Microsoft Corp has agreed to acquire Activision Blizzard in a $68.7 billion deal marking the biggest ever acquisition in the gaming industry’s history to date underscoring the tech giant’s interest in increasing its footprint in the virtual gaming industry.
The deal, announced by Microsoft, is the biggest all-cash acquisition on record and will bolster its market presence in the booming videogame market where it will battle peers such as Sony and Tencent.
The deal is also representative of Microsoft’s bet on the virtual online world, the “metaverse” where consumers can work, play and socialize, with many of its peers already kneed deep in this industry.
“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 platforms,” said Microsoft’s CEO Satya Nadella.
Microsoft has offered $95 per share for the purchase marking a 45% premium to Activision’s Friday close. Activision’s shares were last up by 26% at $82.10, still a steep discount to the offer price, underscoring concerns that the deal could potentially get stuck in regulators’ scrutiny.
So far, Microsoft had avoided this level by scrutiny faced by its peers such as Facebook and Google; with this deal, Microsoft will become the world’s third largest gaming company, placing it on regulator’s crosshair, opined Andre Barlow, from the law firm Doyle, Barlow & Mazard PLLC.
“Microsoft is already big in gaming,” said Barlow.
According to a source, Microsoft will pay a $3 billion break-fee if the deal falls through, suggesting it is confident of winning antitrust approval.
The development comes at a time when Activision’s shares had slumped more than 37% after reaching a record high in 2021; Activision is also struggling with allegations of misconduct by several top managers as well as sexual harassment of employees.
Since July 2021, Activision has fired or pushed out more than 36 employees and has disciplined another 40. The company is still in the process of addressing the allegations.
As per a source familiar with the plans, Activision’s CEO Bobby Kotick, would continue to remain at his post following the deal, and is expected to leave after the deal closes.
In a conference call with analysts, while Microsoft’s CEO Satya Nadella did not directly mention the scandal he did talk on the importance of culture in the company.
“It’s critical for Activision Blizzard to drive forward on its renewed cultural commitments,” said Nadella, while adding “the success of this acquisition will depend on it.”
According data analytics firm Newzoo’s estimate, the global gaming industry generated $180.3 billion in revenues in 2021; this figure is likely to expand to $218.8 billion by 2024.
Microsoft is well positioned in the industry, as one of the big three console makers, and is has also made investments including acquiring “Minecraft” maker Mojang Studios and Zenimax in multibillion-dollar deals in recent years. Furthermore, it has also launched a popular cloud gaming service, which has more than 25 million subscribers.
According to Newzoo, “Microsoft’s gaming market share was 6.5% in 2020 and adding Activision would have taken it to 10.7%.”
According to executives, one of the synergies in the deal is Activision’s 400 million monthly active users; communities such as this could play a pivotal role in Microsoft’s potential future metaverse strategy.
Further, Activision’s library of games could provide Microsoft’s Xbox gaming platform an edge over Sony’s Playstation, which has for years enjoyed a more steady stream of exclusive games.
“The likes of Netflix have already said they’d like to foray into gaming themselves, but Microsoft has come out swinging with today’s rather generous offer,” said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown.
Incidentally, Microsoft’s offer amounts to 18 times Activision’s 2021 earnings before interest, tax, depreciation and amortisation (EBITDA).
“This is a significant deal for the consumer side of the business and more importantly, Microsoft acquiring Activision really starts the metaverse arms race,” said David Wagner, equity analyst and portfolio manager at Aptus Capital Advisors.
“We believe the deal will get done,” said Wagner while cautioning “This will get a lot of looks from a regulatory standpoint.”