Why Is Microsoft Buying Activision?
The Major Reason is because Microsoft wants to Increase it's Market Share In the Gaming Market
Recap
In 2005, the gaming industry had revenues of $10.5 billion and was dominated by makers of portable hardware and consoles. In 2020, just 15 years later, the industry had morphed into a multi-platform powerhouse with revenues of $155 billion.
Blockbuster content material from publishers raked in billions of greenbacks in revenue and brought it through an collection of hardware—cell, private computers, digital fact headsets, augmented fact devices, and consoles—and software program, like the cloud.
Note*
Microsoft's deal to gather Activision Blizzard makes accurate commercial enterprise feel inside a swiftly converting landscape in the gaming enterprise.
Activision has the content material necessary to generate engagement and sales for Microsoft's circulate into cloud gaming.
But the deal will be derailed by using place of work culture problems at Activision and face regulatory blowback.
For Microsoft Corporation (MSFT), a leader in the industry with its Xbox devices, the change could not have come at a better time. Buoyed up by pandemic profits, the company made a bold bet on the gaming industry's future on Jan. 18, 2022, by buying up Activision Blizzard, Inc. (ATVI).
How Much is the Acquisition
The acquisition values Activision at roughly $69 billion and places a 45% premium on the gaming company's price after the announcement was made. It may turn out to be a smart move by the tech giant, given the shifting tides in the gaming industry. But investors have adopted a wait-and-watch attitude considering the deal's regulatory bottlenecks and recent problems at Activision Blizzard.
Why Microsoft Acquired Activision
Gaming has become an increasingly important part of Microsoft's balance sheet. Revenues from the division increased by 33% in fiscal 2021, outpacing the 18% growth in the overall revenue. However, those figures do not tell the whole story.
Most of the division's profits come from hardware sales of its best-selling console, Xbox. The division's revenues and profits decline in quarters when new editions of Xbox are not released. While Microsoft has produced content for its gaming hardware, it is yet to produce a blockbuster franchise. So far, it has relied on games from third-party publishers, such as Activision Blizzard, to generate engagement with its platforms.
In Activision Blizzard, Microsoft has acquired a content powerhouse responsible for some of the biggest blockbusters in the industry. The Santa Monica, California-based company is a leader in mobile gaming as well through its acquisition of King Digital Entertainment, maker of Candy Crush—one of the top revenue grossers in the mobile ecosystem.1
Going by numbers alone, that leadership will continue in the future. Even though the company was engulfed in controversy and scandal in 2021, Activision's development team continued to churn out best-sellers. Two titles from the company's Call of Duty franchise were the top two sellers of 2021.2 During its latest earnings call, Activision's management announced that revenues from the World of Warcraft and Diablo franchises also jumped, propelling 22% revenue growth in the company's Blizzard division. Furthermore, King had record operating income of $303 million and operating margins of 46%.3
The Activision acquisition provides a short cut to Microsoft to ramp up its content credentials. It also helps the company access valuable intellectual property. A Bloomberg report states that "some content" from Activision Blizzard will be "exclusive" to the Xbox console.4 During a 2020 acquisition of Zenimax Media, Phil Spencer, head of gaming at Microsoft, said that the company would consider licensing rights on a "case-by-case" basis.5 Given Activision's content library, the rights stakes are even higher this time around. Exclusive content should drive more users to Microsoft platforms, and licensing the franchise to other gaming hardware makers will generate IP revenue.
Great content from Activision could also bolster subscription numbers for Game Pass—Microsoft's gaming subscription service that allows players to play games across platforms—and its cloud gaming service. Both are expected to drive future growth for Microsoft's gaming division as revenue models and platforms shift in the industry.
Game Pass stumbled in 2021, a year after it was launched, by missing its target subscription numbers. It had originally planned for subscriber growth numbers of 47.79% but was only able to grow subscriptions by 37.48%.6
Microsoft to Acquire Activision Blizzard
Finally, the acquisition solves another problem on Microsoft's balance sheet. Record sales during the pandemic resulted in a swollen cash reserves on the software giant's balance sheet. Toward the end of 2021, the company had the third-highest cash reserves of all companies in the S&P 500.7 The $68.7 billion all-cash deal uses up some of the $137.7 billion available to company executives in November last year.
Why Are Investors Not Enthused?
Activision's shares popped by as much as 36% in response to the announcement of the acquisition. Microsoft's stock, however, fell by 1% and ended the day down by 2.5% from its opening price. Microsoft investors may not be enthusiastic about the Activision deal for a couple of reasons.
There's the regulatory blowback from a merger of two giants. Both companies are leaders in their respective industry—Microsoft in tech and Activision in gaming. A combined entity will easily have the heft and resources to crush competition. Regulatory authorities have increasingly taken a dim view of such combinations due to concerns over anti-competitive behavior.
Gene Munster, analyst with Loup Ventures, said that the acquisition announcement was "good drama setting up in the market"—referencing the optics of two large companies asking regulators for permission to join forces. He said that the acquisition could "set up a collision course between Silicon Valley and D.C."8
Even if regulators give a green light to the merger, Microsoft will still have to contend with Activision's internal problems. A toxic work culture at the company led to lawsuits, large-scale layoffs, and a significant decline in its share price. Activision Blizzard's management has taken corrective steps and announced investments to promote diversity and inclusion in the gaming industry .
Microsoft, which is managing its own crisis and announced a evaluate of its sexual harassment regulations lately, has the unenviable task of ensuring that Activision remains on direction and keeps to attract skills to increase gaming
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