Shareholders of Activision Blizzard are the putative winners of the largest acquisition by a technology company in history. Yet they will probably remain disappointed. A scandal involving alleged sexual harassment means Microsoft would buy the computer games business cheaply. Even that exit may elude them: regulators are increasingly hostile to vertical deals.
On Tuesday, Microsoft announced it would acquire the beleaguered group at an aggregate purchase price of US$68.7 billion ($101.3b) after deducting net cash. Microsoft is already present in gaming via computer via its Xbox unit. The purchase will bulk up a division that is relatively small compared with the juggernaut's enterprise software and cloud computing businesses.
Microsoft stands to get a plum asset for a relative song. It would not only leapfrog ahead in gaming. It would also steal a march in the metaverse land grab, since games are seen as crucial parts of that environment for young users.
Microsoft has limited ability to build a decent video games business through organic growth. Buying such a top-tier franchise is an easier option for a tech giant with an enterprise value of US$2.3 trillion and a cash balance of US$130b.
Activision is best known for such titles as Call of Duty, Warcraft and Candy Crush. Such billion dollar intellectual properties takes years if not decades to create. But that value can also prove ephemeral. The gaming industry had been wracked by scandals involving abusive workplaces.
At Activision, controversy has focused on the culture of a business whose chief executive Bobby Kotick was previously among the highest paid US bosses. The shares have fallen 37 per cent from their peak last February.
If Microsoft was paying the same premium — 45 per cent — over the trading price of Activision shares at their historic earnings ratio of 25 times, it would have to rustle up US$99b.
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The implied purchase P/E multiple Microsoft is paying is just 26 times. The deal is a fraction of the software group's own value but large enough that virtually no other bidder — say Netflix — could try to jump in.
Revitalised regulators are the biggest potential deal-breakers. Microsoft has a cloud subscription portal called Game Pass which already has 25m subscribers. Plugging Activision titles into GamePass would be a natural move, even though Microsoft has existing tie-ins with the likes of Electronic Arts. This would keep gamers within Microsoft's online world for longer. As in Call of Duty, the aim of the game is to seize and hold on to territory.
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