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5 months ago
Published January 18, 2022 by

Daniel Ives: Microsoft’s $68.7B Activision buy is a metaverse play

“This represents Microsoft’s largest acquisition ever and the largest M&A deal (Dell/EMC $67 billion) in tech history.”

From a note to Wedbush clients that landed on my desktop Tuesday:

This morning in a landmark acquisition Microsoft announced it is acquiring Activision for $95 per share in an all cash transaction valued at $68.7 billion. This represents Microsoft’s largest acquisition ever and the largest M&A deal (Dell/EMC $67 billion) in tech history. Microsoft buying Activision is an aggressive consumer acquisition that includes core franchises such as Call of Duty, Warcraft, and Candy Crush among many others now integrated into the Redmond ecosystem and streaming endeavors. The deal is expected to close in MSFT’s FY23 (June) and will be accretive to earnings once closing. There is a $3 billion breakup fee and while we expect this deal to ultimately clear regulators, however there will be some inherent speed bumps navigating both the Beltway and Brussels on a tech deal of this size.

We note that while Microsoft’s cloud business led by Azure and Office 365 has been the gold standard of success over the last five years under Nadella, the consumer strategy at MSFT has been on a treadmill approach. Acquiring Activision will help jump start MSFT’s broader gaming endeavors and ultimately its move into the metaverse with gaming the first monetization piece of the metaverse in our opinion. With Activision’s stock under heavy pressure (CEO related issues/overhang) over the last few months, MSFT viewed this as the window of opportunity to acquire a unique asset that can propel its consumer strategy forward.

From a regulatory perspective, MSFT is not under the same level of scrutiny as other tech stalwarts (Amazon, Apple, Facebook, Google) and ultimately Nadella saw a window to make a major bet on consumer while others are caught in the regulatory spotlight and could not go after an asset like this. From a stock perspective, MSFT needs to give investors comfort around the broader strategic view of Activision and make sure integration and taking its eye off the prize of cloud computing will not come into play. Another issue at play will be Activision’s relationship with Sony PlayStation console and future streaming efforts. We maintain our OUTPERFORM rating and $375 price target.

My take: Ives’ other top tech pick, of course, is Apple. From a note published earlier Tuesday:

Into earnings season, our favorite tech names to own are below:

    • Favorite large cap names: Apple and Microsoft
    • Favorite cyber security names: Zscaler, Palo Alto Networks, Tenable, CyberArk. We are adding Palo Alto and Tenable to the Wedbush Best Ideas List this morning.
    • Favorite value names (which could be safety blanket names during the storm): Pega, Progress, Checkpoint, Consensus, NICE Systems, and Ziff Davis
    • Favorite EV names: Tesla and Li-Cycle

21 Comments

  1. David Emery said:
    I suspect this will get A LOT of regulatory review.

    3
    January 18, 2022
  2. Robert Paul Leitao said:
    This is a smart and shrewd move by Microsoft. Although the company formerly known as Facebook changed its name to reflect its interest in the metaverse, it may arrive in that distant land behind Apple and Microsoft.

    5
    January 18, 2022
    • Robert Paul Leitao said:
      It’s not a waste of money for Microsoft which is already positioned as a global leader in the video game market through its previous acquisition of developers and the Xbox console franchise. Make no mistake: While the enterprise formerly known as Facebook is gabbing about the metaverse, Microsoft is already at least ten steps ahead in the game. Xbox Game Studios is already established. MSFT has the global presence, the balance sheet and expertise to monetize the so-called metaverse while potential competitors talk and gawk about it.

      2
      January 18, 2022
      • David Emery said:
        John Gruber did a back-of-the-envelope calculation on the revenue from this sale.

        ” ‘We also announced today that Game Pass now has more than 25 million subscribers. As always, we look forward to continuing to add more value and more great games to Game Pass.’

        Game Pass subscriptions cost between $10–15 per month. Let’s just call that about $150/year per subscriber. That’s just under $4 billion per year. … $69 billion for Activision doesn’t seem absurd as a long-term investment. And that’s just counting Game Pass subscription revenue, not traditional game sales.”

        0
        January 18, 2022
        • Daniel Epstein said:
          Maybe not an absurd amount but certainly not a swift payback. The current ATVI Ebitda is 3.771B according to CNBC. 68.7Billion divided by 3.771 = 18.22 or so years at the present rate of profit before expenses and deductions . Not a short time period. It is going to have to grow a lot. Maybe it will but who knows. It wouldn’t be the first time someone paid too much money for something they wanted. Won’t be the last. Or it could be a masterstroke!

