Thoughts on Microsoft Acquiring Activision Blizzard?

The deal is expected to close June 2023, all-cash for $68.7B. Microsoft has said this will help them make their push into the metaverse (hopefully no metaverse meetings). I'm decently into gaming and have mixed feelings about this personally. I mean, all past gaming related deals haven't really been all that. They acquired Bethesda and haven't done shit.Also might meet some resistance in Congress with the closing. Good on Microsoft for using their excess cash, insane deal. GS is the advisor so the fees must be quite nice.Thoughts?

Comments (51)

Jan 19, 2022 - 2:03am

You genuinely think they're going to spin a series like Call of Duty which generates billions annually with a fairly even distribution over the two gaming consoles? I price the probability of that at zero. It's literally taking a $1b+ haircut annually just to increase hardware sales by 15-20% max. Activision is currently reporting MTX revenues of ~$5b annually, total revenue in the $9b ballpark, and as you said, a valuation in the 20x EBITDA range (F9M Op. Income $2.6b). Slice off Playstation revenues and that valuation becomes even more insane. 

Jan 18, 2022 - 5:33pm

As a gamer I love this fact since all of the activision blizzard games will be day one on game pass for free. I don't care about exclusivity since I managed to grab both the series x and the ps5 so I get all the games from both worlds. However, on the business this deal I believe will be the sort of gateway into the crazy valuations we are going to see in the gaming industry. The gaming industry (including mobile) is the entertainment industry in the world (above sports and movies/shows). It just shows that the industry is going to really pick up going forward. This activision blizzard acquisition will not be the last of its kind. Also there is confirmations that both Amazon and google will be heavily investing into gaming as well in the coming decade (both companies have large war chests and money to burn as well). So we might see a bidding war start in the gaming industry among the tech giants. Excited to see what the future holds.

Most Helpful
Jan 18, 2022 - 5:41pm

Personally split on it. One the one hand, it does seem to be accretive so just out of the block there's a lot worse deals they could have done. On top of that, it doesn't take a super creative mind to foresee at least a few realistic synergies that could boost profits, as well as wider synergistic implications for their new Game Pass approach of GaaS. I think the metaverse explanation is just press release buzzword slinging or a very different interpretation of what a metaverse is from what our minds easily conjures. All that to say, from the top, it seems like an intelligent acquisition of a discounted company in an area Microsoft has shown to want to push.

On the other hand, as a "gamer", I just can't see Activision-Blizzard as a company I would want in my fold. The culture is relentlessly toxic, let alone the CA lawsuit, sexual harassment stuff, etc. In line with that, they've lost a ton of the talent that really made the studio what it is today (particularly on the Blizzard side), while at the same time letting "wokeness" creep into the company like nobody's business. You can look at the games from the basis of metrics and it looks great, but looking a bit more critically their IP has been devalued a lot. Diablo 4 seems like it's in dev hell, and lost a lot of good will with D3/their Diablo phone game. Starcraft is dead dead, and has zero mental real estate in gamers today (might as well be fresh IP if they released a new game under Starcraft). WoW is being squeezed for all its worth but the graph of players by expac release says it all - the booms are getting smaller and in the drops come sooner. In 10 years it probably will be dead dead unless they have a real nice card up their sleeve (which it certainly seems like it doesn't). Overwatch was squandered and is dying. The list goes on and on. Activision seems like it made a new cash cow in Warzone but we've seen before that these battle royales can become yesterday's news very quickly (H1Z1, PUBG, fortnite to an extent), and it's feasible Microsoft is getting Warzone near the top. King's marquee game is the Candy Crush saga/trilogy/whatever. Just today, Dream Games, a turkish mobile games studio, announced their ~$3B valuation. Foreign companies are coming to realize they can utilize their relatively educated, low value of labor population to create these "laborious" ventures like games, for a hell of a lot cheaper than the West. This bodes poorly for the moat around Candy Crush and King Games.

For $68B could Microsoft really not have invested that money into making their own world class IP? This isn't like Amazon buying MGM where they're getting in a pretty low price, $68B is a lot of money even for Microsoft. If you put that money into making great games in-house they could easily do it for cheaper, with much much greater freshness of the IPs, without scandal problems, without regulatory pressures, etc. It might take a bit longer and be harder, but at the end of the day I believe in Microsoft's ability to make great products much more than Activision Blizzard (riding off of 20 year old IP).

