Activision Blizzard Inc. shares rallied Tuesday for their best one-day performance since Microsoft Corp. announced its $ 69 billion offer to buy the videogame publisher after a federal judge cleared a major roadblock to the deal.
U.S. District Court Judge Jacqueline Scott Corley on Tuesday morning denied the Federal Trade Commission’s injunction to block the deal, but U.K. concerns must still be addressed before a July 18 deadline to close, or else Microsoft is on the hook for a $ 3 billion breakup payment.
In her Tuesday opinion, Corley said the FTC did not show “this particular vertical merger in this specific industry may substantially lessen competition.”
“To the contrary,” Corley wrote, “the record evidence points to more consumer access to ‘Call of Duty’ and other Activision content.”
Activision Blizzard ATVI, +10.02% shares surged 10% to close the regular session at $ 90.99, and added another 1% gain after hours. Tuesday’s close not only marked the stock’s largest one-day percentage gain since Jan. 18, 2022, when shares surged 25.9% after the deal was first announced, but their highest price since the premium $ 95-a-share deal was announced.
The share-price move prompted Raymond James analyst Andrew Marok to downgrade Activision Blizzard to market perform late Tuesday “given today’s move in the stock and what we now believe is a near-term completion of the deal at the $ 95 headline price.”
Meanwhile, Microsoft MSFT, +0.19% shares rose 0.2% to close Tuesday at $ 332.47, as the S&P 500 index SPX, +0.67% rose 0.7%, the tech-heavy Nasdaq Composite Index COMP, +0.55% rose 0.6% and the Dow Jones Industrial Average DJIA, +0.93%, of which Microsoft is a component, gained 0.9%.
After the court decision, Microsoft’s President and Vice Chair Brad Smith said the company will now address concerns brought up by the U.K.’s Competition and Markets Authority.
While EU regulators approved the deal in mid-May, U.K. regulators said in April they would prohibit the deal on anticompetitive concerns. The prohibition was much like the FTC’s, arguing that Microsoft, with its Xbox gaming console, could withhold hit Activision Blizzard videogame franchises such as “Call of Duty” and “Overwatch” from competing console platforms like Sony Group Corp.’s SONY, -1.20% PlayStation and Nintendo Co.’s 7974, -0.76% Switch.
Read: FTC files injunction to block Microsoft acquisition of Activision Blizzard
In a Tuesday note, TD Cowen analyst Doug Creutz, who has a market perform rating on Activision Blizzard, said Corley’s ruling was a “double whammy” that made the deal closing “much more likely,” as in the 80% range, with the only doubts being whether the FTC appeals, or the CMA issues do not get resolved in time. The analyst added that the bar for the FTC overturning the decision was “very high.”
“One obvious way to read this is that with the FTC’s challenge having apparently failed, the CMA is now feeling heavy political pressure not to be the lone holdout against the deal, and is looking for a graceful exit where it can still declare some sort of victory (further concessions from Microsoft, even if they are modest in nature),” Creutz said.
Macquarie analyst Sarah Hindlian-Bowler, who has an outperform rating on Microsoft, said all signs point to a close.
“We do see this as the best course for Microsoft’s U.K. conundrum — and a viable one — as the current U.K. Parliament is on record as noting concern around the CMA’s stance as being viewed as increasingly anti-business and ultimately adverse to the overall economic health of the U.K.,” Hindlian-Bowler wrote in a Tuesday note.
When the FTC hearings began in late June to determine whether the regulator had a case, Microsoft had said the deal hinged upon the judge’s decision.
“Microsoft has committed in writing, in public, and in court to keep ‘Call of Duty’ on PlayStation for 10 years on parity with Xbox,” Corley wrote in her Tuesday decision. “It made an agreement with Nintendo to bring ‘Call of Duty’ to Switch. And it entered several agreements to for the first time bring Activision’s content to several cloud gaming services.”
Back in February, Microsoft signed a 10-year deal to bring Xbox and other properties to Nvidia Corp.’s NVDA, +0.53% cloud gamers and to Nintendo gamers in a push to satisfy antitrust regulators.
Read: Microsoft teams up with Nvidia and Nintendo in 10-year deal to stream Xbox games
Also, on Tuesday, Microsoft said it would report its fiscal fourth-quarter earnings on July 25 after the market closes.
“Our merger will benefit consumers and workers. It will enable competition rather than allow entrenched market leaders to continue to dominate our rapidly growing industry,” Activision Blizzard Chief Executive Bobby Kotick said in a statement following the ruling.
Shares of Electronic Arts Inc. EA, +5.20% also rallied along with Activision Blizzard, closing up 5.2% at $ 137.33, as uncertainty over whether the Microsoft deal would close or not had been an overhang for EA as a takeover target when videogame-publisher merger frenzy was peaking in early 2022.
Back in April, one analyst downgraded EA because regulatory opposition to Microsoft’s acquisition was taking away the “takeout premium” in its shares.