3 takeaways from Microsoft’s $68.7B purchase of Activision Blizzard

Posted: 21 January 2022 5:14 pm

Tech company set to become world’s third-largest gaming company by revenue. What it means for investors.

Microsoft (MSFT) announced this week its plans to acquire Activision Blizzard (ATVI), the Santa Monica–based video game publisher known far and wide for its iconic franchises Call of Duty, Crash Bandicoot and Tony Hawk.
This megadeal comes as Microsoft looks to accelerate its gaming business and claim its stake in the metaverse. “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,” Microsoft CEO Satya Nadella said in a press release. “We’re investing deeply in world-class content, community and the cloud to usher in a new era of gaming that puts players and creators first and makes gaming safe, inclusive and accessible to all.”
For the deal, Microsoft is offering $95 per share in an all-cash transaction valued at $68.7 billion. This is a 45% premium to Activision’s stock price at close on Friday. (US stock markets were closed Monday in observance of Martin Luther King Day.)
The deal is expected to close in fiscal year 2023 and will be accretive to Microsoft’s non-GAAP earnings per share upon close, according to the company’s press release. In other words, Microsoft’s earnings per share will increase after the deal goes through.
Activision’s shares closed Tuesday up 26% at $82.31, still a significant discount to the offer price. The stock was stagnant Wednesday and opened on Thursday at $82.29.

Should you buy Microsoft stock ahead of the purchase?

Microsoft’s stock is down slightly since announcing its plans to acquire Activision and down around 14% from its 52-week high of $349.67, which the company achieved in November 2021. This could mean a good buying opportunity on some weakness with strong indications for future growth.
For starters, the deal is set to increase Microsoft’s share of a couple rapidly growing industries — video game publishing and the metaverse. The $43.9 billion video game publishing industry in the US is forecasted to grow 7.4% in 2022, according to research firm IBISWorld. A Bloomberg analysis puts the metaverse market at roughly $800 billion by 2024.
Analyst consensus estimates have not reflected the deal. Still, Microsoft currently has 34 analysts covering the stock, 27 of which have called it a Strong Buy or Buy, versus just six Holds and one Sell. The average price target is $370.28, a 24% premium over its current price.

What about Activision stock?

Microsoft’s offer is for $95 per share, a little over 15% above Tuesday’s closing price of $82.31. The stock has been trading fairly flat ever since the announcement, which is normal after a buyout is announced. The target stock usually trades for a little less, and gradually moves closer to the full deal price as the closing date of the transaction approaches.
Activision stock was trading at $81.56 midday Friday, meaning there’s still room for growth — roughly 16% from its current price — if you want to seek a premium buyout at the $95 value. Meaning, investors can earn another roughly 16% gain by simply buying and holding their Activision shares. Assuming the deal is finalized, of course.
The deal could also fall through, which would likely cause Activision’s stock to drop. A recent Barron’s article says the deal has a 60% likelihood that it’ll close given the antitrust scrutiny that it will likely receive.
In addition, the transaction isn’t expected to close for some time, fiscal year 2023. Microsoft’s fiscal year 2023 starts on July 1, 2022. This means your money will be tied up for a while and could miss out on a higher return elsewhere.

Microsoft’s position in the competitive gaming market

Microsoft reported gaming revenue of $11.6 billion in 2020, making it the fourth-largest gaming company in the world behind Tencent, Sony and Nintendo. The company’s gaming revenue is generated by Xbox consoles and Xbox content and services, such as Xbox live and cloud gaming.
In 2020, Microsoft saw a year-over-year decline in its gaming revenue. Gaming revenue increased by only $189 million, or by 2%, from 2019, compared to an increase of $1.0 billion or 10% from 2018 to 2019. This was primarily due to a drop in Xbox hardware revenue, which declined 31% due to a decrease in volume and price of consoles sold.
So what does the purchase of Activision mean for the future of Microsoft? Here are three takeaways from the deal as an investor.

1. What the deal adds for Microsoft

When the transaction closes, possibly later this year, Microsoft will have 30 internal game development studios and will become the world’s third-largest gaming company by revenue, behind Tencent (TCEHY) and Sony Group (SONY)..
Activision reported 2020 revenue of $8.1 billion. Combined, this would put Microsoft somewhere in the area of $20 billion in annual gaming revenue.
In comparison, Sony reported total gaming revenue in 2020 of $23.3 billion, while Chinese tech giant Tencent reported 2020 gaming revenue of around $25 billion. (Not coincidentally, Sony stock fell 10% in a move seen widely as a response to the stepped-up competition from Microsoft.)
Activision’s library of games will nudge Microsoft into the top three largest gaming companies in the world.

2. A race to dominate the metaverse

Microsoft sees gaming as playing a key role in the development of metaverse platforms and views the purchase of Activision as providing the necessary building blocks for it to become a major player in the metaverse.
“Together we will build a future where people can play the games they want, virtually anywhere they want,” said Microsoft Gaming CEO Phil Spencer in Tuesday’s press release.
Wedbush Securities managing director Dan Ives on Tuesday told Brian Sozzi and Julie Hyman of Yahoo Finance Live that Microsoft’s purchase of Activision is indeed a metaverse play. “I think this was a huge, aggressive metaverse-related deal, in terms of what Activision could play, in terms of over the coming years, in terms of their franchises,” Ives said.
“ … This is something that’s going to have repercussions across the landscape. And you’re going to see a blending more of technology, gaming, and streaming. That’s something that I believe is going to be a big trend in 2022.”
Microsoft’s version of the metaverse began taking shape in November 2021, when it unveiled Mesh for Microsoft Teams, a feature that combines the mixed-reality capabilities of Microsoft Mesh with the productivity tools of Microsoft Teams. During an investor and media call shortly after the Tuesday announcement, Microsoft executives described its outlook for its version of the metaverse.
“When we think about our vision for what a metaverse can be, we believe there won’t be a single centralized metaverse,” Nadella said on the call. “We need to support many metaverse platforms.”

3. Big tech companies still dominate the media world when they want to

Microsoft’s move to purchase Activision is another reminder of the growing power of Big Tech. Over the last two decades, rapid growth in the technology sector has pushed many tech companies to become some of the biggest in the world.
We’ve seen the tech giants — Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Microsoft and Meta (FB) — extend their reach in many ways, buying up smaller companies in new sectors to broaden their revenue streams and outmaneuver competitors.
The sheer size of the deal – MIcrosoft’s biggest ever, and one of the largest in any sector in years – would make it tough for a smaller company to pull off.
US lawmakers and regulators have been acting to curb the power of Big Tech, viewing the growth in purchases of smaller companies as anticompetitive business practices.
But these companies continue to relentlessly forge ahead, dominating software platforms, online communication, e-commerce — and now, gaming. At the time of publication, Matt Miczulski owned shares of AMZN and AAPL.

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