Jan 18, 2022 - 6:04pm

It's not about making their world class IP's. I do believe they bought the company for the existing IP's because of their reputation. Everyone knows call of duty and buys it every year. Overwatch has it's own market and provides a big leeway into the esports market (same thing with StarCraft). Diablo itself has a huge fan base. They paid that money to save time, growing your own ips and game engines and hiring devs takes a crazy amount of time 5-10 years. This way, all of the game engines, ips, devs, and resources that activision blizzard has will be able to hit the ground running after like 6-12 months. Microsoft gets access to all of their resources and ips without having to waste time developing new ones on their own (not that they are not doing that). In terms of leadership I am still hopeful that Microsoft will be able to make changes to the culture and leadership at activision blizzard, if that happens I believe everything else will fall into place. I do believe they considered all options before making a purchase this big, and I do believe they made the right choice. However, this still apparently not the end of their acquisitions, they are still going to continue growing the Xbox studios. Interested to see who they go after next. Also excited to see how Sony tries to respond to all of this.

Jan 18, 2022 - 6:23pm

I get that, but my broader point is that if they are in fact buying solely for the existing IP's, they're in for a bad surprise 5 years down the line when their assets have continued a depreciating trend. I get your points, but a layer beneath each of those upsides of the IP, there's a compelling reason why they're not as good as they seem from the outset. Overwatch's esports foray really hasn't been all that successful and the pursuit of an esports strategy has arguably been the fatal flaw of their Overwatch strategy. Diablo had a huge fanbase - their core fans were usurped by similar games like Path of Exile that catered to their whims in a far more nimble way (games' quality fundamentally suffers from big bloated companies) and their new fans coming in seem to be from China, where there's tons of competition for similar games and faces poor headwinds in the form of regulatory pressure (from both China and U.S.) Etc etc.

Yeah it would take more time to make it themselves, but given the shit pay and culture Activision-Blizzard has, Microsoft literally could have poached half their workforce in a month by just offering regular Microsoft salary/stock and I'm not exaggerating.

If Microsoft's leadership will make the studio run better why are they even buying it? They could simply leverage that for a helluva lot cheaper to make their own games. I see nothing about Microsoft that makes them able to magically come in and fix the culture/leadership, when Microsoft has a general policy of leaving their acquired companies alone, plus Microsoft has a ton of employees but not a whole lot of trail-blazing game devs. The fundamental problem of Activision-Blizzard is their problems are fundamental. The cultural rot set in a long time ago, and has decimated their talent pipeline, bank of hit-makers, and nimble culture.

  • Intern in IB - DCM
Jan 19, 2022 - 1:26pm

Very nice in-depth comment. I would also recommend you consider the COD esports scene too since it's relatively big and there is definitely room for growth.

  • Intern in HF - Other
Jan 18, 2022 - 6:56pm

I think it was a good buy, but I'm more interested in the future of TTWO and EA. Especially with TTWO, their IP is insane especially with GTA, RD, BioShock, etc along with their valuation at 18b, it seems like it would be considered chump change for one of these other tech companies trying to compete in the gaming sector to go in and buy it up.

  • Prospect in IB - Gen
Jan 18, 2022 - 7:55pm

I think Sony buying Take Two would be astute - gives them first-hand access to GTA development and the ability to leverage that to keep the PS5 competitive in a potential mutually assured destruction way (i.e. if MS makes CoD Xbox exclusive Sony could come back and do the same with GTA)

  • Intern in HF - Other
Jan 18, 2022 - 8:44pm

Exactly. its a good form of insurance, although i think MSFT is just using the acquisition to entice ppl to subscribe to gamepass rather than make most of these games exclusive which would be a stupid move and would anger the gaming community.

  • Intern in IB - DCM
Jan 19, 2022 - 1:30pm

Yes but Sony forking over $18b is heavy for them. They generate ~6b in fcf while Microsoft generates ~50b while still having a lot of divisions like movie production, music hardware etc.

Jan 18, 2022 - 8:20pm

It's a great deal for Microsoft. It's a healthy premium to their share price today, but activision was trading at this valuation in early 2021. The culture at activision is tainted, and this gives them a fresh start. I'm sure activision felt this was necessary, but there will be who feel shortchanged by this deal on the ATVI side.

