With Xbox consoles seeing strong demand and the subscriber base for the Game Pass subscription service hitting a new high, Microsoft Corp. is ready to grow its gaming business in a monumental way.
The technology company on Jan. 18 agreed to acquire Activision Blizzard Inc. for $95 per share in cash, valuing the game publisher and developer at $68.7 billion, including net cash. Following the deal's expected completion in fiscal 2023, Microsoft expects to become the world's third-biggest gaming company in terms of revenue, behind China's Tencent Holdings Ltd. and Japan's Sony Group Corp.
The transaction is Microsoft's biggest so far by value, coming in at more than twice the size of Microsoft's $29.04 billion buy of professional social networking platform LinkedIn Corp. in 2016. It also overshadows Microsoft's $8.10 billion purchase of fellow video game company ZeniMax Media Inc., the parent of The Elder Scrolls and Fallout developer Bethesda Softworks LLC.
The implied enterprise value of about $68.7 billion for Activision Blizzard represents a multiple of 7.51x trailing-12-month revenue, according to S&P Global Market Intelligence data. Microsoft also anticipates the transaction to be accretive to EPS on a non-GAAP basis upon completion.
Microsoft expects the deal to help speed up its growth in the mobile, PC, console and cloud gaming segments while providing the foundation for developing metaverse platforms. The company expects to gain 30 internal game development studios as well as additional publishing and e-sports production capabilities following the transaction.
Microsoft CEO Satya Nadella said during an investor call that the company has focused on investing in Xbox cloud gaming, which is expanding to countries where access to traditional PC and console gaming is difficult.
Activision Blizzard will become a unit of Microsoft after deal completion, directly reporting to Microsoft Gaming CEO Phil Spencer. The game developer acquired esports business Major League Gaming and Candy Crush developer King Digital Entertainment PLC, both in 2016. The latter deal has a value of $4.9 billion.
Home to popular franchises such as Call of Duty, World of Warcraft, Diablo and Overwatch, Activision Blizzard has about 400 million monthly active players globally. Microsoft plans to integrate the games into its Game Pass offering, which has already gained more than 25 million subscribers.
The deal comes as Activision Blizzard is facing the task of rebuilding its work culture after facing gender discrimination and sexual harassment claims. The scandal led to the exit of former Blizzard Entertainment head J. Allen Brack in August 2021. Activision Blizzard CEO Bobby Kotick, who has faced resignation calls over the issue, will remain in his role after the deal closes.
Microsoft committed to supporting Activision Blizzard's efforts to build a culture of inclusion "where everyone can do their best work," Nadella said.
Amid the scandal and leadership changes, Activision's shares have dropped 27.3% between Jan. 14, 2021, and Jan. 14, 2022. Over the same time period, Microsoft's shares have increased 45.6%.
While the companies' boards have greenlit the transaction, it remains subject to regulatory scrutiny, Activision Blizzard shareholders' approval and other customary closing conditions.
