Microsoft-Activision M&A Report
Introduction:
The October 2023 acquisition of Activision Blizzard by Microsoft, the largest video game deal to date, marks a pivotal moment for the gaming industry. Building on a series of recent acquisitions, this merger leverages Microsoft’s technological prowess and Activision Blizzard’s renowned franchises to drive significant growth and reshape the gaming landscape.
Transaction Overview:
● Acquirer: Microsoft Corporation (MSFT)
● Target: Activision Blizzard Inc
● Announcement Date: January 18, 2022
● Deal Value: $68.7 billion
● Deal Structure: All-Cash Deal
● Transaction Advisers: Goldman Sachs, Simpson Thatcher (MSFT); Allen & Company, Skadden (Activision)
Strategic Rationale:
The merger between MSFT and Activision Blizzard was driven by several strategic objectives:
- Market Positioning: with the gaming industry projected to grow to over half a trillion dollars by 2030, this acquisition could prove highly profitable for Microsoft.
- Expansion of Gaming Portfolio: this acquisition provides Microsoft access to valuable intellectual property and exclusive content that could bolster subscription numbers for its Game Pass and cloud gaming service.
- Content Creation Capabilities: this will strengthen Microsoft’s game development and content creation capabilities, allowing them to offer more exclusive and high-quality gaming experiences.
- Financial Analysis:
Prior to the merger, both companies exhibited strong growth:
● Microsoft’s gaming division saw a 33% revenue increase in 2021, surpassing the overall revenue growth of 18%. This surge was primarily driven by hardware sales of the Xbox, with revenues declining in quarters without new releases.
● With various blockbuster franchises, Activision’s Blizzard division saw a 22% revenue growth. Notably, the Call of Duty franchise had the top two best-selling games of 2021. - Valuation:
● The $68.7 billion transaction was an all-cash deal, supported by Microsoft’s “swollen” cash reserves of roughly $138 billion, accumulated from record pandemic sales.
● At approximately $95 per share, this represents a substantial 45% premium based on the announcement date.
Evaluating the Impact:
● In Q3 ending March 31, 2024, Microsoft’s total revenue grew 17% to $61.9 billion, and net income rose 20% to $21.9 billion.
● Xbox Content & Services revenue grew 62% year-over-year, setting records for console usage and monthly active devices, driven by the Activision acquisition.
● In March, Microsoft added its first Activision title, Diablo IV, to the Game Pass, with Microsoft’s CEO expressing a commitment to “bringing great games to more people on more devices.”
● With Activision Blizzard franchises now accessible on Xbox, Microsoft projects a gaming growth improvement for Xbox by approximately 50 points.
Regulatory and Legal Considerations:
● The acquisition raised anti-competitive concerns, requiring regulatory approval from several bodies as Microsoft became the third-largest gaming company by revenue.
● The FTC in the US, along with regulators in the UK and Europe, expressed concerns that Microsoft’s ownership of popular gaming franchises could “shut out rival gaming console makers”.
● To gain approval, deadlines had to be extended and agreements with rival developers were established. In the EU, for example, Microsoft agreed to a 10-year period during which Activision games could be freely streamed by European consumers on any cloud gaming platform.
● In dealing with the U.K. ‘s CMA, Microsoft had to transfer Activision Blizzard’s cloud gaming rights to Ubisoft, the publisher of series like Assassin’s Creed and Far Cry.
● Furthermore, Activision has been marred by scandals and misconduct, with employees urging former CEO Bobby Kotick to resign amid workplace harassment investigations.
Market and Competitive Impact:
● Microsoft’s Xbox directly competes with Sony’s Playstation and Nintendo, with each company having its own niche
● Newly acquired titles like Candy Crush enhance Microsoft’s portfolio, enabling stronger competition with mobile gaming giants like Tencent. With a projected user base of 1.9 billion by 2027, mobile gaming is rapidly expanding.
● Additionally, the esports scene is rapidly growing, with significant audience expansion and potential. Activision’s established presence in esports will help Microsoft position itself as a key player, opening new revenue streams from sponsorships, advertising, and media rights.
Stakeholder Analysis:
● Microsoft and its shareholders stand to benefit from anticipated revenue growth and market expansion in the gaming sector, while Activision Blizzard is poised to leverage potential synergies enabled by Microsoft’s resources.
● The acquisition is expected to bring Activision Blizzard titles to cloud gaming services, making them more accessible and affordable for consumers.
● Approximately three months after the acquisition, Microsoft cut 1,900 jobs from its 22,000-person gaming workforce, reducing the division by 8%.
● Following its legal defeat in this deal, the FTC and DOJ issued updated guidelines outlining their approach to reviewing future mergers and acquisitions.
Conclusion:
The October 2023 acquisition of Activision Blizzard by Microsoft represents a major event in the gaming industry. It marks a significant step in Microsoft’s journey towards enhancing gaming content and services, capitalising on market growth opportunities, and integrating diverse gaming ecosystems. Despite facing regulatory hurdles that required certain agreements, such as transferring some cloud gaming rights to Ubisoft, Microsoft’s acquisition positions it strongly in the competitive gaming landscape. As companies continue to navigate the complexities of M&A in dynamic industries, this merger highlights the importance of strategic alignment, regulatory compliance, and effective integration strategies for sustainable long-term success.
Amruh Tawil – Quorica Capital M&A Research Analyst