Activision/Vivendi Merger Brings Blizzard of Benefits

Last weekend, Activision (ATVI) announced an exciting merger with Vivendi (V). The offspring, Activision Blizzard, will combine the two companies’ video game units and leave Vivendi with 68% of the outstanding shares. To initiate the deal, Vivendi will be tossing in $1.2 billion while Activision will make a cash tender offer for up to 146.5 million shares at $27.50.

SmartGuyStocks readers who bought the ATVI calls I recommended are getting an early holiday gift. The question now is whether to sell and take the gains, hold longer, or exercise the options closer to expiration.

If you scaled into your position and are sitting on gains of 100-300%, by all means, take some or all off the table. Otherwise, there is an arbitrage gap that will continue to approach $27.50 as we get closer to the merger date in mid 2008. The only way the stock will not ultimately reach $27.50 (and beyond) is if the deal falls apart. I think this is highly unlikely given the great benefits to both companies and the lack of antitrust issues.

The only snag I envision would be shareholders demanding a higher price. However, given that the deal should close in approximately six months, it’s hard to prove ATVI would be trading higher in such a short period of time (especially given the recent run up).

If you are very bullish on the deal and expect Activision Blizzard to be the new guerrilla on the block, you may consider exercising your options (when your strike price reflects an underlying stock price as close to $27.50 as possible) and holding the new shares. The video game industry is growing faster than the S&P, so the shares should outperform.

Moreover, Electronic Arts (ERTS) may lose priority in fund managers’ portfolios, and rebalancing holdings in favor of ATVI may push Activision Blizzard higher. I will most likely call the shares to maximize the move to $27.50. But I will let you know closer to expiration.

No matter what you do with your ATVI calls, the windfall should make you hum the jingle bell rock on Christmas morning when your children or friends are jamming out to their new Guitar Hero III.

Disclosure: SmartGuyDH owns ATVI calls.