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What Does The Activision Blizzard Acquisition Mean For Microsoft? $MSFT $ATVI

Calvin Lo

Microsoft’s (MSFT) deal to acquire Activision Blizzard (ATVI) for $69B in its largest acquisition ever made huge waves. Management even threw in the “Metaverse” word for good measure as part of the justification for the purchase.

Microsoft to gobble up Activision in $69 billion metaverse bet

After the dust has settled over the past week, I’ve had the chance to read up on what other investors think about the deal to figure out how this affects my view on Microsoft since it is one of our biggest holdings. I was previously a shareholder of Activision, but exited the position back at around $78 shortly after news of the scandal broke back in Sep 2021. See our portfolio here.

Without a doubt, this deal is huge in absolute terms. $69B is definitely nothing to scoff at. However, Microsoft is a huge company at $2.3T. Thus, Activision even at the purchase price of $95/share which is a 45% premium, still only represents 3% of Microsoft’s market cap.

In terms of revenue, Microsoft’s gaming revenue in 2021 was $15.4B which represents <10% of total revenue TTM of $176B. In comparison, Activision’s revenue TTM was only $9B. The combined entity should push Microsoft gaming revenue theoretically to $24B or around 13% of total revenue.

ATVI shares initially surged as much as 30% from ~$65 to ~$85 but have drifted lower closing at ~$79 (as of 25th Jan 2022). In contrast, MSFT shares barely budged in response to the news.

ATVI share price chart
Source: TradingView
MSFT share price chart
Source: TradingView

My take on the deal

  1. Despite the initial surge in ATVI share price to $85, shares never really got close to the offer price of $95/share. Investors might be cautious about how much regulatory scrutiny this deal will draw from authorities already very sensitive about Big Tech acquisitions. The deal is also expected to take around 18 months so that’s a pretty long wait.
  2. Improves the proposition of Xbox Game Pass (25M+ subscribers), which is the video game streaming subscription service for Xbox, i.e. the Netflix of video games. If the deal goes through, expect many of Activision’s games to become exclusive to Xbox (except Call of Duty).
  3. Microsoft Gaming growth has been slowing, although tough comparison vs last year when gaming revenue got a boost from the pandemic. Microsoft reported in Q2 2022 that Gaming revenue grew only 8% vs other segments growing at 20+%. Hopefully Activision will provide a boost to Gaming with more titles coming under Xbox.
  4. Toxic work culture and allegations of sexual harassment at Activision (read here) will be challenge for Microsoft to clean up. Expect Activision CEO Bobby Kotick to leave should merger happen, will be lead by Microsoft Gaming CEO Phil Spencer.
  5. Activision Blizzard’s revenue growth has also been healthy last I checked (see my post on Q1 2021 results here), mainly driven by Call of Duty franchise so I foresee plenty of growth ahead.
  6. Microsoft can good use of its cash pile through this investment, since they’ve tried and failed in its 2 prior attempts to buy Discord and TikTok (although it was Trump that tried to push TikTok onto Microsoft). Discord would’ve been a good fit IMO.

Final thoughts

Initially, I was skeptical about this deal and felt that Microsoft might be paying too high a premium at 45%. However, as I did more research the attractiveness of this deal grew on me. $95/share is also not a ridiculous price, since ATVI was trading at that level at its peak.

I believe Microsoft will be able to clean up the toxic culture at Activision and use its platforms to grow the combined Microsoft Gaming + Activision revenue.

With this acquisition, Microsoft is trying to grow it’s consumer-facing business through gaming and build up its ecosystem geared towards the metaverse. I continue to be bullish on Microsoft with this deal and happy to consider picking up more shares during this dip in the stock market.

What do you think about this Microsoft-Activision deal?

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Disclosure: I’m long MSFT.

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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