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Microsoft closes the deal; Arm has Wall Street salivating: Weekly tech roundup

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By Louis Juricic and Sarina Isaacs

— Here is your weekly Pro Recap on the biggest headlines out of a big earnings week for tech: Microsoft closes the deal – and owes a boatload of taxes; Arm Holdings earns top ratings from analysts; Netflix slashed.

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Microsoft closes Activision deal, owes billions to the IRS

Microsoft (NASDAQ:) and Activision Blizzard (NASDAQ:) have finally completed the transaction to merge – Microsoft’s largest deal in its 48-year history – after intense regulatory scrutiny and related delays, per the deal that the companies announced back in January 2022.

In accordance with that agreement, Activision Blizzard became a wholly owned as a subsidiary of Microsoft – Anchorage Merger Sub Inc. – merged with and into Activision Blizzard.

Microsoft successfully addressed myriad competition concerns from U.K. and European regulators and received a favorable ruling from a U.S. district judge in this regard, and the news came after the U.K.’s Competition and Markets Authority (CMA) said the buyout, excluding cloud gaming rights, would help maintain competitive pricing and improve services.

Still, even after the closing of the deal, the U.S. Federal Trade Commission said it continued to oppose the pact and remained focused on its appeal against it.

“Today we start the work to bring beloved Activision, Blizzard, and King franchises to Game Pass and other platforms,” Microsoft Gaming CEO Phil Spencer said in a blog post.

Separately, Microsoft revealed in an 8-K filing that the IRS (Internal Revenue Service) has notified the company of a $28.9 billion back-tax claim, along with penalties and interest, for the tax years 2004 to 2013.

This dispute revolves around how Microsoft allocated profits across various countries and jurisdictions during that period. Microsoft also notes that the proposed adjustments are taxes paid under the Tax Cuts and Jobs Act (TCJA), which could potentially reduce the final tax liability under the audit by up to $10B.

The company intends to appeal the IRS’s claim, and the company does not anticipate any immediate changes in its tax liabilities, as the IRS Appeals process is expected to take several years to complete.

Analysts at BofA don’t expect to see material impact on FY24/25 EPS or FCF, writing, “The $28.9 billion represents 111% of Microsoft’s deferred income tax liabilities and 45% of the company’s net cash balance.”

Microsoft shares barely budged for the week, closing Friday at $327.73.

Arm Holdings picks up slew of buy ratings

Chip designer Arm Holdings (NASDAQ:) earned a series of top ratings from several major brokerages following its highly anticipated IPO last month, bringing an end to a customary quiet period for Arm’s underwriters.

Arm’s debut garnered $4.87 billion for the company’s 90% owner SoftBank (TYO:) in the largest listing so far this year.

Arm, which holds a near-monopoly in terms of share of the lucrative smartphone market, has been hit by a recent downturn in demand for the devices.

But in notes to clients, a raft of key brokerages initiated their coverage of Arm with buy-equivalent ratings, citing optimism around the firm’s plans to generate revenue through elevated royalty fees and its focus on building its presence in cloud and automotive markets.

“We believe these strategic shifts and the higher royalty rates they can command should accelerate the company’s revenue growth and further expand the valuation premium at which the company historically traded, based on the uniqueness and ubiquity of its technology ecosystem as well as the highly profitable and predictable nature of its business model,” analysts at Deutsche Bank said, giving Arm a Buy rating and a price target of $60.

Goldman Sachs, which set a price target of $62, also predicted that Arm would continue to bolster its smartphone dominance through the increased royalties.

Other analysts at Citi, Mizuho and TD Cowen also delivered price targets of between $60 to $70, with JPMorgan taking the most bullish view.

Arm shares lost some 6% for the week, closing at $50.78. They had debuted at $51.

Netflix loses Outperform rating at Wolfe Research

Netflix (NASDAQ:) took a hit Friday trade after Wolfe Research cut the streaming giant’s rating to Peer Perform from Outperform.

“2024 ARPU [average revenue per user] expectations look full, while today’s paid-sharing net adds lead to tomorrow’s gross add shortfalls,” the analysts wrote in a downgrade note.

While Netflix has been expanding its share of the global premium video revenue, the analyst flagged 2024-2025 growth forecasts as being too optimistic.

“If future growth falls short, we doubt that NFLX’s 50% P/E and 70% EV/EBITDA premium to the S&P would hold up,” they added.

The firm’s prior bullish thesis was built on the expected transition from a land-grab phase to a more efficient one that aims to monetize existing viewership by addressing issues such as ad-supported video-on-demand (AVOD) and password sharing among 100 million global users.

“With reports of slow AVOD adoption, recent ARM shortfalls signaling trade down, management signaling less margin expansion, and a lack of compelling 3P data on sub growth, we believe the risk/ reward for NFLX is balanced,” the analyst said.

Shares lost nearly 7% for the week to $355.68.

Senad Karaahmetovic and Scott Kanowsky contributed to this report.

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