From a valuation perspective, I believe I read ~20x EBITDA. This seems reasonable, especially when you think about Day 1 synergies. Xbox immediately puts these on Game Pass increasing recurring revenue, and increasing Xbox sales in the short term future. Hell, it probably will increase Xbox sales as early as today since gamers know what this means.

Finally, not sure what you mean by "haven't done shit with Bethesda". Every Bethesda IP is now theirs and went straight to Game Pass at acquisition close. Bethesda has extremely loyal fan bases, and their is still money to be made on these older games. Starfield is a Nov 2022 release and not only will be an insanely popular release, if all goes as planned will create a fan base for the next decade on that game alone. Owning IP to Elder Scrolls, Fallout, and likely Starfield were worth the purchase price alone. That's all ignoring the rest of the Bethesda IP which is solid albeit mid tier.

Jan 18, 2022 - 8:47pm

I think it opens the door to other large gaming companies being poached by bigger companies. Big tech wants to get into gaming, with Google Amazon and Netflix entering the space. Companies like TTWO and EA are huge, but they are tiny compared to the tech giants. 

Maybe they might get an idea and acquire a gaming company. Apparently Google shut down its game studios after Microsoft bought Zenimax

There aren't that many public game publishers left, all are targets to be scooped up now. TTWO just announced it would acquire Zenga

Jan 18, 2022 - 10:30pm

With the world changing so much these past few years, I take comfort in the guarantees... Like GS TMT destroying the tech league tables each year.  

  • Prospect in RE - Comm
Jan 18, 2022 - 11:29pm

Read about it in the wall street journal this morning. Seems interesting. Funny enough, when I first read it, it mentioned harassment from the CEO, but did not say anything of him resigning. In fact, it said that the Chief would now report to the head of the gaming division for Microsoft. A few hours later, I got a notification, and it said that the CEO was stepping down. Overall, should be good in raising revenue for the gaming division now that they can add game series such as COD or League of Legends to their subscription service. Could also cause people to buy more of the gaming consoles as well.

  • PM in HF - Other
Jan 19, 2022 - 12:29am

Reminds me of their "reach of linkedin". MSFT swings hard and focuses one or key acquisitions it seems. Think the "gaming sites" see this as the natural evolution of "game pass". Think everyone agrees "game pass" is way ahead of stadia/etc. So do not doubt MSFT on this one. 
Truly only issue ATVI had was its dog shit leadership as someone pointed out, that said MSFT is known to fix those situations fast.

  • Analyst 2 in IB - Cov
Jan 19, 2022 - 12:49am

Was interviewing with a hedge fund, sent an ATVI short as my sample stock pitch. Pretty sure they are gonna blow up. 

Jokes aside, imagine:

1. When you open your Windows 95 start menu and next to Minesweeper, you see a weird remake version of OverWatch 5. Then you see your friend who is a fucking gaming moron play Diablo 8 on his/her iPhone 26 after the newest DLC came out last Saturday, along with 8 other independent packs available to buy (Sims 4 I'm looking at you bastard in the rearview mirror). Your friend bought all 8 packs and suddenly are having much more fun than you playing Druid because hey it's not the 50's anymore why are you still playing Druid ? That's for grandpas.

2. Next you click on Warcraft 5 that comes with your Windows 15 setup, and you saw this "The Tale of Arthas" before you decide to go on the Battle Net to battle some shithead who thought Sky played Orc and Grubby Human. You get really excited. You finished all 5 chapters in the afternoon when Arthas was paired up with Paladin (don't ask) to find the Sword of BigAss, then at the end of Chapter 5, they gave you that line "the story continues in Warcraft 6". Knowing Blizzard you know you will have to wait 10 years. But wait, the story of Alex Hunter in FIFA DID continue, no? I'll just need to pay later.

Fathom now, pay later, that's the fintech I'm talking about. That now and later thing. 

You go to sleep smiling like an angel.  

  • Analyst 1 in IB-M&A
Jan 19, 2022 - 6:24am

Allen & Co. is one of the ATVI advisors along with GS I presume

Jan 19, 2022 - 9:43am

$68 billion for a video game company. Good god.

I'm going long on healthcare companies targeting chronic diabetes and childhood obesity. It's a can't-miss...