          1
          January 18, 2022
  4. David Emery said:
    Will Epic go onto the auction block?

    1
    January 18, 2022
    • Robert Paul Leitao said:
      There are plenty of video game content and development properties that don’t involve the challenges of dealing with Mr. Sweeney and Tencent as a significant shareholder. I can name at least a half dozen properties before doing more research.

      1
      January 18, 2022
  5. Thomas Williams said:
    The moment the Take-Two Interactive purchase of Zynga was announced I knew other moves would be made in the chess game among major video game vendors. Every video game maker wants a social game platform like Zynga before VR/meta supposedly takes off*.The sales of NFTs in certain video games is treasured by game developers too, though not necessarily all serious players. The benefit of buying a designer gown, as an NFT for my avatar, in one game and wearing it to a ball in another virtual world escapes me. What if there’s a wardrobe malfunction?
    Apple does allow NFTs in iOS games, if the developer makes certain Apple’s 15 to 30% cut is paid.
    Epic supposedly does not do NFTs but Mr. Sweeney’s Steam platform allows games from other developers that do offer NFTs. Typical hyperbole.

    *VR ‘predicted ‘ to take off with the masses for 30 years running.

    0
    January 18, 2022
  6. Daniel Epstein said:
    Interesting timing of such a major purchase announcement. Microsoft had 86.5 Billion in Ebitda in the last year according to the CNBC so spending 69 Billion is not quite a year of profit before deductions. Earnings are coming up in a week. Probably rolling in dough! The cash must be burning a hole in Nadela’s pockets. ATVI only seems to have revenues of 9.4 billion but the deal is valuing that at 69 Billion if the deal goes through. MSFT can afford it but does seem like they better have a good plan to grow the revenues to make this pay. Probably not as good an acquisition as linked in.

    1
    January 18, 2022
  7. Michael Goldfeder said:
    $68.7 billion is just an obscene amount of money to buy anything. Talk about going from the refrigerator to the nuclear reactor in one bold move. I’m sure Lina Khan will be all over this transaction, as will every other regulator from here to Timbuktu. We’ll see just how effective Brad Smith has been working behind the scenes at Congress to put the spotlight on all of big tech other than Microsoft. My thought here is that he was playing all of these politicians in order to curry favor before announcing this buyout merger.

    I’m waiting for Klobuchar, Warren, Blackburn, Cicilline, and others to announce their impressions on this situation. Or more importantly, if they all felt they were being played by Microsoft the entire time? It sure looks that way from this end.

    One thing for certain IMO, this takes a lot of heat off the Apple buyback program.

    Let the games begin! (Pun absolutely intended!)

    3
    January 18, 2022
    • Robert Paul Leitao said:
      Michael: It’s a race to the metaverse even though it’s not a fixed spot in the big universe at this time. Combined with Xbox Studios, MSFT now has the content and the titles along with the resources to establish clear leadership and games are the easiest way to monetize the strategic initiative. The enterprise formerly known as Facebook is being boxed in. At this time, I expect Apple and Microsoft to be the leaders into the metaverse. Each of them have the resources to create “digital space stations” along the way as they both figure out exactly where they are headed. Commercially speaking, the value of the metaverse will be measured in thirteen figures.

      0
      January 18, 2022
  8. Fred Stein said:
    Apple went from nowhere to be the leading mobile game platfrom, which is a primary driver of App Store revenue. Their deep chip/sw stack is so far ahead, that no one can displace them regardless of hype, acquisitions, or name changes.

    As we all know, Apple brings the best customers to any game developer, mobile / virtual etc.

    1
    January 18, 2022
  9. Fred Stein said:
    No wonder Microsoft wrote a statement of support in the Epic trial in Epic’s favor. They know the power has shifted.

    For MSFT, the argument of monopoly power by Apple gets much tougher after these acquisitions.

    4
    January 18, 2022
    • Robert Paul Leitao said:
      Fred: Absolutely. This acquisition strengthens Apple’s claims the company does not have the market power to be a monopolist. While roughly 68% of App Store revenue flows from games at this time, the market is huge with well entrenched competitors such as Microsoft and many different modes of game play from mobile to desktop to consoles, etc.

      While Apple is widely expected to enter the AR/MR market and games will be a component of the strategy, there’s far more to the metaverse than games. Ultimately, I see the enterprise formerly known as Facebook to be the loser from this acquisition.

      2
      January 18, 2022

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