The Deal of the Century

Dear Reader,

On Friday, the Ninth Circuit Court handed Microsoft a win.

Fifteen months ago, Microsoft agreed to acquire video game maker Activision Blizzard for $69 billion. However, the deal faced hurdles.

Stateside, the Federal Trade Commission (FTC) tried to halt the deal.

Microsoft is a gaming hardware maker with its series of Xbox consoles. Activision is among the top five largest game developers.

Regulators were worried about Microsoft controlling too much of the market and limiting options for consumers.

But the recent ruling removes the largest barrier to completing the deal. Microsoft still faces a challenge in the U.K. But the company believes it can overcome this challenge by October.

Microsoft’s victory in the U.S. court system was a win for the company and any investors in Activision. Shares popped 3% this week as much of the uncertainty around the acquisition fell away.

But to me, this also signals something important for future dealmaking… and a major prospective deal between two iconic companies.

A Greenlight for M&A

FTC chairwoman Lina Khan is known for her aggressive stance toward corporate mergers and acquisitions (M&A). She made a name for herself in 2017 when she published the report, “Amazon’s Antitrust Paradox.” She assumed office in 2021 under the new Biden Administration.

Kahn’s presence made companies more hesitant to pursue potential acquisitions. As the Microsoft/Activision case showed, an aggressive FTC chair can tie companies up with legal distractions for years.

But the resolution of the Activision deal could be a “greenlight” for new M&A activity. After all, if such a high-profile acquisition can be cleared, it would make companies more comfortable pursuing new deals. And that’s important right now, for a few reasons.

Many large tech companies enjoyed rising stock prices for years when rates were low and investors were eagerly buying growth stocks. The market has rebounded in recent months, but the economy is still not as strong as it once was. Organic growth will be harder to come by. And that means many companies will be looking to “buy” growth and new revenue. And that means M&A.

And you might be surprised to learn which two companies could be lining up to make what I believe would be the deal of the century.

Apple & the Mouse

I predict that Apple (AAPL) will make an offer to acquire part of the business now owned by the Walt Disney Company (DIS) within the next six to 12 months. That might seem rather bold, but it’s not as crazy as we might think.

Apple holds $55 billion in cash and $110 billion in securities that can easily be converted to cash. Apple could buy a company like Morgan Stanley, Intel, or Lowe’s outright.

But it doesn’t need to. It can issue bonds and pay an interest rate similar to U.S. Treasuries.

With a $3 trillion valuation, Apple can fund deals with any combination of cash, debt, and equity. Banks would trip over themselves to lend money to one of the most iconic companies in American history.

Apple’s acquisition troubles aren’t financial, they’re legal.

One of the FTC’s tasks is to prevent business unions that stifle competition. That gives them the power to flag acquisitions like the Microsoft and Blizzard deal.

In the past, the FTC blocked mergers like Nvidia and Arm, Aetna and Humana, and AT&T and T-Mobile in recent years.

But the Microsoft and Blizzard deal getting court approval opens the door for Apple to make a very specific acquisition.

A Play for Media

Apple launched Apple TV+ in 2019, featuring a range of original content. In 2023, the company achieved a record 54 Emmy Nominations for its original content. 

Apple is also going after live sports. It signed a seven-year deal with Major League Baseball in 2022 to stream exclusive games on Apple TV+. A similar deal brought every televised Major League Soccer match to Apple devices for the next 10 years. 

Apple’s interest in media has everything to do with incentivizing users to purchase Apple TV devices and Apple TV+ subscriptions. Importantly, Apple wants users to maintain their subscriptions and not cancel after watching one or two shows.

Streaming has become more competitive in recent years. But the benefits to companies that can grow and maintain subscribers are the same: recurring revenue which can lead to higher valuation multiples for the stock.

For now, Apple has stuck to mostly original content and licensing deals to avoid FTC intervention.

But now that the FTC lost its case against Microsoft, Apple’s team of lawyers can use its precedent to support a major media acquisition. As I said, I think that acquisition is Disney – or at least part of it.

Perfect Timing

Earlier this month, Disney’s CEO Bob Iger hinted at selling off TV assets like the ABC and ESPN channels.

That’s following a $1 billion decline in operating income from linear TV and continued losses from streaming services eating into the profitability of its theme parks.

In a recent interview, Iger stated:

If [a strategic partner] comes to the table with value, whether it’s content value, distribution value… that enables ESPN to make a transition to a direct-to-consumer offering, we’re gonna be very open-minded about that.

Around the same time, Iger and the NBA were praising Apple’s mixed-reality headset, the Vision Pro, for watching basketball games. Iger even made an appearance during the virtual launch of Apple’s Vision Pro Headset.

Apple buying even a portion of Disney’s TV content draws a similar parallel to Microsoft buying Activision… a hardware maker buying a major content maker.

The idea of these two companies joining forces is not entirely new.

In a 2019 autobiography, “The Ride of a Lifetime,” Bob Iger stated, “I believe that if Steve Jobs were still alive, we would have combined our companies, or at least discussed the possibility very seriously.”

Also, Apple’s Vision Pro is slated to release in early 2024. It needs a strong use case to find mass adoption. At $3,500 per unit, it’d have to sell 11.2 million units of Vision Pro to grow its revenue by 10%.

Roughly 232 million Americans follow pro-sports. If Apple can make the Vision Pro appeal to even a small piece of this audience, it could potentially sell millions of units.

I believe Apple is considering acquiring at least ESPN from Disney… if not the entire linear TV division.

Apple wouldn’t need to acquire the entire company, which encompasses popular theme parks in California, Florida, and around the world.

Apple is a $3 trillion company. Growth will be harder to come by unless Apple does something dramatic. And we shouldn’t be surprised if, sometime in the near future, we hear a commentator say, “Welcome to SportsCenter, exclusively on Apple TV+ and Apple Vision Pro.”

Regards,

Colin Tedards
Editor, The Bleeding Edge