M&A: Microsoft’s takeover of Activision Blizzard

Content Team May 16, 2023

The EU‘s decision to approve Microsoft‘s acquisition of Activision Blizzard first muted in January 2022, puts the much-troubled deal a step closer to completion. The deal was initiated in January when Microsoft announced its intent to acquire Activision Blizzard for US $68.7 billion.?

The Japan Fair Trade Commission also approved the merger in March 2023.

However it still faces stiff opposition from the US .and other regulators.

The Consumer Markets Authority in the UK said it would withdraw its objections if Activision Blizzard sold off the Call of Duty franchises. But that is very unlikely, as Microsoft sees the value of the deal in Call of Duty and not so much in Crash Bandicoot.

Microsoft’s bid, when completed, would see its own Activision Blizzard Entertainment under Microsoft Gaming’s own Xbox Game Studios. which would also include the ownership of franchises of Call of Duty, Crash Bandicoot, Spyro, Warcraft, StarCraft, Diablo, Overwatch and Candy Crush.

Too much control of the industry

If approved by international regulators, it would be the largest video game acquisition in history. Uncertainty over the transaction relates to regulators being concerned that a merger would give Microsoft resources that could decimate its competition. Sony argues that the combined company would deny the PlayStation platform of games like Call of Duty.

Head of gaming at Microsoft, Phil Spencer said that ‘’the company would consider licensing rights on a “case-by-case” basis. U.S. Federal Trade Commission (FTC) said it was concerned that the merger ‘’would harm consumers of Activision Blizzard’s games and give Microsoft too much control of certain parts of the industry, such as cloud gaming’’.

Microsoft responded that Sony is the largest platform with exclusive titles that contractually cannot be made for Xbox, adding that they ‘’plan to offer content for multiplayer Bethesda games like Elder Scrolls Online and Fallout 76 for all platforms to avoid undercutting the player base’’.

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

On 23 February, Microsoft met with the EC and advised it had entered into a 10-year agreement with Nintendo to bring Call of Duty to that platform as well as other?first-party Microsoft games with Nvidia as part of their GeForce Now streaming service.

Microsoft Quick Facts

Microsoft currently has the world’s second-highest market capitalisation.
Market Cap: $2.273 trillion
E.V.: $2.16 trillion
LTM Revenue: $184.9 billion,
LTM EBITDA: $90.83 billion
LTM E?V/Revenue: 11.70x
LTM EV/EBITDA: 22.79x

Activision Blizzard Quick Facts

Market Cap: $61.45 billion
E.V.: $55.36 billion
LTM Revenue: $9.05 billion
LTM EBITDA: $3.69 billion
LTM EV/Revenue: 6.14x
LTM EV/EBITDA: 15.00x

The Offer

The deal, which opponents say is allowing Microsoft to buy Activision cheaply due to pending sexual harassment and gender bias lawsuits, places the implied equity value at US $61.6 billion and the total transaction value at US $68.7 billion, a 45 percent premium on the company’s share price after the announcement.

Activision Blizzard’s shareholders approved the acquisition near-unanimously in April 2022. Activision’s shares jumped almost 36 percent on the announcement, while Microsoft’s stock ended the day down by 2.5 percent from its opening price. The all-cash deal still leaves Microsoft with a war chest of cash reserves of around US $70 billion to settle court cases.

What’s behind Microsoft’s Interest in Activision

Activision Blizzard ranks third behind Sony and Tencent. Its 2021 revenues were almost US $9 billion derived from ownership of Call of Duty, Crash Bandicoot, and Spyros; Warcraft, Diablo, StarCraft and Overwatch; and Candy Crush Saga. By April 2021, the Call of Duty franchise had sold over 400 million units.

Gaming is important to Microsoft’s balance sheet, with revenues increasing in 2021 by a third, far ahead of the company’s 18 percent overall revenue growth. But Microsoft has not yet produced a blockbuster title franchise and has relied on third party games to drive subscribers. That said, most divisional profits are derived from Xbox console sales, reflected in the dip in divisional profits when Xbox versions are not released.

