By Nancy Huang (University of Melbourne) and Tudor Popescu, Bella Chen, Devashree Goenka, Jaden Wu, and Max Averbach (UChicago)
Photo: Jeremy Bezanger (Unsplash)
Overview of the deal
Acquirer: Microsoft
Target: Activision Blizzard
Implied Equity Value: $61.6 bn
Total Transaction Size: $68.7 bn
Closed date: Ongoing
Acquirer advisor: Goldman Sachs & Co. LLC
Target advisor: Allen & Company LLC
Driven by external factors of technology advancement and customers’ growing appetite in virtual reality gaming, Microsoft takes on an all-cash acquisition of Activision Blizzard, a renowned gaming company known for creating Candy Rush and Call of Duty. The vertical integration into the gaming industry is Microsoft’s attempt to adapt to the landscape of “Metaverse” as technology companies transition to a new internet generation. It's speculated that Blizzard games will be distributed solely through Microsoft platforms post-acquisition, allowing Microsoft to achieve its vision of a single subscription-based online service.
Company Details (Acquirer - Microsoft)
Microsoft is a multinational technology corporation founded in 1975 that currently has the second-highest market capitalization of any firm in the entire world. They specialise in computer software, personal computers, and other computer hardware like Xbox consoles. Microsoft's most known products include the Windows operating system and the Microsoft Office suite.
Founded in 1975, headquartered in Redmond, Washington, USA
CEO: Satya Nadella
Number of employees: 107,000
Market Cap: $2.273 trillion (as of 28/01/2022)
EV: $2.16 trillion
LTM Revenue: $184.9 billion
LTM EBITDA: $90.83 billion
LTM EV/Revenue: 11.70x
LTM EV/EBITDA: 22.79x
Company Details (Target - Activision Blizzard)
Activision Blizzard is an American video game publishing company headquartered in Santa Monica. A leading company in the competitive video game industry, Activision rivals similar giants like Sony and Tencent. The firm owns several significant intellectual properties, including blockbuster games and various Esport initiatives.
Founded in 2008, headquartered in Santa Monica, California, USA
CEO: Bobby Kotick
Number of employees: 9,800
Market Cap: $61.45 billion (as of 27/01/2022)
EV: $55.36 billion
LTM Revenue: $9.05 billion
LTM EBITDA: $3.69 billion
LTM EV/Revenue: 6.14x
LTM EV/EBITDA: 15.00x
Projections and Assumptions
Short-term consequences
Despite Microsoft’s claims of a brisk integration between its entertainment and devices branch and Activision Blizzard, many effects of the acquisition are unlikely to be apparent in the short term.
Firstly, Microsoft has shown a willingness to let its acquiree keep a high level of autonomy. During Microsoft's acquisition of Bethesda, the firm's second-biggest video game acquisition to date, development teams are left to work in much the same manner as under previous leadership. There is no reason to believe that Microsoft would change this behaviour when integrating their most valuable acquisition, especially since the value of Activision’s various Intellectual Properties (IPs) make up the bulk of the nearly $69 billion target price. Some IPs include hit series like Overwatch, Call of Duty, and Diablo. Therefore substantial reorganisations or attempts at synergizing development teams are highly unlikely.
Secondly, Microsoft will not leverage its new IP ownership in the short term. Titles previously owned by an independent Activision are not exclusive to Microsoft hardware. Since Sony and Nintendo still hold Activision titles until 2023/2024, Microsoft can't immediately isolate their newly acquired IPs to their hardware. Therefore it could take up to two years for Microsoft to start hemorrhaging users away from competitors with exclusive titles.
The only exception to the lockup is Microsoft's Gamepass subscription service, which will include Activision IPs immediately after the merger. An all-inclusive subscription model is very lucrative but has seen mild success due to a limited catalogue of lacklustre in-house titles. With the acquisition enabling a large influx of prominent and desired titles, with no announced price hike, there will likely be an immediate increase in Gamepass membership, putting pressure on developers, not within Microsoft's umbrella.
Long-term Upsides
Microsoft’s acquisition of Activision Blizzard will allow them to become the world’s third-largest gaming company by revenue. They will add Activision’s hit games like Call of Duty, Warcraft, Diablo, Overwatch, and Candy Crush to Xbox Game Pass, boosting its subscription service. Microsoft’s Game Pass is a cloud-based subscription service that allows players to access best-selling games.
Projections predict that the cloud gaming market will reach $12 billion by 2026. As Microsoft currently has 60% of the cloud gaming market share, this acquisition will keep them ahead in the market. This acquisition would allow Microsoft to steadily grow Gamepass’ library and charge a premium on the subscription price. Activision will also help Microsoft compete in the metaverse with its know-how and popularity in the gaming industry.
In addition, Activision’s current CEO, Bobby Kotick, who was under fire for ignoring reports of sexual harassment, will leave. Chris Spencer, the head of Microsoft’s gaming division, will take over instead.
Risks and Uncertainties
While the acquisition provides several long-term upsides for Microsoft, it does come with a few risks and uncertainties.
Firstly, Activision Blizzard has been under intense scrutiny for the past six months following sexual harassment allegations, beginning with a lawsuit filed against the company in mid-2021. The firm is under fire for the sexual harassment allegations and discriminatory actions against their female employees, such as unequal pay and hostility. Microsoft is said to be able to deal with all allegations about Activision due to their significant cash storage, which will help them pay whatever is needed to settle the allegations against their newly acquired company. However, the negativity towards Activision Blizzard could cause issues with completing the deal in the fiscal year 2023.
Despite Microsoft’s market share of the gaming industry drastically increasing from the deal, it also faces potential backlash from consumers concerned about data privacy. As Microsoft expands its market share through PC games, consoles, and cloud gaming, it will gain more customers while retaining and using more consumer data. Given that games created by Activision are among the most played globally, that gives Microsoft even more access to consumer data, which threatens to bring broader data privacy issues for their customers.
These uncertainties for Microsoft and risks for their customers are a large part of the deal, and they are issues that it needs to consider when discussing the overall transaction.
“Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platform.” - Satya Nadella, chairman and CEO, Microsoft