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Satya Nadella, CEO of Microsoft.
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Microsoft tried to set a record in 2008, when then-CEO Steve Ballmer pursued plans to buy Yahoo for about $50 billion. It would have been the biggest U.S. tech deal ever, topping JDS Uniphase’s $41 billion purchase of SDL in 2000.

Fortunately for Microsoft, Yahoo repeatedly rejected its bid. Yahoo was getting trounced by Google in internet search and ultimately ended up selling for $4.5 billion to Verizon in 2017.

Satya Nadella is now trying once again to put Microsoft in the deal record book.

On Tuesday, Microsoft said it’s buying video game publisher Activision Blizzard for almost $69 billion, a price that would narrowly eclipse the richest U.S. tech deal in history. In 2016, Dell purchased EMC for $67 billion. The JDS-SDL deal comes next, followed by IBM’s $34 billion acquisition of Red Hat, which closed in 2019.

Microsoft still has to win approval from Activision’s shareholders and, more importantly, from regulators. Two recent mega-deals in the semiconductor industry — Nvidia’s effort to buy Arm and AMD’s agreement to purchase Xilinx — have both been held up in regulatory review for over a year.

For Microsoft, the purchase price is more than double what the 47-year-old company has ever paid. Its top previous acquisition was LinkedIn in 2016, which cost over $26 billion.

But Nadella, who succeeded Ballmer as Microsoft CEO in 2014, has the capital to spend and an investor base that’s urging him to be aggressive.

Proportionally small

At the time of the LinkedIn announcement, Microsoft was valued at about $400 billion, so the purchase amounted to roughly 6.5% of its market cap. When it tried to buy Yahoo, Microsoft’s market cap was around $260 billion, meaning it would’ve been giving up almost 20% of the company.

Today, Microsoft has a valuation of almost $2.3 trillion and is paying just 3% of its market cap for Activision.

Rather than using its increased stock value, Microsoft is paying Activision investors in cash. It’s a hefty load, but Microsoft can afford it. As of Sept. 30, the company was sitting on $130 billion in cash and equivalents, with 85% of that in the form of short-term investments.

Microsoft’s purchase price is a 45% premium over Activision’s closing price on Friday. But Microsoft investors seem fine with it. The stock fell just 2.4% on Tuesday — in line with many other tech stocks in an overall down day for the market.

That’s partly due to Nadella’s proven success in integrating previous acquisitions, including LinkedIn and GitHub, which Microsoft bought for $7.5 billion in 2018. But it’s more a reflection of the excitement around gaming and Microsoft’s potential to expand its presence beyond the Xbox and its existing subscription service called Game Pass.

“The all-cash offer to acquire ATVI for $68.7B represents the largest acquisition in Microsoft’s history but also brings attractive strategic value, particularly within the consumer technology sector where Microsoft has a smaller product portfolio,” wrote Piper Sandler analysts, who recommend buying the shares, in a note after the announcement. “Gaming and advertising represent two segments that combined represent an incremental $1 trillion share gain opportunity for Microsoft longer-term.”

Microsoft is also taking advantage of a regulatory environment that has been pressuring Big Tech but has mostly left Microsoft alone. Executives from Google, Apple, Facebook and Amazon have in recent years faced the wrath of elected officials, who are concerned about advertising, commerce and mobile data consolidating into too few hands.

While those mega-cap companies have been mostly limited to small acquisitions in tangential markets, Microsoft continues to swing big.

“From a regulatory perspective, MSFT is not under the same level of scrutiny as other tech stalwarts (Amazon, Apple, Facebook, Google),” wrote Dan Ives, an analyst at Wedbush Securities, in a report. “Ultimately Nadella saw a window to make a major bet on consumer while others are caught in the regulatory spotlight and could not go after an asset like this.”

Still, a deal of this size is sure to raise eyebrows in Washington, D.C., and will test whether Microsoft still maintains such goodwill.

Activision closed up 26% on Tuesday at $82.31, or 13% below the agreed acquisition price. That’s a clear sign that investors aren’t convinced the tie-up will make it to the finish line.

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