Why did Microsoft buy Activision Blizzard at a sky-high price

Buying Activision Blizzard may be the best time to buy the dip now.

“Grand Theft Auto” developer Take-Two announced last week that it would buy social gaming giant Zynga for $12.7 billion, setting a new record for acquisitions in the gaming industry. Unexpectedly, just one week later, this record was rewritten again, and the scale was directly increased by five times. Microsoft announced today that it will acquire the gaming giant Activision Blizzard for $68.7 billion in an all-cash deal.

The transaction has been approved by the boards of both parties and, if approved by regulators, is expected to close in fiscal 2023, which begins in the fourth quarter of this year. Activision Blizzard CEO Bobby Kotick will stay on after the acquisition, reporting to Microsoft Gaming CEO Phil Spencer.

While $68.7 billion is an all-time high for the global gaming industry, this is less than Microsoft’s annual profit, but 18 times Activision Blizzard’s annual profit; this price-earnings ratio exceeds Take-Two’s 16 times the acquisition of Zynga . In fiscal 2021, Microsoft’s operating profit was $69.9 billion on revenue of $168.1 billion. It is worth mentioning that the $68.7 billion all-cash acquisition, which only a few giants have the strength to complete, also reflects Microsoft’s confidence in its future share price growth. The previous all-cash acquisition record was Bayer’s $63.9 billion acquisition of Monsanto in 2016.

What is Microsoft’s sky-high acquisition for? After the acquisition, the Xbox Game Pass game service will also include popular titles such as “Call of Duty”, “World of Warcraft”, “Candy Crush Saga”, and Microsoft will also become the three giants in the global game industry together with Sony and Tencent. Microsoft’s stock price has risen by more than a third in the past year, and its market value has ballooned to $2.3 trillion.

Activision Blizzard was formed by the merger of Activision and Blizzard in 2007. It is one of the giants in the game industry, with a total of nearly 400 million monthly active users of its games. Activision Blizzard currently has more than 10,000 employees, including Demonware, Digital Legends, High Moon Studios, Major League Gaming, Radical Entertainment and many other industry-renowned game studios. These futures will become the core competitiveness of Microsoft’s game business and Sony’s all-round competition.

Interestingly, Mike Ybarra, CEO of Blizzard Entertainment, has worked for Microsoft for 22 years, responsible for the development of multiple versions of Windows, and is also responsible for game publishing in the Xbox division. He jumped to Blizzard in 2019 as executive vice president of platform technology, and just became CEO of Blizzard Entertainment in August last year. Unexpectedly, he would passively return to Microsoft again two years later, and Barra himself also tweeted an emoticon that was dumbfounding.

Although the game business does not contribute much to Microsoft’s revenue compared to several core businesses such as productivity and cloud services, it has always been the most important business puzzle for Microsoft’s executives, and it is one of the few businesses that Microsoft has successfully achieved in the consumer field. . Market analysis firm Newzoo estimates the global gaming industry’s total revenue last year was $180.3 billion, and it may grow to $218.8 billion in 2024.

Since the launch of the first-generation Xbox in 2001, Microsoft has spared no expense in the field of game consoles and game production for the past 20 years, and has continued to make acquisitions to strengthen its game studio. After Nadella took office, he has stepped up the pace of Microsoft’s game acquisitions, and has acquired more than 10 game studios in a row, including game developer Zenimax acquired last year for $7.5 billion and Mojang Studios.

After the completion of the acquisition of Activision Blizzard, Microsoft has fully aligned with Sony in game consoles and game content. Hosts, content and cloud are the three cornerstones of Microsoft’s game business. Game Pass, the cloud game business, currently has more than 25 million users. After the inclusion of Activision Blizzard, Microsoft’s market share in the global game business will increase from 6.5% to 10.7%.

Going up another latitude, Microsoft’s acquisition of Activision Blizzard is not only an increase in competition in the game field, but also a layout in the Metaverse. After Zuckerberg renamed Facebook to Meta last year, the futuristic concept of the Metaverse became a hot topic. The game industry is the best landing scene in the early stage of the Metaverse. Both Microsoft and Activision Blizzard have previously announced plans to invest heavily in the research and development of the Metaverse.

This time, Microsoft’s inclusion of Activision Blizzard has given Microsoft a strong advantage in the entire industry chain in game consoles, production, distribution, and cloud, and its layout in the Metaverse field exceeds that of other Internet giants. Microsoft CEO Nadella bluntly said when evaluating the acquisition that gaming is the most dynamic and exciting field of entertainment on all platforms today, and will also play a key role in the development of the Metaverse platform.

Buying Activision Blizzard may be the best time to buy the dip now. In the 2021 U.S. stock market bull market, Activision Blizzard has become the biggest loser, with its share price falling by more than a third in the past six months. The acquisition price of $68.7 billion is equivalent to an offer of $95 per share for Activision Blizzard, a 45% premium to the share price before the deal was announced.

Activision Blizzard’s stock price slump isn’t because of their uncompetitive business or sluggish performance, but because of internal turmoil. Activision Blizzard has been subject to successive class-action lawsuits by California regulators and company employees due to the company’s culture of condoning sexual harassment and significant differences in pay between male and female employees. Blizzard co-CEO Jen Oneal resigned after she was dissatisfied with her salary being lower than her male co-CEO Barra. When she quit, Blizzard tried to keep her with the same pay.

According to media reports, Kotick was aware of the company’s internal cultural issues but was indifferent to it. Angry Activision Blizzard employees organized several sabotages, and more than 1,500 employees jointly asked Kotick to resign.While Kotick did not resign, he had to announce a series of company culture changes, including zero tolerance for harassment and an end to a policy of forced arbitration of complaints. For this reason, Microsoft Gaming CEO Spencer specifically mentioned in the employee email announcing the deal that Activision Blizzard’s culture will be evaluated in the future.

For Microsoft CEO Nadella, aggressive acquisitions have always been his strategic means to expand Microsoft’s territory.After taking office, Nadella led Microsoft to continue to make sky-high acquisitions, setting new highs in merger and acquisition transaction value one after another. Over the past seven years, Nadella has acquired more than 80 companies and invested more than $70 billion. But at the same time, the capital market also gave a positive response. Microsoft’s stock price has soared sevenfold since Nadella took office, and its market value has soared by more than $1.8 trillion. After the massive acquisition, the performance growth stock price soared, and Nadella can also get performance-based compensation, so why not do it.

Microsoft’s biggest acquisition before this was its $26 billion acquisition of professional networking platform LinkedIn in 2016. Last year, Microsoft invested 16 billion US dollars to acquire Nuance, an artificial intelligence company, with the intention of expanding its business in the medical field; because nearly 80% of hospitals, three-quarters of radiology departments and more than half of surgeons in the United States use Nuance’s cases Sorting and remote diagnostic software. In 2020, Microsoft also negotiated the purchase of TikTok, a short video business owned by ByteDance. At the time, US President Trump forced ByteDance to sell TikTok on national security grounds, but the sale was later dropped when Trump stepped down.

Of course, the reason why other giants such as Google, Apple, Amazon, etc. dare not make large-scale acquisitions is mainly because they are facing anti-monopoly pressure from the government and dare not act rashly, while Microsoft is not the target of the US government’s anti-monopoly investigation. This time, Microsoft’s acquisition of Activision Blizzard may also not be punished by regulators. Because Microsoft won Activision Blizzard, it is only the third strongest in the global game industry, and their biggest competitor is Sony, not an American company. Microsoft’s release payment for the acquisition is $3 billion, indicating that Microsoft is confident that the transaction can be approved by regulatory authorities.

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