspective.
- John, what do you think the odds are that they are going to be able to pull it off through appeals? Because Microsoft still remaining pretty confident. We heard from Activision-Blizzard CEO saying he is confident that this deal is still going to get done.
JOHN FREEMAN: Right. Well, the thing is, though, you can't not show confidence. Because then, all kinds of other dominoes fall, and then it becomes a bit of a self-fulfilling prophecy, I think. I don't know. Here's the thing. I think it's possible, but-- I don't know, maybe less than 50/50 possibility, I think.
The thing that I look at, though, is should they do it? And I think a $3 billion break-up fee would be a fine thing for Microsoft to do. I want them to focus on the enterprise era. I have a strong buy on Microsoft. I think it's a fantastic company, fantastic stock position for cloud migration, which I think they should focus on and focus their acquisitions there. They can get much better deals now in the enterprise software space, in the cloud space, rather than the video game space, which-- they're a legitimate duopoly. So whatever acquisition they make there, any acquisition they make there is going to get a lot of scrutiny.
- Hey, John. I guess, from a gaming fan point of view, it's not really a monopoly when you have Microsoft, Sony, and Nintendo sort of dominating the market. If Microsoft can effectively take Activision off the board but then say, hey, we'll get you to give games for 10 years-- you know, I feel like Microsoft's case is not that weak. And also, what if you have a consent decree that allows them to say, hey, Microsoft, you have to let these games go to the competitors for X number of years. Would that make it-- or resolve some of the issues?
JOHN FREEMAN: It might. But certainly, I didn't think that they were going to be able to pull this off without concessions. That, I never really thought. They were going to have to make concessions if they wanted to pull it off. And certainly, that Activision user base-- the "Call of Duty" user base-- I mean, isn't that-- I understand why they're interested in buying Activision, right? They want that "Call of Duty" user base.
There are a couple hundred million, you know, real-time, 3-D-- it's basically a narrowly-defined version of what we've been talking as the metaverse. Right? So if they could generalize that with other applications, wow. That would be a fantastic property to own both content, technology, and user base. So I understand why they would want to do it.
And at the same time, because it is effectively, I don't know, a duopoly for living room consoles, right? Non-mobile platforms-- they have monopoly-- I think, you know, they have monopolistic power. So they don't have to have an absolute monopoly. At least, that's the interpretation I have been hearing. I'm not a lawyer. But that's what I've been hearing.
- Microsoft President Brad Smith saying, "We've been committed from day one to addressing competition concerns. He elaborated later about where they're going-- "complete confidence in our case, and we welcome the opportunity present it in court." John, you mentioned how you feel about Microsoft going forward. What's the investor story and the impact of Activision's side of this?
JOHN FREEMAN: Well, here's the thing. I don't think it's that bad an outcome, because Microsoft will have to pay, even if it's blocked. Even if it's a regulatory block, they'll have to pay Activision $3 billion. Well, you know, that's not much for Microsoft. They've got a net cash position of over $50 billion.
But it would be really nice for Activision. I mean, it gives them a nice war chest for them to do acquisitions. Activision's always been a good acquirer of studios, [INAUDIBLE] has a real nose for what's up and coming and being able to integrate it with the platform. I don't know. Like, I believe that Activision would be perfectly fine and healthy, even if they don't get bought by Microsoft.
- John Freeman. Thank you so much, man.