Shares in video game developer Activision Blizzard (ATVI) are expected to rise over the coming months ahead of its planned $68.7bn takeover by Microsoft (MSFT). By having Activision in its portfolio, Microsoft would be able to expand its presence in the growing video gaming industry and reach a greater pool of new customers thereby re-emerging as one of FAAMG frontrunners together with Apple (AAPL). However, it’s far from a done deal since the U.S. Federal Trade Commission is likely to launch an antitrust probe against Microsoft’s attempt to buy Activision Blizzard for competitive purposes only. Rumors abound that the agency could file an antitrust lawsuit as soon as next month. If the FTC takes such a step, that would be a major roadblock for the deal.

There is also every reason to believe that an expansion of Microsoft’s gaming business will be able to create additional shareholder value in the long run.

It’s been almost a year since the deal to acquire Activision by Microsoft was announced, yet we’re still waiting for regulatory approval in order for the deal to go through. As antitrust watchdogs of the U.S., EU, UK, and China are reviewing the purchase, there are still a lot of misconceptions about the reasoning behind Microsoft’s decision to acquire Activision, considering that gaming is not its core business. Nevertheless, in the grand scheme of things, the gaming business has one of the biggest abilities to help Microsoft aggressively expand its reach and attract a large pool of new customers into its ecosystem, which is why acquiring Activision makes sense from a business point of view.

Things began to change when Satya Nadella became Microsoft’s CEO in February 2014. A month after taking a new role, he appointed an Xbox veteran Phil Spencer to lead Microsoft’s gaming department, and at the same time in September of that year approved the acquisition of Mojang, a gaming studio that created Minecraft, for $2.5 billion. It was at that time when it became obvious that the new management was keen to revive Microsoft’s gaming business and make it a major part of its overall growth strategy. With Phil Spencer leading the gaming business, Microsoft began to focus on the gamers' priorities, which resulted in the launch of Game Pass in 2017, the acquisition of a dozen of gaming developers in 2018, and the release of an initial version of a cloud gaming service xCloud in 2020.

Indeed, Microsoft Corporation’s decision to acquire Activision Blizzard, Inc. for $68.7 billion makes all sorts of sense for the company. As of November 24, 2022, Activision Blizzard is having a market cap of almost $60 billion. Its P/E ratio stands at close to 36X whereas the closest competitors, Ubisoft Entertainment’s P/E is approximately 38X, while Nintendo’s P/E stands at just 13X, but the latter bears Japanese currency risk. So, without the Microsoft deal ATVI could be identified as a fully valued company, but it has been the world’s 247th biggest company, and Microsoft apparently seeks synergy ahead of valuation, so, presumably, current ATVI’s shareholders could expect certain bonuses if the deal goes through. It was also the 4th largest video game business and the second largest eSports player, behind Tencent.

As the gaming business starts to have a greater impact on the company’s financial performance, allocating more resources for its expansion appears to be a no-brainer at this stage. Even though the deal is not completed yet, as the antitrust watchdogs are currently reviewing it, there are good chances that Activision will become a part of Microsoft next year.

That strategy is working well for Microsoft to this day, since if we go through the company’s latest Q3 earnings report, we’ll see that out of $50.12 billion in total revenues the company generated during the period, $3.61 billion were generated by the gaming division. This accounted for ~7.2% of the overall revenues.