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Why Did Microsoft Buy Activision Blizzard?

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Microsoft (MSFT) announced today that it will be acquiring Activision Blizzard (ATVI) in an all-cash deal valued at $68.7 billion—$95.00 per ATVI share. This comes as a huge splash in the Big Tech space, as virtually all companies have been aiming to develop interactive entertainment content.

This will be Microsoft’s largest deal ever, signaling the importance it places on doubling down with online gaming.

Historically, Microsoft has been best known for many of its legacy products. For example, the Windows operating system and other software offerings including Microsoft Office are synonymous with personal computing.

Still, the company has been rapidly growing with technology that connects users globally. Notably, its Azure cloud computing platform has been on fire. Likewise, its gaming division with Xbox has a strong foothold with consumers.

What Does Microsoft Get From Buying Activision Blizzard?

In their press release, Microsoft indicated the acquisition will accelerate growth in their gaming business across mobile (the largest gaming category), PC, console, and cloud. It will ultimately make them the third-largest gaming company by revenue.

This means they’ll have immediate scale to continue broadening their reach. Activision brings with it millions of consumers who already love their products.

With this acquisition, Microsoft gains the following advantages:

  • A strong recurring revenue stream due to great franchises
  • High-quality talent and teams
  • Synergies with its existing units of business

It is worth considering each of these in turn.

Activision Blizzard’s Robust Franchises: Huge Recurring Revenue Streams

All forms of entertainment rely on creating emotional links with consumers. This is as true for gaming as it is for other platforms such as streaming.

It comes down to developing content that the audience cares about. Once you have that, you have a sticky user-base that won’t switch products easily.

In the gaming world, some of the most enduring global franchises are owned by Activision:

  • World of Warcraft
  • Call of Duty
  • Candy Crush
  • Diablo

Some of these games cross generational lines, with parents growing up on them and sharing with their kids.

Businesses thrive on developing as many sources of cash flow as possible.

Activision brings in recurring revenue through several reliable methods:

  1. Developing new content. Think of each World of Warcraft expansion that gamers simply must have.
  2. Ongoing subscriptions. It costs money each and every month for gamers to play many online games.
  3. Selling skins and items. Gamers want to look good and have the best gear for fighting.

This becomes a virtuous circle for a well-run business.

High-Quality Talent

If it were just a matter of spending money on developing any kind of content, Microsoft wouldn’t bother with this costly acquisition. They’d just do it themselves.

The issue, however, is that the kind of talent that it takes to build lasting franchises is rare. The skillsets to build the best games in the world don’t come around easily.

What Microsoft is doing is buying an immediate entry into the best franchises and acquiring the builders themselves. Activision has a deep pool of talent that knows how to ship high quality products on time.

Further, there have been plenty of scandals in the press about conduct of staff at Activision. This merger with Microsoft may offer the opportunity to develop a new, better culture among that workforce.

Synergies with Existing Business Units

The cloud is the likely destination from which nearly all games will be hosted in the future. This is all going to require boundless amounts of processing power to render these online worlds at hyperspeed.

The aforementioned Azure cloud computing platform from Microsoft is one of the best in the world. This acquisition means they’ll have the digital foundation in place, along with the ability to build skyscrapers of content.

Activision CEO Bobby Kotick had this to say about the decision-making process to join Microsoft:

As investments in cloud computing, AI and machine learning, more sophisticated data analytics, user interface and user experience capabilities become more competitive and more necessary for the exciting gaming future that lies ahead, we will benefit tremendously from having a partner like Microsoft to better enable our ambitions. As we thought about possible partners, all roads ultimately led to Microsoft.

The Xbox network and Game Pass will be a perfect host for Activision’s games. The pipeline for development will stretch decades into the future.

What Comes Next for the Combined Companies?

The first hurdle will be to get this deal passed by regulators. There will be plenty of resistance to allowing this gargantuan merger to take place.

Assuming it does, Microsoft will have a clear path forward.

Beyond accelerating growth in traditional gaming, Microsoft indicated that they believe Activision will provide the “building blocks for the metaverse”. In other words, the plan isn’t simply to continue on with the status quo.

In fact, CEO Satya Nadella stated the following:

Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms. We’re investing deeply in world-class content, community and the cloud o usher in a new era of gaming that puts players and creators first and makes gaming safe, inclusive and accessible to all.

Microsoft recognizes that the metaverse will have a huge emphasis on gaming. This includes having gamers playing within the metaverse, while also facilitating a solid creator economy.

Operational Considerations

This acquisition is expected to close in Microsoft’s fiscal year 2023. Upon closing of the deal, long-time, Bobby Kotick will hand over the reins of Activision to Phil Spencer, CEO of Microsoft Gaming. This is going to be a passing of the torch, as Kotick was head of Activision all the way back to 1991.

This time will continue to allow Kotick to work through the internal culture challenges at the company.

From the Microsoft standpoint, I consider this purchase a good use of their substantial cash stockpile. Over the past two years, the company has managed ~10% dividend raises. After such a large cash outlay, I suspect they will raise on the lower end in 2022 to remain conservative.

Final Thoughts

The best companies in the world know how to remain on offense in the competitive marketplace. With technology shifting as rapidly as it currently is, there is no opportunity to remain defensive and hope for the best.

By purchasing Activision Blizzard, Microsoft is staking a firm claim on the future of the metaverse. They will be in the position to dictate a large part of what the next few decades are going to look like.

The combined company will have the absolute top tier games, alongside hundreds of millions of monthly-active users. And the vast majority of those gamers are happy to pay for premium content.

All-in-all, I believe this is going to be a fantastic deal for Microsoft and its shareholders. It’s a deal we’ll still be talking about in years to come.

Full Disclosure: Long MSFT

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