Even if Activision Blizzard shareholders approve a US$69-billion sale to Microsoft on Thursday, Wall Street is betting that Biden antitrust enforcers could unravel one of the largest mergers in US history.

Shares of the gaming juggernaut are trading 25% below Microsoft’s $95 offer, indicating investors see risk the buyout won’t close as planned. This risk premium is more than double that of Twitter following Elon Musk’s offer, and higher than most of the announced — but still pending — deals tracked by Bloomberg.

Tough talk from US President Joe Biden’s antitrust enforcers is fuelling investor fears that the deal could be blocked or subject to delays even if it prevails, said Matt Perault of New Street Research. Plus, the deal will also need approval by other governments including the European Union and China.

The merger, which has until June 2023 to close, would make Microsoft the world’s third largest gaming company, and would give it ownership over two of the most recognisable gaming brands on the planet in Call of Duty and World of Warcraft. Microsoft would also gain control of Candy Crush developer King, which made $2.6-billion in revenue last year.

Activision shareholders will vote Thursday and are expected to approve the deal, according to Betty Chan, a merger-arbitrage specialist at Elevation. SOC Investment Group, an activist shareholder group with a small stake, earlier this month encouraged shareholders to vote down the deal and Microsoft’s offer of $95/share. That group and other investors have spoken out against a potential golden parachute for embattled Activision CEO Bobby Kotick, who is expected to leave once the deal closes and will walk away with more than $375-million.

Forceful approach

The deal will be reviewed by the Federal Trade Commission, which is led by Lina Khan, who has long advocated for a more forceful approach to reviewing deals, particularly by the biggest technology companies. Under her leadership, the agency has blocked Nvidia’s acquisition of ARM as well as Lockheed Martin’s deal for Aerojet Rocketdyne Holdings. She also resurrected the FTC’s monopoly case against Meta Platforms, which seeks to split off WhatsApp and Instagram.

Fears of a legal challenge are well-founded, based on Khan’s statements opposing growth via acquisitions by big tech platforms, said Jennifer Rie, an antitrust analyst with Bloomberg Intelligence. Plus, it’s likely the FTC will have a Democratic majority by the time a decision has to be made, alleviating a stalemate that may have caused inaction on the Amazon-MGM merger, Rie said.

Not everyone is worried. Wedbush Securities analyst Michael Pachter places the odds of an FTC lawsuit at 10%, and chances of winning a case at 0% due to the difficulty in defining the concentrated market that this merger would cause. Microsoft wouldn’t have a massive share in the market for console games or videogames at large, and current antitrust law overlooks so-called freemium business models common in gaming, Pachter said.

He attributes market fear to lack of familiarity with the videogame industry and the FTC’s tough talk on mergers. The agency “can’t win this one — so if they can’t win, they’re not going to sue. And Microsoft’s going to call their bluff.” Biden’s new antitrust chiefs have said they’re willing to take risks on big cases.

Even if an FTC challenge doesn’t ultimately prevail, a protracted legal fight could prompt the companies to abandon the deal, analysts said. Despite being the nation’s second largest company, Microsoft has escaped much of the scrutiny lobbed at its peers. Its experience with regulators and proactive communications about the deal could make a difference in winning approval, said Elevation’s Chan.