A bold move by Microsoft
Microsoft (MSFT) announced on Tuesday a deal to acquire Activision Blizzard (ATVI) in an all-cash transaction for $68.7B (or $95/share). The deal is expected to close by the end of Microsoft’s FY23 (June 2023) and would strengthen Microsoft’s position in this space, making it the third-largest gaming company (as measured by revenue) in the world after Tencent and Sony.
Content is key in entertainment, and Microsoft’s strategy is to increase its capacity on this front. What we are now witnessing in the gaming industry is similar to what we saw with movies & TV shows (Disney acquiring Marvel and Lucas Films, AT&T taking over Time Warner, etc.). Activision Blizzard is a leading developer with strong titles across console, PC and mobile. While Microsoft does already have some strong Intellectual Property of its own, the addition of the Activision Blizzard portfolio will allow it to substantially level-up, so to say.
Microsoft claims that the deal will help to accelerate the creation of a Metaverse proposition, while driving subscriber growth for Xbox Game Pass and providing exposure to the fast-growing mobile gaming segment, in which Microsoft has not yet built a significant presence. The deal should also accelerate Microsoft’s ambitions in cloud gaming with enhanced mobile capabilities and the inclusion of highly successful franchises such as Overwatch and Diablo in the near-term.
At first glance, a $69 billion price tag looks hefty. It implies a 45% premium to Friday’s close. However, we should keep in mind that ATVI shares have taken a major hit over recent months following allegations of misconduct at the firm. In fact, the $95/share price is almost a 10% discount to the highs of 2021. The deal values Activision Blizzard at around 7.3x forward bookings, 17x FY22 EV/EBITDA and 25x FY22 P/E based on consensus estimates.
From a regulatory standpoint, the fragmented nature of the industry and a wide number of gaming competitors/platforms should ease concerns but the vertical nature of the deal will likely receive scrutiny by antitrust authorities. It seems that the market is indeed pricing in some antitrust issues as ATVI shares currently trade at a -15% discount versus the proposed take-out price.
More M&A to be expected
Not many firms are able to spend $70bn for a gaming company. Nevertheless, we would not be surprised to see further consolidation in the sector. Indeed, the deal furthers the trend within the global gaming industry whereas companies are always fewer and bigger. As companies target the Metaverse, gaming is also becoming increasingly relevant, given its potential to create, grow and cater to virtual communities. Among the possible candidates for a takeover: Electronic Arts (~$38bn market cap), Take-Two (~$18bn and which is currently acquiring Zynga) or Ubisoft ($6bn). Apple or Netflix could be potential buyers as they want to make a push in this industry.