Jan 19, 2022 - 10:41pm

unless you are investing in the primary market, don't act like your purchase is helping the development of cures or anything. You simply made a bet at the table against someone else.

  • Business School in CorpStrat
Jan 19, 2022 - 11:38am

In a business sense and as a former hardcore gamer, this is a very cool acquisition! Microsoft CEO definitely more acquisitive it seems than a lot of FAANG heads.

  • Managing Director in IB-M&A
Jan 19, 2022 - 11:51am

Aside from financials, I'm wondering if there's a "play for metaverse" here. Imo, gaming is metaverse 1.0 and deep IP and knowledge around how to build an online universe and attract/monetize that online universe are something they would gain on top of well performing IP today / financial accretion.

Or, I'm reading into it too much. 

Jan 20, 2022 - 6:11pm

Microsoft released second-generation AR/VR glasses 'HoloLens' in February 2019. Activision Blizzard counts 400 million monthly active players across 190 countries. Unlike ZeniMax, which pre-deal already had some titles on Game Pass, Activision Blizzard's prominent franchises have not been available on Game Pass. Microsoft explicitly noted in its press release that the deal will help provide the "building blocks for the metaverse"-likely a reference to integrating Activision Blizzard's 400 million monthly active users into Microsoft's cloud flywheel.

everyday AR/VR wearable hardware (think smart glasses the size and weight of regular gasses) won't be commercially viable until 2024-2026 (Would love to see Microsoft buy ostendo technologies); required innovations in semi chips (quantum photonics/system on chips), micro LED displays, edge computing/5G-penetration, AI/ML etc. remain. MSFT can't let meta's ecosystem advantage in VR hardware/software reach critical mass. Expect MSFT to release a 'Hololens light' device for its cloud gaming platform soon. 

  • Prospect in Consulting
Jan 19, 2022 - 12:20pm

Did any news release who is advising this deal?

Jan 19, 2022 - 9:21pm

Been playing WOW for a whole decade and everyone knows it is going down, like every other IP in Blizzard's portfolio. OWL turns out to be a pile of shit and burned out, Diablo 4 is on the timeline but apparently, the influence of Diablo as an IP only plummeted over time (those who played D2 are now in their thirties), and SC2 is dead already. WOW is a joke at the moment, not even comparable to, say FF14, which has already acquired a larger player base in a rather short period of time. 

The only way to justify the deal for me is to look at COD and F Candy Crush (who knows), or the Dev team, if you will. However, 69B and 40% premium on stock price still sound ridiculous to me. Maybe MSFT is just sitting on a pile of cash and wanna pour it on some metaverse scam. 

Art history majors can get into high finance too. I proved it.
  • 1
Jan 19, 2022 - 9:31pm

From the latest filing Microsoft has $130B in Cash, Cash Equivalents. They can pay for the biggest deal in video game history with cash. Reminds me of when Ballmer paid for the Clippers($2B) with a wire transfer that was settled within a few hours.

Jan 20, 2022 - 2:32am

Please fix Warzone ASAP. So many bugs and if I have to shoot someone with an invisible gun one more time…

Jan 21, 2022 - 12:34am

Could also speculate. Buy a put a few bucks OTM and cheap ass call at 90 with little cash outlay for around 1 year term. Yes there's tons of risk even timing but the MoM looks attractive in more than 50% of outcomes. You do that trade all day long.

Jan 20, 2022 - 6:00pm

Microsoft released second-generation AR/VR glasses 'HoloLens' in February 2019. Activision Blizzard counts 400 million monthly active players across 190 countries. Unlike ZeniMax, which pre-deal already had some titles on Game Pass, Activision Blizzard's prominent franchises have not been available on Game Pass. Microsoft explicitly noted in its press release that the deal will help provide the "building blocks for the metaverse"-likely a reference to integrating Activision Blizzard's 400 million monthly active users into Microsoft's cloud flywheel.

This deal's upside is obvious. everyday AR/VR wearable hardware (think smart glasses the size and weight of regular gasses) won't be commercially viable until 2024-2026; required innovation in semi chips (quantum photonics/system on chips), micro LED displays, edge computing/5G-penetration, AI/ML etc. may advance quicker or slower than I describe here. 

Would love to see Microsoft buy ostendo technologies. 

Jan 21, 2022 - 5:39am

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