The most expensive acquisition in Microsoft's history will allow Microsoft's gaming business to grow by more than half, making it the third-largest company in terms of gaming revenue after Tencent and Sony
Wen | Caijing reporter Han Shulin Zheng Hui Yin Lu
Edit | Liu Yiqin
On January 18, local time in the United States, Microsoft Corporation (Nasdaq: MSFT) announced the largest acquisition ever, which is also the largest acquisition in the history of the game industry.
Microsoft will buy game company Activision Blizzard (Nasdaq: ATVI) for $95 per share. At that price, Activision Blizzard's equity valuation is about $74 billion. Microsoft said the acquisition would be an all-cash transaction, valued at $68.7 billion, adjusted for Activision Blizzard's net cash.
After this acquisition, Microsoft will become the second only game revenue to Tencent (0700. HK) and Sony (TYO: 6758) are the third largest company.
The deal was abrupt, without any prior warnings or rumors. An employee of Blizzard in the United States told the "Finance" reporter that even employees at a certain level did not know in advance.
Previously, Microsoft's biggest acquisition was the acquisition of Social Linkedin in 2016 for $26.2 billion. In the gaming world, the acquisition significantly refreshed take Two's record of $12.7 billion acquisition of social networking gaming company Zynga last week. Take Two is the publisher of the famous Grand Theft Auto (GTA) series, and Zynga has developed the famous social game FarmVille.
The price of $95 per share represents a 45% premium to Activision Blizzard's share price in the previous session. Activision Blizzard shares rose 25.88% from the previous session to close at $8.231 billion per share after the announcement of the deal. Microsoft fell 2.43 percent to close at $302.65 per share, under the influence of the broader market.
On the same day, the shares of Sony, Microsoft's most direct competitor in the game business, plunged 12.58% to close at 12,440 yen per share, which partly reflected the value of the acquisition. Tencent's share price, whose gaming business is mainly mobile, had little impact, closing at HK$455.8 on the day, up 0.66% from the previous session.
The reason for Microsoft's big acquisition
Microsoft CEO Satya Nadella said on a post-acquisition conference call that games are the fastest-growing market in the entertainment industry, that people have mostly been separated from each other in the past two years, and that games have played a key role in helping people maintain a sense of community and belonging. There are now 3 billion gamers worldwide and it is expected to reach 4.5 billion by 2030.
Nadella, who also ties the deal to the "metaverse," said the prospect of the metaverse should not be monolithic and centralized, but rather support multiple metaverse platforms and a robust ecosystem of content, commerce and applications. In the gaming world, metaverses are collections of content-based communities and personal identities that can be accessed on any device. Combining great entertainment content with new technologies, communities, and business models is exactly what the deal is for.
In revenue terms, the acquisition will grow Microsoft's gaming business by more than half. According to Microsoft's fiscal year 2021 (July 2020 to June 2021), its gaming business revenue was $15.37 billion, while Activision Blizzard expects net revenue to reach $8.66 billion in 2021 in its November 2021 outlook.
The deal shook the game circle. Activision Blizzard has a number of game brands with wide global influence, and the latest third quarter report of 2021 discloses a monthly active player of 390 million people. Activision Blizzard is the original Activision company in 2007 merged with the French entertainment company Vivendi to form Activision Blizzard, which is controlled by Vivendi. It became independent after acquiring a majority stake from Vivendi in 2013 and bought game company King in 2015 for $5.9 billion.
This series of mergers and acquisitions also constitutes Activision Blizzard's current three major sub-sectors: Activision, represented by the shooter game Call of Duty series; Blizzard, which has developed a number of games with wide influence in the history of Games such as StarCraft, Warcraft, Diablo, World of Warcraft, Hearthstone, and Overwatch; and King's Company has developed the world-famous Candy Saga Crush), King Corporation is also the highest monthly active segment of Activision Blizzard, with 245 million monthly active users in the third quarter of 2021.
For Microsoft, the acquisition further expands its gaming footprint. Since Nadella became CEO in early 2014, Microsoft has continued to expand the gaming space, typical of which include the acquisition of Minecraft developer Mojang in 2014 for $2.5 billion, and the $7.5 billion acquisition in 2019 of game publisher Zenimax Medix's game development company Bethesda Softworks, which developed the famous open-world games The Elder Scrolls and Fallout.
Previously, Microsoft's game layout was mainly based on console and PC games, and after the acquisition of Activision Blizzard, with the help of King's "Candy Legend", its game tentacles will be extended to mobile terminals.
The core of the game competition is still the content
It is worth mentioning that Microsoft's important strategy in the field of gaming in recent years is cross-platform experience and subscription services. As long as players pay to become an Xbox Game Pass (XGP) subscription member, they no longer have to pay separately for the games included in the XGP membership, the host, PC can be universal, and Microsoft's first-party games will be the first time to log on to the XGP membership platform. The traditional stand-alone game business model is to pay for individual games, and many games are "exclusive" by a platform host and will not land across platforms.
This new business model has won more players for Microsoft, with XGP membership subscriptions growing by 38% in 2021 and now having more than 25 million subscribers. On the other hand, the core reason why players decide whether to join XGP membership is whether there are enough attractive games on the platform.
Therefore, despite the grand prospects of the "meta-universe", the core of the game market competition is still high-quality content - that is, good games, which is why Microsoft has continuously acquired third-party studios in recent years.
For domestic players who are born in the post-80s and 90s, Activision Blizzard is a company with special feelings. Before the merger, Blizzard Entertainment released a number of games from the late 1990s to 2010, all of which had a reputation of "Blizzard produced by Blizzard, must be a boutique" in the hearts of players because of the leading game quality and wide influence in the industry.
But the aura of blizzard in recent years is gone. After releasing Overwatch in 2016, Blizzard has never released a game with global reach. To make matters worse, corporate governance is also mired in a quagmire. In 2021, Activision Blizzard was embroiled in allegations of serious sexual harassment and gender inequality scandals, with frequent turnover of management and employees, and overwatch 2 under development constantly delaying its launch. In July 2021, California regulators filed a lawsuit against Activision Blizzard, and by the time of the acquisition, Activision Blizzard's stock price had fallen by about 30%, although Activision Blizzard's revenue continued to grow during this period.
After the news was announced, the above-mentioned Blizzard employees in the United States told the "Finance" reporter that he was "conservative and optimistic" about the impact of the acquisition on the company.
At present, the acquisition has been approved by the boards of directors of Microsoft and Blizzard, and the next step is to pass regulatory review and approval of shareholders of both companies, and is expected to be completed within Microsoft's fiscal year 2023.
