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Microsoft ‘s (MSFT) proposed blockbuster acquisition of video-game publisher Activision Blizzard (ATVI) may be doomed thanks to British regulators. But our faith in the American tech giant endures whether the deal can still happen or not. The U.K.’s top antitrust body — the Competition and Markets Authority — said Wednesday that it opposes Microsoft’s $69 billion bid because of competition concerns in the budding cloud gaming market. The CMA’s rationale caught some Wall Street analysts by surprise. Microsoft and Activision said they intend to appeal the decision, which can take many months. History suggests the likelihood of a successful appeal is slim . “Microsoft does not need” to own the publisher of “Call of Duty,” Jim Cramer said Wednesday, driving home what has been the Club’s view on the pending acquisition for months. Our investment case in Microsoft does not require completion of the deal. The star of the Microsoft show has been — and continues to be — its growing cloud-computing platform, Azure. Microsoft’s impressive quarterly results after the closing bell Tuesday reinforced the longer-term promise of Azure, which management claimed has taken market share from rivals because of its artificial intelligence savvy. Microsoft — a key partner and investor in the startup behind buzzy ChatGPT — has aggressively leaned into AI in recent months and positioned itself as a leader in the technological transformation. AI should be an engine of growth for both Azure and the Microsoft 365 software suite — not to mention a newly overhauled Bing taking aim directly at Google’s near search monopoly. MSFT 1Y mountain Microsoft’s stock price over the past 12 months. Microsoft shares, which surged in extended trading Tuesday in response to the better-than-expected quarterly numbers and solid revenue guidance, rose 8% in Wednesday’s regular session, to nearly $298 each. The U.K. regulator’s decision hardly dampened investor enthusiasm around Microsoft. However, Activision shares, meanwhile, fell more than 11%, to under $77 each — well below Microsoft’s $95-per-share bid price . British regulators signaled in February that they may block the Microsoft-Activision tie-up, expressing concerns that it may harm competition in the country’s gaming market. Microsoft’s multipart gaming business includes Xbox consoles, cloud-based Xbox Game Pass service and in-house titles, such as the long-running “Halo” series. One worry initially was that Microsoft could make Activision’s games — especially the immensely popular “Call of Duty” series — exclusive to Xbox consoles, or that Microsoft would make a lower-quality version of the games available on rival Sony’s PlayStation. Microsoft had already inked a 10-year commitment to bring “Call of Duty” to Nintendo, if the Activision acquisition went through. But in late March, the CMA dropped its concern about competition in the console gaming market, raising hopes that the regulator would not stand in the way of the deal. Those hopes proved misguided. The CMA’s opposition centered on competition concerns in the burgeoning world of cloud gaming, which Jefferies analysts estimate is less than 2% of the overall gaming market. Cloud gaming enables players to, essentially, stream video games without having to buy a physical console. “Allowing Microsoft to take such a strong position in the cloud gaming market just as it begins to grow rapidly would risk undermining the innovation that is crucial to the development of these opportunities,” the CMA said in a release . In a statement, Microsoft President Brad Smith said Wednesday the CMA’s decision appears to rest on a “flawed understanding” of the cloud gaming market “and the way relevant cloud technology actually works.” Bottom line Microsoft has a lot going for it — with or without Activision Blizzard. To be sure, acquiring Activision’s game lineup, which also includes “World of Warcraft,” would bolster the attractiveness of its gaming business. Microsoft would not have entered into such an expensive transaction if it did not believe it would be accretive over the long term. But we also see impressive strength in Microsoft’s existing gaming business, as evidenced by its third-quarter results reported late Tuesday afternoon. Revenue in its gaming business only declined 1% year over year on a constant currency basis, despite a 28% decline in Xbox hardware revenue. That’s because gaming content and services revenue — which includes Xbox Game Pass — rose 5%. “We’re rapidly executing on our ambition to be the first choice for people to play great games whenever, however and wherever they want,” CEO Satya Nadella said on the earnings call. At the same time, our investment case is built on Microsoft’s larger opportunity outside gaming, as enterprises shift their workloads to the cloud and look for ways to harness the power of artificial intelligence in their own operations. Microsoft has been delivering so far, with more growth on the horizon. Another reason we won’t sweat if the Microsoft-Activision deal is scrapped: Microsoft would be left with more than $60 billion that could be redeployed in different, yet still beneficial, ways. That could include upping its capital return to shareholders through a dividend or buyback boost or adding to its investment in AI capabilities. In any case, Microsoft is in a good place. (Jim Cramer’s Charitable Trust is long MSFT, GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Velib bicycles are parked in front of the the U.S. computer and micro-computing company headquarters Microsoft on January 25, 2023 in Issy-les-Moulineaux, France.
Chesnot | Getty Images
Microsoft‘s (MSFT) proposed blockbuster acquisition of video-game publisher Activision Blizzard (ATVI) may be doomed thanks to British regulators. But our faith in the American tech giant endures whether the deal can still happen or not.
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