🌌 What Is Microsoft's Vision With Activision?

Sony shares tumble post Microsoft-Activision deal.

Hey Global Investor! Here’s what you need to know before the US markets open.

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🌌 Microsoft: Stock Beta In The Meta?

Microsoft (MSFT) yesterday announced its largest-ever acquisition. Video game maker Activision Blizzard (ATVI) is set to become part of Microsoft for $68.7B in cash in the largest tech deal ever. What does this mean for Microsoft’s universe and the Metaverse? (Tweet This)

Game Theory

Launched in November 2001, Microsoft’s Xbox was in direct competition to Sony’s PlayStation 2, which had hit the stores in 1999. Between Xbox, Xbox 360 (2005), Xbox One (2013), and Xbox Series X and Series S (2020), Microsoft took the gaming world by storm. The Xbox 360 and Xbox One gaming consoles have so far managed sales of 86M units and 51M units, respectively.

Since Satya Nadella took over as CEO in 2014, Microsoft has fortified its gaming presence. That year, it acquired Mojang, the maker of Minecraft, for $2.5B. Last year, it acquired ZeniMax Media, the parent of video game giant Bethesda, for $7.5B, which brought eight new studios to Microsoft’s stable, complementing the existing 15.

As gamers came in droves, Microsoft started Xbox Game Pass, a video game subscription service that allows users to access a catalog of games from various publishers. These monthly subscriptions cost anywhere from $9.99-$14.99 per month, depending on the level of service requested by the user. Today, the Xbox Game Pass service has 25M subscribers, up from 18M in January last year.

The target company, Activision Blizzard, was founded in 2008 through the merger of Activision Inc. and Vivendi Games. It currently consists of five major divisions – Activision Publishing, Blizzard Entertainment, King, Major League Gaming, and Activision Blizzard Studios.

Activision’s claim-to-fame is Call of Duty, a video game franchise launched in 2003. As of April last year, the series had sold over 400M copies. As of Q3 2021, Activision had 119M Monthly Active Users (MAUs). For Call of Duty Mobile, net bookings grew 40% year-on-year in Q3.

Microsoft must be thanking its lucky stars that its $50B bid for Yahoo! back in 2008 didn’t materialize. (Yahoo! was later sold to Verizon in 2017 for a paltry $4.5B). Until yesterday, the Dell-EMC merger with a price tag of $67B was the largest in US history. This time around, Microsoft seems to have a plan in place to make this acquisition work.

Battlelines In The Metaverse

Microsoft will pay $95 per share to Activision shareholders, a 45% premium to the latter’s closing price last Friday. This deal easily eclipses the former’s $26.2B purchase of LinkedIn in 2016. As a result of this deal, Microsoft will become the No. 3 gaming company globally.

As is the case with any deal, shareholders of the target will need to approve the takeover, followed by the regulators, who have been on the heels of big tech companies in the recent past. Microsoft has had its run-ins with the government concerning its business practices in the past when it crushed Netscape Navigator by bundling the Internet Explorer along with Windows.

Now, though, regulators are training their guns on Apple, Google, and Facebook, and Microsoft might actually be able to pull off the deal based on the relative goodwill it enjoys. 

Activision comes with some baggage of its own. There have been complaints of sexual misconduct and sexual harassment from employees. Last September, the company settled with the US Equal Employment Opportunity Commission for $18M. The company fired over a dozen executives this week following an investigation.

Activision CEO Bobby Kotick himself faces charges of mistreatment and that he kept reports of sexual misconduct under the wraps from the company’s board. With Microsoft now acquiring Activision, Kotick is expected to depart once the acquisition is completed. The deal is expected to consummate by 2023.

These issues at Activision resulted in its share price halving from a peak of $104.53 last year. Its two most-anticipated games have been delayed, and the Q4 sales forecast fell short of analyst expectations. As a result, Microsoft is now extra-sensitive to these issues, given its internal investigations into Bill Gates’ conduct with junior female employees.

Microsoft’s shares fell by 2.5% after the deal was announced, signaling shareholders believe the company may have overpaid. Even so, with $130B in cash sitting in its books and with a market cap of $2.3T, the management doesn’t seem concerned. If anything, Microsoft will need to decide what to do about the fact that Playstation contributes significantly to Activision revenues.

With Activision in its stable, Microsoft is all set to make the Metaverse its staple. It seems the battle lines are rapidly being drawn to dominate in the alternate universe. That seems to be the day’s Call of Duty!

Market Reaction
MSFT ended at $302.65, down 2.43%.

Company Snapshot 📈

MSFT $302.65 -7.55 (2.43%)

Analyst Ratings (38 Analysts) BUY 89%  HOLD 11%  SELL 0%

Newsworthy 📰

Impact: Sony slides on ‘monumental challenge’ from Microsoft gaming deal (SONY -7.17%)

Request: Tesla investors urge judge to order Musk repay $13B for SolarCity deal (TSLA -1.82%)

Miss: Goldman Sachs profit hit by weaker trading, rising expenses; shares tumble (GS -6.97%)

Later Today 🕒

  • UnitedHealth Inc. Earnings (UNH)
  • Bank of America Corp. Earnings (BAC)
  • Procter & Gamble Co. Earnings (PG)
  • Morgan Stanley Earnings (MS)
  • Alcoa Corp. Earnings (AA)
  • United Airlines Holdings Inc. Earnings (UAL)
  • Prologis Inc. Earnings (PLD)
  • US Bancorp Earnings (USB)
  • State Street Corp. Earnings (STT)
  • Discover Financial Services Earnings (DFS)
  • Fastenal Co. Earnings (FAST)
  • Comerica Inc. Earnings (CMA)
  • Kinder Morgan Inc. Earnings (KMI)
  • Wintrust Financial Corp. Earnings (WTFC)

Today’s Market Terminology: Santa Claus Rally

A Santa Claus Rally is generally a seasonal rise in stock prices in the last week of a calendar year, between Christmas and New Year’s Day

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