The feds tried to pull the plug Thursday on the Microsoft (MSFT) deal with Activision (ATVI) deal. But does that really mean it's game over?
The Federal Trade Commission said it would sue Microsoft to block its attempt to acquire the video game maker. According to the FTC, "Microsoft would have the means and motive to harm competition."
Activision Blizzard, home to popular video game franchises such as Call of Duty, Candy Crush, and World of Warcraft, agreed to the acquisition in January, at a price tag of $68.7 billion. The all-cash deal would make Microsoft, manufacturer of the X-Box console, a kingpin in the gaming industry and a player in the metaverse.
What can the technicals tell us about Microsoft and Activision Blizzard? Let's go to the charts to find out.
Microsoft (blue) has underperformed the S&P 500 (green) this year. But the Seattle-based software giant is outperforming the tech-heavy Nasdaq 100 (QQQ) (red, QQQ) by a narrow margin.
Activision (black) is disconnected from the market due to the merger agreement. The company agreed to be acquired by Microsoft at $95 per share.
Charts by TradeStation
Activision quickly fell to $73 after the FTC's statement, but rapidly rebounded to $75. Despite the announcement, the stock only lost 1.58% on the day.
This tells me that investors were not surprised by the FTC's announcement, and are hanging on to the stock. Either they believe that the deal will eventually go through, or that another buyer will emerge. Either outcome would be positive for Activision.
Perhaps investors were encouraged by comments from Activision CEO Bobby Kotick, who sent an email to his staff shortly after the FTC announced its verdict.
"I want to reinforce my confidence that this deal will close," said Kotick. "The allegation that this deal is anti-competitive doesn't align with the facts, and we believe we'll win this challenge."
Technically, Activision formed a candlestick pattern known as a hammer (shaded yellow). This bullish formation featured a long lower wick and occurred on high volume (arrow).
Some traders are looking at the 21% discount of Activision's current price vs. its buyout price of $95, and see an arbitrage opportunity. I can't disagree. Both Activision and Microsoft weathered Thursday's news as if it were a minor inconvenience. Both stocks are trading as if the deal eventually will be consummated.
Here's a simple way traders can play Activision: Enter a long position if the stock exceeds Thursday's high of $75.52. Close the trade for a small loss if Activision falls below Thursday's low of $73. This setup creates a low-risk, high-reward scenario.
