Why Did Microsoft Buy Activision?

The decision by tech giant Microsoft (NASDAQ:MSFT) to acquire video game major Activision Blizzard was one of the largest takeover stories in the technology sector over the past half decade.

After nearly two years of delays and legal challenges, Microsoft formally acquired Activision on October 13th 2023. With this purchase, Microsoft has moved further than ever before into the video gaming market. 

Is it a smart play that will bolster revenues or a drag on Microsoft’s balance sheet?

Why Did Microsoft Buy Activision?

The acquisition of Activision is part of a larger trend toward gaming consolidation at Microsoft. Already the owner of the Xbox console and a catalog of PC and cloud games, Microsoft will now be able to add Activision’s massive portfolio of intellectual properties to its own platforms. Notable franchises owned by Activision include Call of Duty, Diablo and World of Warcraft.

With Activision secured, Microsoft will become the world’s third-largest gaming company by revenue. Given that the gaming industry is expected to grow to over half a trillion dollars by 2030, the Activision purchase is part of a strategic positioning that could prove highly profitable for Microsoft.

On a short time horizon, the addition of Activision’s games to the Xbox library and other platforms will give Microsoft’s gaming revenues a modest boost. Sales of Xbox gaming consoles are expected to rise as a direct result of the availability of popular Activision titles. This effect may help Microsoft recover some ground in its device sales, which have taken a backseat to the higher growth of cloud services in recent years.

Looking further down the road, Activision could become an integral part of Microsoft’s new gaming strategy. In its final quarterly report for Q2 of 2023, Activision counted 356 million monthly active users. With an active customer base larger than the population of the United States, Activision is without a doubt a tremendously valuable asset for any company making a play for market share in the gaming space.

In particular, Microsoft’s ownership of Activision game franchises could be crucial as gaming shifts from consoles to mobile devices. Cloud gaming is rapidly emerging as the most important new avenue for video game companies. With some of the world’s most popular games in its own catalog, Microsoft will be well-positioned to attract gamers to its platform as cloud gaming continues to grow.

What Happens to Activision Stock?

Upon completion of Microsoft’s purchase, shares of Activision were delisted and the company ceased to trade publicly.

Per the terms of the purchase agreement, shareholders were given $95 per share of Activision they held prior to the closing of the deal.

What Is the Deal Between Activision and Microsoft?

In January of 2022, Microsoft offered to purchase Activision at the offer price mentioned above.

In April of 2022, the deal was approved by more than 98 percent of the voting shares at a special meeting of Activision shareholders.

Under the terms of the deal, Microsoft would fully acquire Activision and integrate it into its own business.

Is the Microsoft Activision Deal All Cash?

In a somewhat unusual manner for such a large acquisition, Microsoft purchased Activision in an all-cash deal.

With around $111 billion of cash on hand as of the most recent quarterly report, the deal to purchase Activision represented a large buy even for a tech giant like Microsoft.

Who Was Against the Microsoft Activision Deal?

While the Activision purchase may have been a good long-term business decision for Microsoft, it also involved the company in a complex battle with the Federal Trade Commission. The regulatory watchdog alleged that Microsoft’s ownership of extremely popular game franchises would allow it to shut out rival gaming console makers, potentially creating an anti-competitive lock on the gaming market in the US.

Despite defeating the FTC’s argument against the acquisition in court, Microsoft may still see further attempts by the commission to unwind the purchase. The FTC has decided to appeal the court’s original decision. That appeal is expected to be heard in December, though it is unlikely to alter the outcome of the case in the FTC’s favor.

Regulators in the UK and Europe also opposed the deal for similar reasons to the FTC. To gain the EU Commission’s approval, Microsoft agreed to a 10-year period in which Activision games could be freely streamed on any cloud streaming platform by European consumers.

This compromise, in conjunction with an investigation that found limited competitive concerns associated with the acquisition, paved the way for ultimate approval by the European regulatory body.

What Did Microsoft Agree to Pay for Activision?

The final purchase price as agreed between Microsoft and Activision was $68.7 billion. This makes it by far the largest acquisition in the history of the gaming industry.

The next-largest buyout was also announced in 2022. In that deal, Take-Two Interactive agreed to acquire Zynga for $12.7 billion, less than 20 percent of the price Microsoft paid for Activision.

Did Microsoft Overpay for Activision?

Although Microsoft may derive significant long-term value from combining Activision’s intellectual properties with its gaming platforms, there’s little doubt that Microsoft paid a substantial premium to acquire Activision.

This is especially true in light of the interest rate hikes that have occurred since the deal was initiated in 2022. With prevailing rates, Microsoft could actually have earned more money this year by keeping the $68.7 billion it paid for Activision in treasury notes.

As of the end of Q2, Activision had generated earnings of $2.73 per share over the trailing 12-month period. At $95 per share, Microsoft paid nearly 35 times trailing earnings for the company. While a significant shareholder premium is almost frequently a feature of a large acquisition, this multiple is well above the 23.9 times trailing earnings that the S&P 500 currently averages.

The question, however, is how much value Microsoft will be able to gain from the synergy between its existing gaming business and Activision’s game catalog. Higher device sales, for example, could represent an immediate increase in revenue and earnings beyond what Activision could have delivered as a standalone business.

Ultimately, Microsoft’s decision to acquire Activision was an extremely expensive one, but it could be a key move in helping the company position itself for long-term success in an increasingly consolidated gaming market.

With Activision incorporated into its gaming business, Microsoft will likely be able to pad device sales, derive additional revenue by distributing popular titles on new platforms and produce new games to build additional consumer engagement.

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