Microsoft Corp. (MSFT, Financial) announced on Jan. 18 that it plans to buy Activision Blizzard Inc. (ATVI, Financial) for $95.00 per share in an all-cash deal worth $68.7 billion. Activision Blizzard is a U.S. video game and interactive entertainment content and services developer and publisher and is one of the world's major third-party video game publishers, creating and distributing content for video game consoles, personal computers and mobile devices.
Recently, the video game industry has seen a significant increase in participation, and the number of game developers is expected to continue to rise. Given the market's growth, the decision to expand Microsoft’s gaming segment seems to have come at the right time. Once the deal is finalized, Microsoft will have control of some of the world's most popular game franchises, including Call of Duty, Warcraft, Overwatch, Candy Crush and a vast catalog of older games. Pending completion of the standard closing conditions, regulatory clearance and obtaining the approval of Activision Blizzard's shareholders, the deal is scheduled to close some time in fiscal year 2023.
A timely deal to capture market share
The rise of cloud gaming has expanded the world of gamers, allowing them to stream high-end games on laptops, tablets and smartphones. The industry is further benefiting from the growing use of immersive technologies such as virtual reality, augmented reality and mixed reality as well. According to Statista, the global online games segment is expected to reach a value of $26.2 billion in 2022 and is expected to grow at a compound annual growth rate of 6.46% through 2026. In the next four years, the number of users in this market is predicted to reach 1.38 billion.
Exhibit 1: Worldwide revenue of online games
Source: Statista
Gaming is currently the largest and fastest-growing entertainment business, with around 3 billion gamers globally, and according to Microsoft's press release, this acquisition will help Microsoft's game segment to grow across mobile, personal computer, console and cloud platforms, as well as in the metaverse. Microsoft currently provides a gaming service called Game Pass, which gives an all-you-can-play menu of games for $10 per month and has over 25 million customers.
Exhibit 2: Average revenue per user in the online games segment
Source: Statista
The acquisition of Activision Blizzard will be Microsoft's largest deal to date, and will likely strengthen its console gaming business to help it gain ground against its closest (currenty much more popular) rival, Sony Group Corp. (SONY, Financial). Sony at the moment faces content-related challenges, and Activision will help Microsoft make the most of this opening to expand its market share. Activision's Call of Duty franchise, which has sold 400 million games since 2003, features multiple entries among the top 10 best-selling PS4 and PS5 games. According to the NPD Group, Call of Duty games have been the best-selling titles in the United States for the past three years. On Jan. 20, Sony stated that it expected Microsoft to ensure Activision games would be available on non-Microsoft platforms, to which Microsoft's videogame chief, Phil Spencer, Tweeted that he had voiced his desire to retain Call of Duty on PlayStation in the foreseeable future. According to Bloomberg, Microsoft is committed to keeping Call of Duty on PlayStation for at least the next two years.
Bobby Kotick will remain CEO of Activision Blizzard once the deal closes, reporting to Phil Spencer, CEO of Microsoft Gaming, and Activision’s team will continue to drive initiatives to further reinforce the company's culture and accelerate business growth.
Takeaway
The gaming market is well-positioned to grow, thanks to the rising use of smartphones and consoles, as well as cloud adoption. Microsoft has made many acquisitions to accelerate its gaming business, including the $7.5 billion purchase of ZeniMax Media, which owns Doom, Fallout and The Elder Scrolls. The company is not done yet, and the announced acquisition of Activision Blizzard will significantly strengthen the company’s Game Pass catalog, aided by Activision’s 400 million monthly active gamers in 190 countries.
Although Microsoft is one of the largest tech companies in the world, there are many growth opportunities available for the company to keep growing at a stellar pace in the next decade. The expansion in the video game content creation market is a strategic move that could deliver immense value to shareholders in the long run.
