How MSFT’s Huge Gaming Deal Impacts ETFs

Shares of Activision Blizzard (ATVI) soared today after Microsoft announced plans to purchase the video game maker. The all-cash acquisition values ATVI at $95 per share, or 45% above the stock’s closing level from Friday.

At the $95 buying price, Activision is valued at $68.7 billion—a huge market cap by most measures, though relatively modest next to Microsoft’s $2.3 trillion market value.

Microsoft said it expects the deal to close in fiscal 2023, meaning either the second half of 2022 or the first half of 2023. However, the firm cautioned that the transaction “is subject to customary closing conditions and completion of regulatory review and Activision Blizzard’s shareholder approval.”

Regulators may scrutinize this deal especially closely as it would make Microsoft the third-largest gaming company by revenue in the world, behind only Tencent and Sony. Big tech in general has been in the antitrust crosshair globally, though Microsoft has avoided the scrutiny of its more controversial peers like Meta, Alphabet and even Apple.

Perfect Fit

Strategically, it’s obvious why Activision Blizzard would be a good fit for Microsoft. The former is a juggernaut in the gaming space, with highly popular franchises across gaming devices. Those include Warcraft, Call of Duty and Candy Crush.

Those franchises would nicely supplement Microsoft’s already formidable gaming lineup, which includes the Xbox gaming system, the popular Halo franchise, and all of the titles the company acquired after buying Bethesda Softworks for $7.5 billion last year.

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Gaming is the biggest and fastest-growing form of digital entertainment worldwide.

More broadly, Microsoft has made no secret of its “metaverse” ambitions. To many, gaming is at the forefront of the journey to the metaverse, and Activision makes Microsoft a leader in the space.    

ETF Impact

Were it to close, the Activision acquisition would remove a sizable position from many exchange-traded funds. According to the ETF.com screener, there are 246 ETFs that hold ATVI.

The funds with the largest positions in the stock are naturally the gaming ETFs. However, some broader ETFs, like the Communication Services Select Sector SPDR Fund (XLC), also hold notable weightings in the firm. ATVI currently represents about 4% of XLC’s portfolio.

Meanwhile, the VanEck Video Gaming and eSports ETF (ESPO), the ProShares On-Demand ETF (OND), the Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD), the Formidable Fortress ETF (KONG) and the Global X Video Games & Esports ETF (HERO) each hold about 5-6% of their portfolios in ATVI.

Even if the Activision acquisition were to successfully close and remove a key holding from these ETFs, today they are cheering the deal. ATVI’s spike is leading to a 1% gain on most of these ETFs, which is notable outperformance versus the S&P 500’s 1.5% decline.

​Follow Sumit Roy on Twitter @sumitroy2