To The Moon

Microsoft‘s $68.7 billion deal to buy Activision Blizzard is no sure thing.

Takeover arbitrageurs are assigning a roughly 60% likelihood to the acquisition being completed given the antitrust scrutiny that it will likely receive.

Shares of Activision Blizzard (ticker: ATVI) shares gained 25.9%, or $16.92, on Tuesday, to $82.31, but trade appreciably below Microsoft‘s (MSFT) all-cash takeover offer of $95 a share. If Wall Street were confident that the deal would be approved, Activision shares would likely be trading close to $90.

To figure out the implied odds of the deal getting done, arbitrageurs take the stock gain today of $16.92 and divide that into the total potential advance of nearly $30 a share measured from Friday’s close if the deal gets completed.

That math works out to just under 60%. It requires an assumption of where Activision Blizzard would trade if the deal breaks. For this calculation, we are assuming that the stock trades back close to where it ended Friday. It’s also assumed that the acquisition will close in just over a year.

For those investors willing to bet that the deal gets completed then, they stand to earn a 15% return. That is high relative to more typical arbitrage returns in the mid-single digits.

Microsoft shares fell 2.4%, to $302.65, on Tuesday.

The good—but not overwhelming—odds of success reflect the tough antitrust environment under President Joe Biden, given new regulators like Lina Khan, the chairwoman of the Federal Trade Commission, who have expressed skepticism about big mergers. The transaction also needs regulatory approval in China, which is viewed as a wild card and tough to predict.

“Some people just don’t want Microsoft to get bigger,” one arbitrageur tells Barron’s.

While Microsoft has received less critical attention from regulators and lawmakers of late than have mega-cap tech peers Alphabet (GOOGL), Amazon.com (AMZN), Meta Platforms (FB), and Apple (AAPL), it is a giant. Microsoft is the second-largest company in the world by market capitalization, at $2.3 trillion, trailing only Apple at $2.8 trillion.

As Microsoft pointed out in announcing the deal, the transaction will make it the world’s third-largest player in gaming by revenue, trailing only Tencent Holdings (TCEHY) and Sony (SONY) — and the largest U.S.-based player.

As my Barron’s colleague Eric Savitz pointed out earlier, Microsoft hasn’t had as much regulatory scrutiny.

“But there are complicated relationships here that regulators will no doubt scrutinize,” Savitz wrote. “For instance, Activision games like Call of Duty are popular on the Sony PlayStation platform, the primary rival to Microsoft’s Xbox game console. It is likely that regulators will want assurances that Microsoft won’t limit Activision games to Xbox. And there are good reasons to ask the question—you can’t play Microsoft’s popular game Halo on a PlayStation, for instance.”

Officials from the FTC and Justice Department declined to comment on the deal during a joint press conference Tuesday to announce a new review of merger guidelines.

The Microsoft/Activision deal shapes up as a key test of the Biden administration’s stance on big mergers. Wall Street not surprisingly is taking a cautious approach given the antitrust environment in Washington.