ATVI & FISV: Adding Activision Blizzard & Fiserv to Investing Ideas (Long Side)

The FTC is reviewing Microsoft's proposed acquisition of Activision Blizzard, including additional information and data requests that extended the investigation and review by at least several months.  Concurrently, the FTC has also issued supplemental data requests to Sony in its effort to acquire Bungie.  The agency clearly wants to dive into the gaming industry to gain a comprehensive appreciation of potential issues as it anticipates the accelerating consolidation trend.  Despite these investigations, we anticipate eventual approval of the Activision deal as the fundamental case to block the transaction is weak and Microsoft is pursuing preemptive measures to soften potential regulatory opposition.

The Case to Block is Weak  

We continue to believe an antitrust case to block the Activision deal would likely fail in federal court.  As a horizontal transaction, the deal would leave Microsoft in third place behind Sony and Tencent in the game publishing market.  As a vertical transaction, theories of antitrust injury are more speculative and readily offset by efficiencies that can lower consumer cost and improve customer convenience. 

Preemptively addressing possible concerns that Microsoft would foreclose "Call of Duty" availability on the Sony PlayStation, Microsoft has made public commitments to maintain PlayStation access to the game franchise for at least several years.  We note, however, that game exclusivity does not necessarily raise antitrust alarm bells as content exclusivity can promote innovation and intensify platform competition.  The absence of such a concession, in other words, would not provide a solid foundation for an FTC enforcement case.

The all-cash offer for Activision ($95.00 per share) remains well above the current ATVI stock price, suggesting significant concerns about the ongoing regulatory review of the deal.  The aggressive antitrust agenda of the new FTC regime and the Biden Justice Department certainly justifies a more cautious outlook toward large tech transactions.  The agencies are also pursuing joint revisions to merger guidelines that will likely embrace more expansive theories to support challenges to future deals.

Nonetheless, the federal courts independently review merger challenges and will ultimately put a check on liability theories lacking fundamental economic support.  Although a formal challenge to the Activision Blizzard acquisition would produce deal uncertainty and extend the time needed to complete the transaction, we think Microsoft has likely gamed out potential litigation scenarios and accepted the potential burden of pursuing the acquisition through the courts if necessary.  Again, however, we believe the FTC would be ill-advised to commit limited agency resources to fighting the deal and should ultimately stand down when making its final enforcement decision.

... We expect Microsoft to continue its affirmative strategic approach to smooth the path toward eventual approval.  The company's preemptive offer of concessions, its support of particular aspects of the Administration's big tech competition policy agenda, and now its concessions to win labor union support for the deal all point toward a flexible campaign to get the transaction over the goal line.  To the extent the prospect of an enforcement challenge, regardless of underlying legal merit, represents a near term concern, Microsoft's preemptive approach to reduce potential deal opposition gives the FTC solid policy reasons to stand down.

Takeaway: We see defensive growth at a historic discount based on solid fundamentals and management execution & prudence despite macro uncertainty.

Given its leadership in card issuing and merchant acceptance, Fiserv has sizeable scale advantages and a deep network of bank relationships, which together with its investments in technology form the company's defense against growing competition from fintechs.

On the merchant side, we look favorably upon the company's dual targeting of enterprise and SMB clients through its omni-channel software platform, Carat, and its cloud-based PoS system Clover, particularly as it adds vertical specialization and increases the penetration of value-added services. 

Regarding it's core banking business, we continue to view Fiserv as a beneficiary of the digital transformation of regional banks and credit unions, which the company is servicing with its cloud and SaaS solutions.

Based on the company's strategic M&A, execution of synergies, and investments in omnichannel, software, SaaS, the cloud, and global diversification, market share worries appear to have been adequately confronted. Moreover, strong cash flow generation has driven down leverage from 4x to 3x EBITDA, funded strategic investments, and helped repurchase ~6% of shares outstanding over the past 24 months.

With valuations coming in across the space, we see the M&A opportunity set expanding to the meet management's disciplined style, with the 29% of the trailing 24 month capital allocation attributable to debt repayment and merger & integration expense now deployable elsewhere.