Video Game ETFs in Focus as UK Blocks Microsoft’s Activision Buyout

The Global X Video Games & Esports ETF (HERO) and the VanEck Video Gaming and eSports ETF (ESPO) edged lower on Wednesday after shares of one of their largest holdings plunged. 

Activision Blizzard Inc. dropped 11% after the U.K.’s Competition and Markets Authority blocked the gaming giant from being acquired by Microsoft. 

In January 2022, Microsoft offered to purchase Activision for $68.7 billion, or $95 per share—a large premium to the $65 the stock was trading for ahead of the buyout announcement.  

After yesterday’s decline, Activision was trading at $77.  

Cloud Concerns  

The CMA cited concerns about Microsoft’s dominance in the cloud gaming market in its explanation for why it rejected the deal. 

Cloud gaming is when video games are run on powerful computers and then streamed to a gamers’ devices, similar to how movies and shows are streamed to viewers’ TVs through services like Netflix.  
 
This allows gamers to play high fidelity games without using dedicated gaming devices, like consoles and gaming PCs. 

“The cloud gaming market is growing rapidly, with the average number of UK cloud gamers tripling between 2021 and 2022,” wrote the CMA.  

“Microsoft already has strong advantages in the market, owning: Windows, the leading PC operating system for which most PC games are made; significant cloud infrastructure and systems; and Xbox and a portfolio of leading games,” it continued. 

“If Microsoft were to buy Activision, that position would only become stronger, reducing competition in cloud gaming, and affecting how the market develops. The evidence available to the CMA showed that Microsoft would find it commercially beneficial to make Activision’s games exclusive to its own cloud gaming service, making it harder for other platforms to compete. Reduced competition could mean less choice and a lack of new, exciting innovations for UK gamers in the future,” added the CMA. 

Though certainly a blow to Microsoft’s ambitions to buy Activision, the CMA’s decision isn’t the final word on the matter. 

Following the CMA’s decision, the two companies announced their intention to appeal: 
 
“We remain fully committed to this acquisition and will appeal. The CMA’s decision rejects a pragmatic path to address competition concerns and discourages technology innovation and investment in the United Kingdom. We have already signed contracts to make Activision Blizzard’s popular games available on 150 million more devices, and we remain committed to reinforcing these agreements through regulatory remedies. We’re especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works,” the companies wrote in a joint statement. 

But analysts say that overcoming the CMA’s rejection in an appeal will be extremely difficult. 
 
“Essentially, there has never been a successful appeal in the UK on an antitrust decision,” Aaron Glick, a merger arbitrage strategist at TD Cowen, told Bloomberg.  

Moreover, even if Microsoft somehow wins its appeal against the CMA, it must also prevail against the U.S. Federal Trade Commission in the FTC’s lawsuit seeking to block the acquisition. 

Big Weighting In ATVI  

For investors in HERO and ESPO, the CMA’s curveball is bad news. Both ETFs hold 6% of their portfolios in ATVI, the highest weighting in the stock among all U.S.-listed ETFs, according to the ETF.com stock finder tool.  

HERO invests in companies that “develop or publish video games, facilitate the streaming and distribution of video gaming or esports content, own and operate within competitive esports leagues, or produce hardware used in video games and esports, including augmented and virtual reality,” while  
ESPO has a similar mandate to invest in companies “involved in video game development, esports, and related hardware and software.” 
 
But despite sharing similar investment strategies, the performance of the two ETFs has deviated significantly this year. HERO is up 6%, while ESPO is up closer to 17% (both ETFs lost around a third of their value last year). 

Most of that difference comes from ESPO’s large position in the high-flying shares of chip giant Nvidia, which is the ETF’s No. 1 position, with an 8.5% weighting. In contrast, HERO doesn’t own the stock at all. 

It’s another example of two thematic ETFs that look similar on the surface but are actually quite different under the hood.  

Follow Sumit Roy on Twitter @sumitroy2