Why Microsoft acquired Activision Blizzard at a sky-high price: an all-round contest with Sony Heavy gold layout meta-universe

Grand Theft Auto developer Take-Two announced a $12.7 billion acquisition of social gaming giant Zynga last week, setting a new record for the gaming industry. Unexpectedly, just a week later, this record was rewritten again, and the scale was directly increased by five times. Today Microsoft announced an all-cash acquisition of gaming giant Activision Blizzard for $68.7 billion.

The deal has been approved by the boards of directors of both parties and, if approved by regulatory authorities, is expected to close in fiscal year 2023, starting in the fourth quarter of this year. After the acquisition is completed, Activision Blizzard CEO Bobby Kotick will remain in office, reporting to Phil Spencer, CEO of Microsoft's gaming business.

While $68.7 billion is an all-time high for the global gaming industry, it's less than Microsoft's annual profit and 18 times that of Activision Blizzard; that's a P/E ratio that's 16 times higher than when Take-Two acquired Zynga. In fiscal 2021, Microsoft's operating profit was $69.9 billion and revenue was as high as $168.1 billion. It is worth mentioning the $68.7 billion all-cash acquisition, which only a few giants have the strength to complete, and reflects Microsoft's confidence in the future stock price upside. The record for all-cash acquisitions preceded Bayer's $63.9 billion acquisition of Monsanto in 2016.

What is Microsoft's sky-high acquisition for? After the completion of this acquisition, the Xbox Game Pass game service will also be included in the "Call of Duty", "World of Warcraft", "Candy Legend" and other popular works, microsoft will also become the global game industry three giants together with Sony and Tencent. Microsoft's stock price has grown by more than a third in the past year, and its market value has swelled to $2.3 trillion.

Activision Blizzard, a merger of Activision and Blizzard in 2007, is one of the giants of the game industry, with nearly 400 million monthly active users of its games. Activision Blizzard currently employs more than 10,000 people and includes many well-known game studios in the industry, including Demonware, Digital Legends, High Moon Studios, Major League Gaming, Radical Entertainment and many other industry-renowned game studios. These will become the core competitiveness of Microsoft's game business and Sony's all-round competition in the future.

Interestingly, Blizzard Entertainment CEO Mike Ybarra spent 22 years at Microsoft, working on several versions of Windows and game distribution in the Xbox division. He moved to Blizzard in 2019 as Executive Vice President of Platform Technology, and just became CEO of Blizzard Entertainment last August. Unexpectedly, two years later, he returned to Microsoft passively, and Barra himself sent a crying and laughing expression on Twitter.

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

Since the launch of the first generation of Xbox in 2001, Microsoft has been investing heavily in the field of game consoles and game production in the past 20 years, and has continuously acquired to strengthen its game studio strength. Nadella has stepped up the pace of Microsoft's game acquisitions since taking office, and has acquired more than 10 game studios in a row, including game developer Zenimax, which was acquired for $7.5 billion last year, and Mojang Studios before that.

After the completion of the acquisition of Activision Blizzard, Microsoft is fully in line with Sony in the game console and game content. Hosting, content and cloud are the three cornerstones of Microsoft's gaming business, and the cloud game business Game Pass currently has more than 25 million users. After the acquisition of Activision Blizzard, Microsoft's market share in the global gaming business will rise from 6.5% to 10.7%.

Another dimension up, Microsoft's acquisition of Activision Blizzard is not only to increase competition in the game field, but also to layout in the outlet of the meta-universe. After Zuckerberg renamed Facebook to Meta last year, the future concept of the metacosm became a big hit. The game industry is the best landing scene in the early stage of the meta-universe, and Microsoft and Activision Blizzard have previously announced plans to invest heavily in the research and development of the meta-universe.

The acquisition of Activision Blizzard by Microsoft has allowed Microsoft to form a strong industry chain advantage in game consoles, production, distribution, and cloud, and its layout in the meta-universe field has surpassed that of other Internet giants. Commenting on the acquisition, Microsoft CEO Nadella bluntly stated that gaming is the most dynamic and exciting area of all-platform entertainment today, and will also play a key role in the development of metaversal platforms.

Buying Activision Blizzard now is probably the best time to buy on dips. In the 2021 US stock market bull market, Activision Blizzard has become the biggest loser, with the stock price falling by more than a third in the past six months. The $68.7 billion purchase price equates to a $95 per share offered to Activision Blizzard, representing a 45 percent premium to the share price before the deal was announced.

Activision Blizzard's stock price slump is not due to a lack of competitiveness in their business or a sluggish performance, but from internal turmoil. Because of the company's culture that condones sexual harassment and there are clear differences in pay between men and women, Activision Blizzard has been subject to successive class actions by California regulators and company employees. Blizzard co-CEO Jen Oneal resigned angrily after complaining that he was paid less than male co-CEO Barra. When she resigned, Blizzard tried to keep her with the same salary.

Media reports show that Kotic knows about the company's internal cultural problems but is indifferent to it. Angry Activision Blizzard employees organized several passive sabotage, and more than 1,500 employees jointly demanded that Kotic resign. While Kotic did not resign, he had to announce a series of corporate culture changes, including zero tolerance for harassment and ending a policy of compulsory arbitration of complaints. For this reason, Microsoft Gaming CEO Spencer specifically mentioned in an employee email announcing the deal that the culture of Activision Blizzard will be evaluated in the future.

For Microsoft CEO Nadella, the big acquisition has always been his strategic means to expand Microsoft's territory. After Nadella took office, he led Microsoft to continuously make sky-high acquisitions, and successively set a new high for the amount of mergers and acquisitions. Over the past seven years, Nadella has acquired more than 80 businesses and invested more than $70 billion. But at the same time, the capital market has also given a positive response. Microsoft's stock price soared sevenfold after Nadella took office, and its market capitalization soared by more than $1.8 trillion. After the big acquisition, the performance growth stock price soared, And Nadella can also get performance-based compensation, why not.

Microsoft's biggest acquisition was the $26 billion acquisition of linkedIn, a professional social networking platform, in 2016. Last year, Microsoft invested $16 billion in the acquisition of Nuance, an artificial intelligence company, to expand its business in the medical field; nearly 80% of hospitals in the United States, three-quarters of radiologists and more than half of surgeons use Nuance's case collation and remote diagnosis software. In 2020, Microsoft also negotiated TikTok, ByteDance's short video business. At that time, US President Trump forced ByteDance to sell TikTok on the grounds of national security, but the sale was later closed because of Trump's downfall.

Of course, the reason why the remaining giants such as Google, Apple, Amazon and other giants dare not make large acquisitions is mainly because they are facing the government's anti-monopoly pressure and dare not act rashly, and Microsoft is not the target of the US government's antitrust investigation. Microsoft's acquisition of Activision Blizzard may not be harshly criticized 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 termination fee for the acquisition was $3 billion, indicating that Microsoft is confident that the deal can be approved by regulators.

Source: Sina Technology Author: Zheng Jun