Microsoft Acquisition of Activision
Deal Overview:
Announcement Date: 18th January 2022
Industry: Electronic Gaming & Multimedia
Deal value: $68.7bn
Deal consideration: Microsoft Corporation (NYSE: MSFT) has entered a definitive agreement to acquire Activision Blizzard Inc (NYSE: ATVI) for $95 per share in an all-cash transaction valued at $68.7bn ($75bn including $6.87bn in net cash).
Microsoft Corporation Advisors: Goldman Sachs Group Inc. is serving as the exclusive financial advisor whilst Simon Thacher & Bartlett LLP are serving as legal counsel to Microsoft.
Activision Blizzard Inc Advisors: Allen & Company LLC is serving as the exclusive financial advisor, whilst Skadden, Arps, Slate, Meagher & Flom LLP are serving as legal counsel to Activision Blizzard.
Expected Completion: 30th June 2023
Microsoft Corporation Details:
Founded: 4th April 1975
HQ: Redmond, Washington, United States
Market Cap: $2,294bn
EV: $2,290bn
LTM EBITDA: $90.83bn
EV/LTM EBITDA: 25.21
Brief overview of company:
Microsoft Corporation is an American multinational technology company that develops and supports a wide range of software products, devices, and solutions. Microsoft is headquartered in Washington State, United States but operates globally across 181 countries. Its most reputable products include Microsoft Office, Microsoft Azure, Internet Explorer web browser and Xbox console.
Microsoft is publicly listed on the NASDAQ stock exchange, and a major component of the S&P 100, NASDAQ 100 and DIJA. It’s $2,294bn market cap, makes it the second largest company in the world, recording revenues of $161bn in 2021 and employing over 180,000 people worldwide.
Activision Blizzard Inc Corporation Details:
Founded: 10th July 2008
HQ: Santa Monica, California, United States
Market Cap: $61.74bn
EV: $54.68bn
LTM EBITDA: $3.84bn
EV/LTM EBITDA: 14.24
Brief overview of company:
Activision Blizzard is a global developer and publisher of interactive entertainment content. The company operates through its three key subsidiaries; Activision Publishing, Inc. (Activision); Blizzard Entertainment, Inc. (Blizzard) and King Digital Entertainment. (King). They deliver content through premium and free to play content, Blizzard develops and publishes entertainment software for creating and maintaining games and King delivers content for mobile devices. They have created a number of successful titles and series, including, Call of Duty, Crash Bandicoot and Candy Crush Saga.
Activision is headquartered in CA, United States but delivers content to users across 196 countries. Activision Blizzard is listed on the NASDAQ stock exchange and a component of the NASDAQ-100 and S&P 500. They generate more than $8.8bn in revenue and employ 9,500 people worldwide.
Strategic Rationale.
Microsoft is acquiring Activision Blizzard for $75bn which includes their $6.37bn of net cash, valuing the deal at $68.7bn. This price is a 45% premium over the stock NASDAQ:ATVI price at the time of the announcement.
Despite what would be Microsoft’s, and the tech industries, largest acquisition ever, the $75bn price tag is seen as an opportunistic buy by many. Activision Blizzard’s share price has declined by approximately 40% between last February and the deal’s announcement, due to a combination of underwhelming releases and a sexual harassment scandal. This means that the deal is somewhat cheap, once Microsoft’s benefits are factored in, with a P/E (TTM) ratio of 23.39.
In the past year, Microsoft has added $1trn in market share whilst bloating the cash on its balance sheet to $130bn. This means Microsoft can finance this deal without raising debt or issuing debt, paying for it entirely with cash-on-hand.
Mobile gaming — King
Newzoo estimates that in 2021, 2.8 billion people played mobile games, generating more revenue than the global film and music industries combines. The future is promising too, with the mobile gaming market expected to explode to $272bn by 2023. Despite, their wide potential range, Microsoft has struggled to secure a foothold. Last year, Minecraft Earth was shut down for good, with smartphone racer Forza Street also planned to close in the near future.
In contrast, Activision Blizzard has gone from strength to strength. Analyst firm Sensor Tower estimates that since January 2014 Candy Crush Saga has generated $7.1bn in revenue, whilst its spinoff Candy Crush Soda Saga has taken in an additional $2.9bn. Furthermore, in its partnership with Tencent, Call of Duty Mobile, was the most successful mobile game launch of all time, with 100 million downloads within the first week of going live in 2019.
Acquiring Activision Blizzard will give Microsoft access to King’s monthly user base of 245 million mobile users, whilst opening up the possibility of releasing big titles, which have historically been restricted to console.
Wider trend of consolidation
Early 2022 has continued the trend of wider consolidation within the Gaming Entertainment industry over the past couple years. Notable transactions, include Take Two Interactive’s purchase of Zynga for $12.7bn, and more recently, Sony’s acquisition of Bungie for $3.6bn. In typical M&A fashion, acquisitions have led to more acquisitions. In fact, in the past year alone, there was $38bn of M&A activity within the gaming industry. The effects of this are clear to see in the image to the right, where consolidation has left a handful of firms controlling all the key players in the industry.
