By Christopher Shim, Rohan Shah, Robert Szongoth (University of Cambridge), James Muse, Jack Briody (Columbia University)
Overview of the deal
Target: Bethesda (ZeniMax Media)
Total Transaction Size: $7.5 Billion
Anticipated close date: H2 2021
Target advisor: Goldman Sachs
In a bid to strengthen their video game offerings, Microsoft has agreed to acquire ZeniMax Media from Providence Equity Partners in a definitive agreement for $7.5 billion in cash. The deal is anticipated to close the second half of the fiscal year 2021. ZeniMax, which publishes interactive entertainment content for consoles, is the parent company of Bethesda Softworks, the developers behind hit game titles including Fallout and Doom. Zenimax has raised more than $600 million from investors, reaching a valuation of $2.5 billion in 2016. The acquisition will significantly strengthen Microsoft’s gaming portfolio, and the structure and leadership of Bethesda Softworks will remain in place, with over 2,300 Zenimax employees being absorbed by Microsoft. After the acquisition, Microsoft will own more than twenty creative studio teams and plans to bring Bethesda’s future games into the monthly Xbox Game Pass subscription which already boasts over 15 million subscribers.
The gaming sector has seen a surge in demand as users are stuck at home during the COVID-19 pandemic. Both Microsoft and Sony are releasing their next-generation gaming devices in November. This deal will give Microsoft more strong titles in its gaming library, which is a major factor for gamers choosing a console.
“Content is just the incredible ingredient to our platform that we continue to invest in. This doubles the size of our creative organization.” - Phil Spencer, Xbox Chief
Company Details: Acquirer - Microsoft
Microsoft Corporation is an American multinational technology company founded by Bill Gates and Paul Allen in Albuquerque, NM in 1975. The company develops, manufactures, licenses, and sells computer software, electronics, and personal computers. Microsoft’s products include Microsoft Windows operating systems (OS), the Microsoft Office suite, Internet Explorer and Edge web browsers, the Xbox video game console, and the Microsoft Surface line of touchscreen computers.
Founded in 1975, headquartered in Redmond, WA
CEO: Satya Nadella
Number of employees: 156,500
Market Cap: $1,560.4 Billion (as of 02/11/2020)
EV: $1,449.8 Billion
LTM Revenue: $143.0 Billion
LTM EBITDA: $65.8 Billion
LTM EV/Revenue: 10.4x
LTM EV/EBITDA: 22.6x
Company Details: Target - Bethesda (ZeniMax Media)
Bethesda is a video game publisher based in the United States. It was originally founded by Christopher Weaver in 1986, and in its first 15 years, the company primarily focused on developing video games. However, in 2001, Bethesda formed its own in-house development team into Bethesda Game Studios. Since then, it has acted as a publisher for all games developed by ZeniMax Media.
Founded in 1999, headquartered in Bethesda, Maryland
CEO: Robert A. Altman
Number of employees: 2300+
EV: $7.5 Billion
Projections and Assumptions
In February earlier this year, Phil Spencer, Microsoft’s Head of Gaming, explained that Microsoft has “a tonne of respect for [Nintendo and Sony], but [Microsoft] see[s] Amazon and Google as the main competitors going forward.” While clearly competition with the aforementioned cloud-computing giants will be a critical vertical in the determination of Microsoft’s continued success in the gaming world, Microsoft’s acquisition of ZeniMax Media indicates that the company still understands the importance of competing with Sony over gamer subscriptions. The move will expand Microsoft’s studio team count from 15 to 23, as compared to Sony’s 19 following their acquisition of Insomniac Games in 2019.
Further, Microsoft will take on a multitude of high-profile names such as Elder Scrolls, Doom, Fallout, Quake, Wolfenstein, Prey, and Dishonored. These titles will be added to the Xbox Game Pass, which is a huge win for Microsoft on the cloud gaming front. Starfield will be added on launch day, which should further increase Game Pass membership figures. According to Reuters, since April, the subscription service is up 50% to 15 million users, with continued growth expected as COVID raises demand for new games. In general, the cloud gaming market is expected to continue accelerating, with anticipated market values more than doubling from $1.15 billion in 2019 to $2.70 billion in 2025 for a 15.3% CAGR from 2020 to 2025 based on a Mordor Intelligence report.
Microsoft’s acquisition will fold in assets including global development studios, 2,300 employees, publishing offices, and more. Additionally, Microsoft gains access to critically acclaimed franchises such as The Elder Scrolls, Fallout, and Wolfenstein, giving the company an edge over other gaming industry competitors. Given that the gaming industry is expected to have more than $200 billion expected revenue in 2021, this is a critical move for Microsoft to strengthen its position in the sector. Microsoft’s timing is notable. The acquisition comes before Microsoft, one of the largest console manufacturers, releases the next-generation Xbox. The implication is that the next series of Elder Scrolls will be on Xbox and not on Sony’s competing product, the Playstation 5, which is also due to come out soon. This could be a significant factor for many customers deciding which console to purchase.
The acquisition of Bethesda will improve the value and demand for the Xbox Game Pass, supporting the subscription-based revenue stream and reducing fluctuations in Microsoft’s revenue from the division. For Bethesda, this provides a number of potential upsides, including the access to more resources and unique Xbox-optimisation of their games, helping them to perform better on their exclusive console. Combined, the increased value of the Xbox Game Pass and the exclusivity of a number of best-selling titles will significantly increase revenue growth and give a competitive edge to Microsoft in the lead-up to the new console releases.
Risks and Uncertainties
Microsoft’s acquisition is subject to regulatory review along with customary closing conditions, the primary risk factor for this transaction, given antitrust concerns in other areas of the company’s business. Microsoft expects that the acquisition will close within the second half of fiscal year 2021 and will have an almost nonexistent impact on non-GAAP operating income, for both fiscal years 2021 and 2022. Non-GAAP excludes the integration and transaction-related expenses, as well as purchase accounting adjustments. Furthermore, there lies the risk that acquisition does not significantly change consumer preferences of Xbox/PS. There also stands the risk that Zenimax’s portfolio of games is old and will lose traction.
“We have enjoyed a close partnership with Microsoft for decades, and this deal is a natural progression of those years working together,” - Robert A. Altman, CEO of ZeniMax Media