Fin 471
18 January 2023
Acquisition Valuation
For this assignment, I wanted to cover the recently announced and soon to be completed
acquisition of Activision Blizzard, a massive game development company, by Microsoft, a giant in the
tech sphere, one of the largest deals in history for the industry. Microsoft announced plans late in 2022
to acquire the game giant for a massive $68.7 billion with the goal of bringing the developers massively
successful IP to Microsoft’s newly developed Game Pass service.
The “story” as some might phrase it, does make a lot of sense in this situation. Microsoft’s
massively successful Xbox platform was looking for ways to grow and expand and found a new avenue
to do so a few years back with the implementation of Xbox Game Pass. This service, which acts very
much like the Netflix of gaming, allows users to access a plethora of games and experiences on their
home console for a flat monthly rate. This service appealed to many consumers given that the old way
of playing games involved making the hefty purchase of $60 per title you wished to own a copy of.
Occasional sales helped ease the burden, but for a long time, the standard was forking over the hefty
fee to gain access to your favorite games as they came out. Microsoft aims to change this meta, and
shift consumers to a paid subscription model, where for a relatively small monthly subscription fee,
users gain access to a library of games that would cost thousands to purchase individually. Acquiring
Activision Blizzard aligns with this company goal, as it will bring newer, better titles to their subscription
platform, thus ideally driving up subscriber counts and annual revenue for Microsoft.
Some sources of risk in this scenario are the potential overvaluation of Activation Blizzard and
it’s IP, as well as the risk that the valuation is fair, but the intended result isn’t achieved, and Microsoft is
unable to generate the required revenue from their new acquisition. There could be a variety of ways
this could unfold, but general concerns are that Microsoft paid too much for the deal, and that the rights
to the games they are receiving are not worth the price they are paying. One major concern is that
Activision hasn’t released any major titles in the last few years besides it’s popular Call of Duty line, but
often times game companies will have a backlog of games in production that are yet to be released or
even publicly announced, so this could explain some of the high price.
Microsoft’s massive size lends itself many advantages when operating. One of these advantages
is their massive pool of cash available for research, development and deals like this. In this case
Microsoft is capitalizing on this deal and is making the acquisition in all cash.
Short term, this deal will create new revenue streams for Microsoft through sales of games
created by Activision Blizzard. On top of this, it is likely going to increase revenue from Game Pass
subscribers 10% or more due to new users joining to take advantage of the new titles offered.
This investment is going to be relatively inflexible, given it is an all cash acquisition of entire
ownership of Activision Blizzard. Once the deal has gone through, Microsoft will be the sole owner of all
of Activision’s assets and liabilities. This involves taking on their large development staff, as well as many
upper-level members of Activision’s management team. This also reduces flexibility, given that much of
the in-depth control of the company will still be governed by long time executives.