After closing the deal in 2023, Microsoft will be the third largest video-gaming firm by revenue, allowing it to better compete with the likes of Tencent and Sony Interactive Entertainment. Additionally, with reports that EA and Sony were in the mix, Microsoft’s acquisition could be considered a defensive move, to prevent its rivals from strengthening further.
Metaverse
Games are no longer just places where people go to unwind, instead it’s a new way to socialise entirely, whether its watching TV shows, film previews or even live concerts. In an interview with the Financial Times, Satya Nadella, the CEO of Microsoft, discussed the similarities between how people interact in the metaverse and in gaming, “You and I will be sitting on a conference room table soon with either our avatars or our holograms or even 2D surfaces with surround audio. Guess what? The place where we have been doing that forever… is gaming.” This acquisition will not only create more immersive gaming experiences for its users but also help lay the foundation of Microsoft’s vision for the Metaverse.
Game Pass
Earlier this year, Xbox Game Pass reached 25 million subscribers, a 28% increase on the previous year. The acquisition of Activision Blizzard aligns closely with Microsoft’s strategy of acquiring Bethesda and ZeniMax, which have seen a significant number of legacy games re-introduced to the new-generation consoles through Xbox Pass. A similar plan is in store to re-monetize Activision Blizzard’s vast library of 1,483 titles, some of which go back to the 1980s. This is something Activision Blizzard has previously been unable to explore, as they don’t have their own cloud gaming platform, and were therefore locked out due to high costs. Microsoft, on the other hand, can leverage its Azure cloud platform to bring back these beloved titles.
When discussing the potential acquisition, Phil Spencer, Xbox CEO, says that they plan to offer “as many Activision Blizzard games as we can within Xbox Game Pass.” Similarities have been drawn between Xbox Pass and Netflix’s current subscriber base in 2012. Netflix saw its 25 million subscribers explode to 200 million, in 2021, once it began investing in original content. Bringing back classic and legacy games from Activision Blizzard’s past, would appeal to a wider gaming audience, especially on mobile devices. This takes the fight to Sony, who are preparing to launch an updated PlayStation Now gaming service in the near future.
Risks
Sexual Harassment Scandal
Microsoft, who have recently reviewed its own sexual harassment policies, following the news that Bill Gates had propositioned employees, will face an uphill battle to integrate and clean-up Activision Blizzard’s “frat boy” party culture, considering last year’s sexual harassment scandal.
The $68.7bn deal is in direct contrast to the comments made last November by Xbox Chief, Phil Spencer, who said the company would be “re-evaluating its relationship” with Activision Blizzard. Since July, 37 employees have been pushed out or fired, with another 44 disciplined. It is expected that Microsoft will further these strides towards a more respectful workplace culture, by asking for the resignation of CEO Bobby Kotick, following the closure of the deal.
Poor Quarterly Results
Activision Blizzard’s recent quarterly earnings fell short of analysts’ expectations, with net bookings down 18% to $2.49bn, and active monthly users declining by 28m when compared to the previous year. This was predominantly due to Activision Blizzard’s current releases with Call of Duty Vanguard not living up to Wall Street’s expectations, and the postponement of Overwatch 2 and Diablo IV following multiple employee walkouts. With the acquisition expected to close by June 2023, Activision Blizzard will have to stand on its own feet for five more quarters.
Antitrust Approval
The acquisition was announced just hours before the FTC and DOJ declared their intent to revise merger guidelines, to prevent large deals and take a more forceful approach to antitrust enforcement, for potentially anticompetitive transactions. Considering the size, scope and industry of this acquisition, this deal is likely to be examined with a fine toothcomb by the FTC, with the decision ultimately setting the tone for a new era of antitrust enforcement.
This review builds on the current administrative stance, following an executive order by Joe Biden last year, making it clear that addressing consolidation was a top priority, whilst the appointment of Lina Khan as FTC chair, has once again, spotlighted the idea of breaking up big tech.
There are concerns that if successful, Microsoft would have the ability to make Activision Blizzard’s titles exclusive to Xbox consoles and Windows-powered computers, effectively shutting out rivals Sony and Nintendo. When Microsoft acquired ZeniMax Media in 2020, it said it would honour the terms of ZeniMax’s existing publishing agreements with Sony, but that any new games would be considered “on a case by-case basis.” Similar comments were made by Phil Spencer on the Activision Blizzard acquisition, “ I confirmed our intent to honour all existing agreements upon acquisition.” This raises questions over whether Microsoft could, at some point in the future, deprive its rival of a bestselling title. Alternatively, Microsoft could prioritise and promote Activision Blizzard’s games on the Microsoft Store over rivals, such as EA.
However, according to Jennifer Rie, in order to block the acquisition, the FTC would need to demonstrate that post-merger “Microsoft would have the incentive and ability to foreclose rivals by virtue of owning Activision assets,” an argument which is unlikely to hold up in court. This sentiment is clearly shared by Microsoft, who agreed to a relatively high break-fee of $3bn in the deal, indicating their confidence in winning anti-trust approval, and closing the deal by June 2023.
Analyst: Callum Harris
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