Microsoft and Activision Extend Merger Agreement

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Analyst Predicts 90% Chance of Deal Completion

TD Cowen analyst Doug Creutz believes there is now a 90% chance that the deal will close. If this happens, it could potentially lead to further merger activity within the videogame industry. However, Creutz also highlights that there may be limited options for clear buyers of companies like Take-Two or EA. As a result, the scarcity value of stocks in the publicly traded videogame firms could benefit, especially if investors return to the space due to anticipated industry growth for the remainder of the year. Many investors speculate that industry consolidation will persist.

Analysts Suggest Beneficial Effects for Rivals

Barclays analysts also share the sentiment that the Microsoft-Activision merger will have a positive impact on remaining U.S. publishers, specifically TTWO & EA. They predict a sustained domino effect, leading to increased multiples for these companies.

Stock Performance

In Thursday’s trading session, Activision stock rose 0.2% to $92.37, Take-Two (TTWO) stock increased by 0.2% to $152.38, and EA (EA) stock gained 0.5% to $137.54.

Potential Negative Effects for Other Videogame Companies

Despite the potential for mergers, Creutz suggests that this deal may have negative long-term consequences for other videogame companies. Microsoft is expected to incorporate titles like “Call of Duty” into its Game Pass subscription service, which could undermine Sony’s existing business model. Additionally, this move may also impact publishers like EA and Take-Two.

As the deadline extension allows for more time to address concerns from regulatory bodies, the outcome of the Microsoft-Activision merger will be closely watched by industry insiders and investors alike.

The Future of Game Pass and the Videogame Industry

While videogame sales experienced a setback in 2022, industry analyst Creutz predicts a rebound in the second quarter and beyond. The timing of Game Pass’s expansion could have a positive impact on investor attention towards the videogame industry, coinciding with improving sales trends. Importantly, 2023 promises a stronger lineup of games than the previous year, which is anticipated to attract more consumers to gaming.

Circana, a third-party data service, reports a notable increase of 58% year-over-year in U.S. console software sales in May. With upcoming highly-anticipated releases like “Diablo,” “Street Fighter,” and “Final Fantasy,” June is also expected to demonstrate robust performance. These positive developments indicate that console software growth in the second quarter will be exceptionally healthy.

Providing further evidence of the industry’s upward trajectory, Activision recently surpassed expectations with its second-quarter results. This positive news suggests that investors can be optimistic about the future of the videogame market.

Echoing this sentiment, UBS analyst John Hodulik believes that the videogame industry will regain its growth momentum. He highlights the strong lineup of game releases in the pipeline and also points out signs of a bottoming-out trend in mobile game sales.

Circana’s data showcases year-over-year growth in U.S. software sales during recent months, driven by key releases. This stands in contrast to eleven consecutive months of year-over-year decline from November 2021 to September 2022. Additionally, Sensor Tower’s data reveals a slowing decline in the mobile market, with the second quarter of 2023 displaying the best performance since the fourth quarter of 2021.

In conclusion, the expansion of Game Pass and the optimistic outlook for the videogame industry suggest a promising future. With a strong lineup of games on the horizon and signs of recovery in mobile game sales, there are reasons to believe that growth will resume.

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