A Blizzard of Gaming M&A Could Be Afoot

After Microsoft agreed to buy Activision Blizzard, we expect more firms could be targets — but our fair value estimates remain unchanged

19/01/2022 17:46:00
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Software giant Microsoft (MSFT) agreed yesterday to buy videogame maker Activision Blizzard (ATVI), for $68.7 billion. It is the largest takeover deal in Microsoft’s history, and the largest video game deal ever. It will make Microsoft the world’s third largest video game firm, behind Tencent and Sony

What’s in it for Microsoft?

Given Microsoft's $2.3 trillion market capitalisation, Morningstar senior equity analyst Dan Romanoff does not view this deal as transformative, especially since stand-alone Microsoft was already a key player in video games. He continues to maintain his $345 fair value estimate for Microsoft.

“We tend to think the purpose of deals like this is to gather exclusive content. However, part of the value of Activision Blizzard is that it develops games across platforms and consoles, so we will be curious to see how much content excludes PlayStation users in the next few years. We also see hype building around the metaverse and believe this deal cements Microsoft's position as the most comprehensive metaverse play over the next decade,” he explained.

He likes the acquisition, as Microsoft bolsters its already strong gaming division with an iconic library that includes traditional console game developer Activision, PC developer Blizzard, and mobile developer King.

“Microsoft has minimal exposure to mobile, the largest gaming platform, so we think King and its Candy Crush franchise will instantly provide mobile chops. Activision has some of the most popular games of all time under its umbrella, including the Call of Duty franchise and World of Warcraft, which changed the gaming industry in 2004 with not only its massively multiplayer game but also its monthly subscription model,” Romanoff said.

What it Means for Activision

For Activision Blizzard shareholders, Morningstar senior equity analyst Neil Macker views the $95 price per share as fair, given his $92 fair value estimate.

“We expect that regulators will heavily scrutinise the deal, given the recent anti-BigTech fervour on both sides of the aisle in Washington. Microsoft expects the acquisition won’t close until fiscal 2023 (ending June), implying that it agrees with our view on the level of regulatory oversight," he said.

"However, we think the deal will be approved in the end as Microsoft is competing with other large foreign firms and will keep the Xbox platform open to third-party publishers. We are leaving our Activision Blizzard fair value estimate unchanged, balancing our stand-alone valuation, the value of $95 roughly a year from now, the potential for regulatory intervention, and the possibility of a higher offer from another suitor."

He also expects further activity in the space with Meta, Tencent and Sony being potential buyers and any large studio as a potential target, including EA, Take-Two, Ubisoft, and even Roblox.

“While we previously saw the platform-neutral stances and multiplatform revenue streams for larger publishers as an impediment to an acquisition by Microsoft or Sony, the marketplace appears to have changed enough to overcome those issues," he said.

"From a larger video game industry perspective, the deal signals that Microsoft increasingly believes that Game Pass and its cloud streaming add-on will be the path forward as it competes against Sony and Nintendo on the console side and Steam and Epic in the PC market.

"We expect that Microsoft will continue to push forward on the mobile efforts at Activision Blizzard while also using the acquisition to help its current franchises move onto mobile devices. The interesting question will be how the mobile games will be distributed and monetised as either stand-alone or part of a mobile version of Game Pass. Apple has been relatively hostile to other companies offering multigame apps that don’t use its payment methods. However, this practice has come under fire from regulators, particularly outside the United States."

What About the Sexual Harassment?

Activision Blizzard has been plagued by sexual harassment complaints, which led a group of investors to seek to oust CEO Bobby Kotick last year.

In our recent special report, “Without Changes, ESG Issues Will Hamper Activision Blizzard”, Macker argued that replacing Kotick was the cleanest path to unlocking the value in the firm’s shares. Kotick and the board found a path around a potential expulsion by engaging with Microsoft. Kotick also took a whopping pay cut.

Macker views the announcement of Kotick continuing at the firm as “…a concession to close the deal and don’t expect he will remain in that position for more than a few months after closing. Not only is Kotick radioactive after the allegations made against Activision Blizzard and him personally over the last six months, but also he is superfluous in the Microsoft gaming structure.”

Microsoft will surely be on the lookout for sexual harassment and gender discrimination at Activision Blizzard during the transition, to ensure the success of the merger, said Leslie Norton, Editorial Director of Sustainability at Morningstar.

“Human capital management problems are a big red flag for investors,” she warned. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Activision Blizzard Inc  
Electronic Arts Inc135.06 USD0.49Rating
Meta Platforms Inc Class A478.22 USD2.67Rating
Microsoft Corp430.16 USD0.74Rating
Roblox Corp Ordinary Shares - Class A32.67 USD2.19Rating
Sony Group Corp ADR80.29 USD-0.63Rating
Take-Two Interactive Software Inc154.60 USD1.49Rating
Tencent Holdings Ltd49.37 USD1.40
Ubisoft Entertainment377.22 MXN1.97

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