The new week brought fresh declines on Wall Street, as stock investors once again struggled to deal with rising interest rates. The yield on the 10-year Treasury climbed above 1.8%, and while that's still extremely low by historical standards, the move was enough to send another warning shot across the Nasdaq Composite's (^IXIC 1.50%) bow. As of 12:30 p.m. ET, the Nasdaq was down more than 2%, sending it more than 10% below its recent record highs.
Even in a down market, there was a standout winner among Nasdaq stocks. Activision Blizzard (ATVI) soared on news that it was an acquisition target, marking continued consolidation activity within the video game industry. Moreover, the size of the deal suggests that companies with a ton of cash on their balance sheets might finally be looking for ways to put that money to use in an increasingly inflationary environment. Below, you'll learn more about what Activision revealed and what it could mean both within the video game industry and elsewhere.
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Leveling up for Activision
Activision shares were up nearly 25% in early afternoon trading on Tuesday. The gains came amid news that Microsoft (MSFT 1.41%) had offered to acquire the video game giant in a deal valuing Activision at a whopping $68.7 billion.
Under the terms of the deal, Activision shareholders would receive $95 per share in cash for their stock. With the stock having closed last Friday at just over $65 per share, the premium of roughly 46% presented a huge potential jackpot for shareholders.
The combination would have a major impact on Microsoft and the industry. It would make Microsoft the third-largest video game company in terms of sales, trailing only Tencent Holdings and Sony. It would bring key franchises including World of Warcraft, Call of Duty, and Candy Crush under the Microsoft corporate umbrella, as well as the major presence in esports that Activision has managed to build in recent years. The move further supports the commitment to video games that Microsoft has had for years, with its Xbox console and associated games for desktop and mobile devices as well.
More broadly, Microsoft's move might become a key plank in larger efforts to counter Meta Platforms (META 2.49%) and its new emphasis on the metaverse. The press release announcing the acquisition made oblique references to the deal providing "building blocks for the metaverse," and CEO Satya Nadella added his belief that video games "will play a key role in the development of metaverse platforms."
A new trend?
Elsewhere in the video game industry, stocks saw follow-on gains. Electronic Arts (EA 0.27%) was up more than 4%, as investors probably see the company as a potential target for any of Microsoft's and Meta's peers looking to buy their way into gaming. Take-Two Interactive Software (TTWO 1.82%), which already has a pending merger with Zynga (ZNGA) in process, was up almost 3%.
Beyond video games, though, Microsoft's acquisition shows just how much buying power big companies have right now. To put the Activision deal in perspective, Microsoft itself had more than $130 billion in cash and short-term investments as of Sept. 30, meaning that even this massive deal uses up only a little over half of its available reserves. Plenty of other businesses have even more capital ready to deploy.
Rising interest rates make holding bonds dangerous, and that might spur more companies to follow Microsoft's lead and start making M&A deals of their own. That in turn could help trigger a rush toward high-quality companies that could further widen the divide between blue chip stocks holding up reasonably well and shares of less well-established companies remaining under substantial pressure for the near future.
