[412-code-talk] Fwd: The Largest Gaming Deal in History

Sun Jan 23 09:03:57 EST 2022

Date: Sun, Jan 23, 2022 at 8:34 AM
Subject: The Largest Gaming Deal in History

Microsoft is making the world's most expensive bet on video games with a
$69 billion purchase of Activision Blizzard. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌
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January 23, 2022
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Good morning and happy Sunday! This weekend we’re discussing the wonderful
world of gaming M&A and, as you’ve probably guessed, it’s all about
Microsoft and Activision Blizzard.

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But back to M&A. Drop me a line at @liamkillingstad
<https://fos.cmail19.com/t/t-l-cuunjd-gzhhdlty-i/> on Twitter or email me
at liam at fos.company if you want to continue the conversation.
The Gaming Deal Heard Around the World

Microsoft, Activision Blizzard/ Design: Alex Brooks

Rarely do we get to claim something as the “biggest of all-time.”

On Jan. 18, Microsoft made that possible by announcing that it would
acquire famed video game publisher Activision Blizzard for a whopping $69
billion — the largest tech acquisition in history.

To put into perspective how massive this deal is, here are individual
purchases Microsoft could have done instead with $69 billion:

   - Every NHL team two times over
   - Every MLB team
   - 29 NBA teams
   - 22 NFL teams
   - Every Bored Ape NFT 60 times over
   - And, as of market close Friday, Peloton’s entire business about eight
   times over

By any stretch of the imagination, the transaction is a blockbuster. Being
a big player in the gaming business pays — the estimated total addressable
market is currently $175 billion, and in an industry that is largely driven
by franchises, Activision Blizzard owns several crown jewels.

Microsoft CEO Satya Nadella is incredibly bullish on the industry, stating
his gaming thesis on the company’s Oct. 26 earnings call:

*“Gaming is the largest and fastest-growing category in entertainment. The
last two years, in particular, have shown how critical games are to helping
people maintain a sense of community and belonging even when they’re
apart.”*

Nadella was introduced as CEO in 2014 and his M&A resume includes the likes
of Mojang, LinkedIn, and GitHub. From the looks of it, the Activision deal
might be the most meaningful of all.
*It’s Blizzarding Cash*

One remarkable thing about this transaction is that it was an all-cash
deal. The $69 billion price tag represents 52% of Microsoft’s cash and
short-term investments — basically anything liquid enough to be converted
into cash.

The $69 billion figure also represents almost 90% of Microsoft’s net
operating cash — the cash that a company has generated from carrying out
its operations, different from simple balance sheet cash and equivalents
which represent a snapshot of liquid assets at a specific point in time.

Another fact worth noting: The deal has an associated breakup fee of $3
billion for either party (depending on who backs out). The breakup fee is a
common feature of large M&A transactions — a fee usually paid by the
acquisition target (in this case Activision) to the acquirer (Microsoft) in
order to incentivize closing the pending deal.

   - According to reports, in this particular case, if the deal is
   terminated due to antitrust concerns, Microsoft will be forking over the
   cash.
   - If, on the other hand, the deal is called off due to Activision
   finding another purchaser, then the fee will fall squarely on their
   shoulders.

Microsoft will be purchasing the gaming studio at a $95 per share price
point, a 45% premium over the company’s share price the week leading up to
the deal, and just 10% off the company’s 52-week high.

Given the percentage of Microsoft’s net cash that this deal represents,
along with the breakup fee and clear path for Microsoft to become the top
player in the gaming space, the incentives to get the deal done are very
real.
*Microsoft’s Portfolio*

>From a gaming studio perspective, there are few companies that are more
compelling targets than Activision, which is 40% larger by market cap than
the next closest competitor, Electronic Arts.

Unsurprisingly, Microsoft has relatively diversified revenue streams, of
which their consumer division is a core strategy. As of the $2 trillion
company’s most recent earnings report, the revenue breakdown looks
something like this:

   - Productivity and Business Process (Office products and LinkedIn): $15
   billion, 22% increase YoY
   - Intelligent Cloud (Microsoft’s version of AWS): $17 billion, 31%
   increase YoY
   - More Personal Computing (consumer products including games): $13.3
   billion, 12% increase YoY

Microsoft’s Xbox content and services fall in the More Personal Computing
revenue bucket and growth for that segment was not exactly impressive, with
only a 2% increase year-over-year — the lowest growth of any line item.

But if you extrapolate gaming-specific performance it looks more promising:

   - 16% increase in total gaming revenue YoY
   - 166% increase in Xbox hardware revenue YoY

Now, here’s the kicker. While building up their gaming revenue is clearly a
huge boon to Microsoft, there are actually other ancillary benefits that
the company will see. Constellation Research analyst Holger Mueller posits
that the acquisition will actually benefit Microsoft’s Azure product.

Activision Blizzard currently operates on Google Cloud, a competitor to
Microsoft’s Azure. When the deal is completed, it can be assumed that the
gaming studio would shift its cloud infrastructure from Google Cloud to
Azure. According to Mueller, this could potentially pay for $10-$20 billion
of the transaction price.
*Capturing Future Gamers*

The move to buy Activision, in some respects, can also be seen as a play to
dive deeper into the metaverse and AR/VR markets.

The next five to 10 years of gaming will require participants to build out
massive amounts of IP and content. Metaverse gaming in particular will
require a pairing of hardware and software expertise along with robust
creative teams to build out the infrastructure.

Under Nadella, Microsoft has clearly become an apex acquirer, but is the
Activision acquisition enough to make them the industry’s clear leader? If
they prioritize getting blockbuster franchises like “Call of Duty” and
“Overwatch” into the hands of Xbox gamers first, and perhaps exclusively,
the answer is likely yes.
*Another One?*

So, what’s the next move and who makes it?

A company like Ubisoft makes sense as an acquisition target. For starters,
it’s embroiled in legal battles similar to Activision, causing a diminished
workforce and a suppressed stock price. Furthermore, Sony, who many expect
to make a major move of their own, is set when it comes to selling consoles
— now they need content and IP, something that Ubisoft has in spades.

However, Sony itself, or at least parts of it could also be the target of
some of the big fish — maybe Netflix or Apple.

   - Netflix began its foray into gaming in 2021 and could benefit from the
   existing portfolio that Sony presents.
   - As the world’s largest company, Apple has enough cash to…well, do
   whatever it wants, and acquiring a company like Sony or Electronic Arts
   would cement Apple as a force to be reckoned with in the space.

The viability of all this depends on the fun police, the FTC and the DOJ,
who ultimately decide if the transaction is deemed anti-competitive. But
it’s not hard to imagine an outcome where gaming consolidation continues
and there are now precedent transactions that could provide meaningful
context for valuations.

It’s all speculation at this point, but hey, I doubt many had a $69 billion
gaming acquisition by Microsoft on their January bingo cards. In the
immortal words of Kevin Garnett, “Anything is possible.”
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