Microsoft-Activision Merger: Understanding the Termination Fees

The planned merger between Microsoft (MSFT) and Activision Blizzard (ATVI) was a landmark deal in the gaming industry, and as with any major acquisition, significant financial considerations are built into the agreement, including termination fees. Let’s delve into the specifics:

Termination Fees: The Short Answer

The termination fee for the Microsoft-Activision deal wasn’t static. Initially, the agreement stipulated that if the merger didn’t close by a set deadline, either party could walk away, potentially triggering a $3 billion breakup fee for Microsoft. However, this fee has been increased. The termination fee was raised to $3.5 billion if the deal was terminated after August 29, 2023, and further increased to $4.5 billion if the deal was terminated after September 15, 2023.

These fees were put in place as a deterrent and to compensate the other party for the time, effort, and resources spent on the merger process. They also reflect the significant value and importance of the transaction for both companies. Fortunately for both parties, the merger was completed, thus avoiding payment of this termination fee.

Understanding the Initial Agreement

Original Deal and Deadline

When Microsoft announced its intent to acquire Activision Blizzard on January 18, 2022, the deal was set to close by mid-July of the same year. The agreement included a clause allowing either company to terminate the deal if it wasn’t completed by the deadline. This original agreement triggered a potential $3 billion breakup fee.

Need for Extension

However, the deal faced intense regulatory scrutiny in various parts of the world, particularly in the UK and EU. These regulatory hurdles prevented Microsoft from meeting its initial deadline. As a result, the deadline was extended to mid-October, with the associated termination fee increased accordingly.

Reasons for Increased Termination Fees

The increase in termination fees demonstrates the rising stakes of the merger. As time went on, both Microsoft and Activision had more invested, making the potential fallout of a failed merger even greater. The increase in termination fees after the original deadline extension served as a further assurance of the commitment from both sides.

The Increased Termination Fees

$3.5 Billion Fee

The first increase in the termination fee came into effect if the deal was terminated after August 29, 2023. This fee was set at $3.5 billion.

$4.5 Billion Fee

Subsequently, if the transaction was terminated after September 15, 2023, the termination fee increased to a total of $4.5 billion.

Why These Increases?

The increments in the termination fees are a clear indication that as time passed, the likelihood of either company unilaterally calling off the deal was reduced. These substantial fees were crucial to keep the deal on track, especially while navigating global regulatory hurdles.

The Outcome of the Merger

Merger Completion

After months of regulatory challenges and numerous extensions, Microsoft successfully closed the $69 billion acquisition of Activision Blizzard, avoiding any termination fee payout and creating a major power player in the gaming world. This finalization of the deal marked a crucial moment in the gaming industry.

No Breakup Fees Triggered

The successful closing of the merger also means that neither company had to pay any termination or breakup fees. As a result, the extended deadline, and associated increased termination fees are of less importance.

Frequently Asked Questions (FAQs)

What was the initial purchase price of Activision Blizzard by Microsoft?

Microsoft announced its intent to acquire Activision Blizzard for $68.7 billion in an all-cash deal, which amounted to approximately $95 per share.

What was the purpose of a termination fee?

A termination fee, often called a breakup fee, acts as compensation to a party for the time, effort, and resources invested in a merger or acquisition if the deal falls through due to the other party’s action or inaction. It serves as a financial deterrent against backing out of the deal.

Why was ATVI stock not trading at $95?

Activision Blizzard (ATVI) stock was trading below the $95 per share acquisition price due to investor uncertainty about whether the deal would get final regulatory approval. The difference in price reflected the risk associated with potential deal failure.

How much did Microsoft ultimately pay to acquire Activision Blizzard?

Microsoft finalized the acquisition for $69 billion.

What happens to Activision shareholders now?

Activision stockholders have received $95 in cash for each share they held prior to the close of the merger.

What are some of the key assets Microsoft has acquired through this purchase?

Microsoft’s acquisition gives them access to multi-million dollar franchises such as Call of Duty, Overwatch, Diablo, and WarCraft, along with studios like Treyarch and Infinity Ward.

Will Activision CEO Bobby Kotick still be with the company?

Yes, Activision CEO Bobby Kotick has stayed in his role through the end of 2023.

Did Warren Buffett own Activision stock?

Yes, Berkshire Hathaway owned a significant position in Activision. Most of the shares were bought by Warren Buffett, while the rest were acquired by his investment lieutenants, Ted Weschler or Todd Combs.

Who are some of the largest shareholders of Activision?

Some of the largest shareholders include Vanguard Group Inc, BlackRock Inc, Public Investment Fund, and State Street Corp.

Why did Berkshire Hathaway sell its Activision stock?

Berkshire Hathaway sold its Activision stock because Warren Buffett saw the investment as a form of arbitrage, expecting investors were being overly pessimistic about regulatory approval. Once the stock price moved closer to the expected sale price he sold his shares.

What were the regulatory concerns regarding the Microsoft-Activision merger?

Regulatory bodies, such as the UK’s Competition and Markets Authority (CMA), initially blocked the merger over concerns about competition in the cloud gaming market. These concerns led to protracted negotiations and adjustments to the agreement.

Was there a refund option for Activision products?

There is a refund option for residents in North America who reject the agreement. They can return their peripheral and the program and request a refund within thirty (30) days after the date of their purchase by visiting http://support.activision.com.

Does ATVI pay dividends?

Yes, ATVI pays regular payouts annually.

What do Wall Street analysts think about ATVI stock?

The consensus among Wall Street analysts is that investors should “hold” ATVI shares.

What was the main controversy surrounding Activision Blizzard?

Activision and its CEO, Bobby Kotick, were embroiled in controversy following allegations of a “culture of constant sexual harassment” in the workplace. This included numerous claims of unwanted comments and physical touching of female employees.

This thorough analysis provides a comprehensive understanding of the termination fees associated with the Microsoft-Activision merger, along with key information about the merger itself. The successful closing of this deal marks a significant shift in the gaming industry and a successful resolution for both companies.