Gaming is the most dynamic and exciting category of entertainment across all platforms and gaming will be at the forefront of the development of the emerging metaverse.

Great content from Activision should drive more users to Microsoft platforms and boost subscription numbers for Microsoft’s gaming subscription service Game Pass, allowing gamers to play games across platforms. Game Pass did not meet its aggressive almost 48 percent growth target realising 10 percent shy of the figure a year after its launch.

Vertical Integration

Cloud gaming, game pass licensing and franchising games are anticipated to drive the growth of Microsoft’s gaming division.

Analysts see Microsoft’s attempt at vertical integration reflects the need to adapt to the ‘’Metaverse’’ landscape and achieve its vision of a single subscription-based online service. Microsoft has trails with its Xbox behind PlayStation 5 and the Nintendo Switch and sees its future in cloud gaming.

Cloud gaming allows streaming games from servers, with no need for expensive consoles. Games can be played on devices like TVs, smartphones, and laptops. But for cloud gaming to succeed, an extensive catalogue of games users who can access via a subscription service is needed to explain Microsoft’s interest in the Activision library.

“We had a concern about cloud gaming, which is very nascent right now, but it will grow,” Margrethe Vestager, the EU’s top competition official, told reporters on Monday.

Sony and Nintendo still own Activision titles

Shareholders in Microsoft expressed doubt that there would be short-term gains. When Microsoft acquired Bethesda, they left the team to work autonomously. There is no reason to think it would not do the same with Activision when integrating its most valuable acquisition, where the value of its IP represents most of the deal price. This, analysts argue, makes major reorganisations and cost-saving synergies unlikely.

Sony and Nintendo still hold Activision titles until 2023/2024, so Microsoft may take two years to attract payers away from competitors with its new and exclusive titles.

With Activision Blizzard soon complete, Microsoft will, by revenue, be the third largest gaming company. As Microsoft enjoys 60 percent of the cloud gaming market share, the acquisition will solidify its leadership in the space. Phil Spencer, head of gaming, stated that ‘’Microsoft’s intent with the acquisition is access to Activision’s mobile games, which include Candy Crush Saga. While there are 200 million game console users worldwide, the mobile market reaches over 3 billion people’’.

What prompted Activision Blizzard to sell

CEO of Activision, Robert Kotick, is reported to have stated that he and Microsoft’s CEO Satya Nadella had concerns over Tencent, NetEase, Apple and Google’s growing strength in the market. They believe that Activision Blizzard did not have the expertise in machine learning and data analytics needed to compete. Activision Blizzard is also believed to have talked with other suitors, including Facebook’s parent company Meta Platforms.

EU Commission

The EU Commission found that the Activision takeover would not reduce competition in the console market, given Sony‘s dominance with the PlayStation.

The following 11 studios are set to join the Microsoft family:

Blizzard Entertainment	Beenox	Digital Legends
High Moon Studios	Infinity Ward	King
Radical Entertainment	Raven Software	Sledgehammer Games
Toys for Bob	Treyarch

Should the Xbox and Activision Blizzard close, Xbox Game Studios will have 34 game development studios under one banner. The complete list would be as follows:

343 Industries	Alpha Dog Games	Arkane
Beenox	Bethesda Game Studios	Blizzard Entertainment
Compulsion Games	Digital Legends?	Double Fine
High Moon Studios?	Id?	Inifinity Ward
Inixile	King	MachineGames
Mojang Studios	Ninja Theory	Obsidian
Playground Games	Radical Entertainment	Rare
Raven Software	Roundhouse Studios	Sledgehammer Games
Tango Gameworks	The Coalition	The Initiative
Toys for Bon?	Treyarch?	Turn 10
Undead Labs	World’s Edge	Xbox Game Studios Publishing
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