Microsoft (MSFT. US) acquisition of Activision Blizzard (ATVI. US) may be a mistake

Microsoft (MSFT. US) is currently making its all-out foray into gaming. On Tuesday, the tech giant announced a $69 billion cash acquisition of Activision Blizzard (ATVI. US)。 If the deal succeeds, it would be the largest acquisition in the company's history, but would the huge deal be wise? Some analysts believe that this deal does not necessarily have more advantages than disadvantages for Microsoft.

At first glance, the acquisition seems very meaningful, as gaming is one of the world's largest and fastest-growing consumer segments and one that could offer huge growth opportunities for a $50 billion company like Microsoft. According to research firm Newzoo, the size of the global gaming market will grow from $180 billion last year to $219 billion by 2024. As a result, Microsoft's goal may be to strengthen its own development in this area by acquiring the largest publicly traded video game publisher in the United States.

Zhitong Finance APP learned that in cooperation with Activision Blizzard, Microsoft will obtain direct authorization for many well-known games, including popular games such as Warcraft, Diablo, Overwatch, Call of Duty, and nearly 10,000 senior game employees. Some analysts say that Microsoft is clearly betting that owning some of the most popular video games will give the company a foothold in the metaverse in the future, because in the future, some entertainment, business and social activities may take place in this virtual world.

But the proposed deal has several big problems. First, some of the video game company's top talent may have left, and under the leadership of longtime CEO Bobby Kotick, Activision Blizzard has experienced a serious workplace culture crisis. The company has faced multiple government investigations for failing to protect female employees from sexual harassment and discrimination. On Monday, it was reported that the company had fired or fired more than 30 employees for misconduct.

Over the past year, the scandals have prompted some executives and developers to voluntarily leave, while others have staged protests. There are reports that Kotick is expected to leave after the deal is completed. If he had left earlier, it might not have been a surprise.

Second, Microsoft may have overpriced its acquisition bid. Financially, Call of Duty is Activision Blizzard's most important game, but it could be in trouble. In 2020, Call of Duty accounted for about half of the company's total operating profits. Last week, Activision Blizzard was forced to apologize for a technical problem prevalent in several recent Call of Duty games. Players have been complaining about game glitches, crashes, and bugs on Reddit for weeks.

At the same time, there are signs that the latest Call of Duty games are underperforming the market. According to the European industry group, Call of Duty: Vanguard's holiday season sales in the UK fell by about 36% compared to the same period last year. Historically, the data for the UK market has been consistent with data from other large markets, so this could mean that overall sales are trending downward. World of Warcraft, perhaps Activision Blizzard's second most important game, also shows that player interest is declining. A recent report by Baird analyst Colin Sebastian showed that online role-playing games were searched 60 percent less on Google than they were in the same period last year.

In a conference call with analysts on Tuesday morning, Microsoft management said the acquisition was not for short-term performance, but for the long-term potential of Activision Blizzard's games. But even looking ahead to the next few years, the company may be underestimating the damage the Activision Blizzard brand has suffered in workplace scandals and complaints about game quality.

Regulatory issues are also a big problem. Last week, it was reported that the U.S. Federal Trade Commission was investigating Meta (FB. US) 's VR division, Oculus' anti-competitive behavior, including the acquisition of VR applications. But if Meta is under scrutiny for small acquisitions, it begs the question: Why would Microsoft be allowed to buy large companies?

Although the tech giant is reluctant to be in the spotlight of public attention, its M&A activity has been active. Last year, the company acquired video game publisher ZeniMax Media for $7.5 billion and announced a nearly $20 billion acquisition of Nuan Communications, a leader in speech recognition and artificial intelligence. US)。 It has been previously reported that the company also investigated other targets such as the game chat community Discord Inc., Pinterest Inc., and so on. There is no doubt that regulators will be keeping a close eye on the deal to acquire Activision Blizzard, which is clearly expected by all parties given the proposed fiscal year 2023 completion date.

Microsoft's premium of $95 a share is very high, but the price tag will only make sense if Activision Blizzard cleans "its own room."