“All major gaming companies have been active on the M&A front of late,” says Todd Holman, managing director at Union Square Advisors, a tech-focused investment bank in San Francisco and New York that advises on mergers and acquisitions.
“There are trades happening everywhere from the AAA [high-profile game] platform space to the freemium/online space.”
The transformation offers opportunities and risks for investors looking to capitalize on these massive corporate marriages.
As more titles and technology fall into the hands of fewer companies — a trend across the tech industry and beyond — gamers’ questions about what the future holds for their favorite hobby offer clues about the sector’s consolidation.
Will they suddenly need to buy a $600 Xbox to keep playing Call of Duty? Or will a $16 monthly subscription to Microsoft’s Game Pass now grant entry to the World of Warcraft and infinite lives in Candy Crush?
And what will happen to other studios and publishers, now that Big Tech has declared open season?
The big merge
The Activision Blizzard acquisition is a standout moment in gaming history, but it won’t stand alone.
Investors interested in tech and gaming will need to pay close attention to the flurry of moves expected in the coming years. In fact, with debt still cheap, some companies may feel pressure to make their purchases soon.
“While this move is the largest gaming deal to date, and brings Microsoft squarely into the top-three global gaming businesses, the worldwide market for games is still in the early innings,” says Holman.
“Other players will continue to merge and pursue scale in an effort to capture market share.”
Those players aren’t limited to traditional gaming companies. Apple, Google, Meta and Amazon are all heavily invested in the space; even Netflix bought a small game studio to make simple titles for its platform.
Tencent — a Chinese conglomerate with its hands in everything from social networks to e-commerce sites to film studios — eclipses Sony and Microsoft in gaming revenue.
It got there by scooping up Riot Games, developer of League of Legends, and picking up major stakes in companies including Epic Games, developer of Fortnite. Both games are multibillion-dollar cultural phenomena, among the most played titles in the world.
Speculation is rampant in the headlines and analyst notes that other billion-dollar gaming companies like Unity, Ubisoft and Electronic Arts could be targeted. Each company’s stock rose after Microsoft announced its Activision purchase.
Indeed, analyst Jordan Klein of the Japanese megabank Mizuho recently said in a note to investors that Unity — creator of a top game engine that underpins various titles — could be snatched any time, adding that a company like Apple “would make sense” as a buyer.
Will the big deal actually happen?
Before investors start making plans, remember there is a counterbalance to all this consolidation: antitrust laws that strive to ensure enough competition remains in any given industry to protect consumers’ interests.
President Joe Biden issued a sweeping executive order last year promoting competition, calling on the Justice Department and Federal Trade Commission to enforce antitrust laws “vigorously,” naming Big Tech as an area of concern.
On Jan. 18, the day of Microsoft’s announcement, federal antitrust regulators said current merger guidelines are outdated and asked for proposals to strengthen enforcement.
The FTC recently sued to block chipmaker Nvidia’s takeover of a chip designer — and the commission will review the Microsoft deal, according to a Bloomberg report.
“Companies with large budgets are purchasing video game companies of all sizes as an opportunity to pick up a large community of already engaged users,” says Kaitlin Thompson, vice president of product strategy at Evolve ETFs, a Canadian asset management firm focused on innovative investments.
Some of those users are hopeful the Microsoft takeover will clean things up at Activision Blizzard, which has lost much of its prestige. The company’s stock fell from around US$100 a share to US$60 in 2021, amid the delay of two highly anticipated titles and ongoing litigation accusing the company of a culture of sexual harassment and discrimination, followed by a Securities and Exchange Commission investigation.
But not everyone is optimistic. Despite assurances from Microsoft and Sony that they won’t try to use their acquisitions to yank players from competitors by ending access to Activision Blizzard games on other platforms, past promises have been short-lived.
“There is an open question whether Microsoft, and its Xbox platform, will continue to support these games on other platforms — but I believe they will,” says Holman.
“There is the opportunity to sell on other platforms on an a la carte basis, at a premium, while bundling the games into the Game Pass for Xbox, thereby potentially enticing the gamer over to the Xbox ecosystem.”
If the FTC does decide to block the Activision Blizzard purchase, that may temper acquisition ambitions of other companies, including those outside the gaming space.
But Holman’s take is that the deal is unlikely to get blocked, despite expected scrutiny by various regulatory bodies.
“Consumers have ample opportunity to pursue entertainment content in various forms.”
What investors need to consider
Mergers and acquisitions can be attractive opportunities for investors.
An acquisition target often sees a quick stock price boost, as the buyer typically agrees to pay a significant premium to secure shareholder approval.
Activision Blizzard shares shot up more than 25% after the deal announcement with Microsoft offering a 45% premium over the original price. At around US$80 a share, Activision Blizzard’s stock remains well below Microsoft’s planned purchase price of US$95.
The buyer’s stock price often drops for the same reason, and long-term investors might buy the dip if they believe the deal improves the company’s business outlook. But the dip is small for Microsoft, whose stock fell about 2% the day of the announcement and has held steady.
Before investing in a company going through an acquisition — or speculating on a stock that might go through one soon — remember that deals fall through all the time, and they’re not always a win.
“The Microsoft/Activision Blizzard acquisition will certainly face regulatory scrutiny, and the developments will need to be monitored closely until the deal is closed,” says Thompson.
In a note to investors, Deutsche Bank analyst Benjamin Soff says Activision Blizzard’s lower stock price accurately reflects the uncertainty of an acquisition six to 18 months from closing, with a "not so trivial degree of regulatory risk.”
If the deal sinks — because of the FTC or another reason — Activision Blizzard’s stock could go with it.
Soff ultimately pointed investors toward Electronic Arts and Take-Two, which he predicted would have two to three times more potential than Activision Blizzard in the near future.
As for investing in Microsoft, there is always the possibility that another bidder leaps in.
Citi analyst Jason Bazinet thinks that is unlikely but says he wouldn’t be surprised if Alphabet or Amazon tossed in a competing bid because their cloud businesses "could help drive meaningful synergies."
Ultimately, investing in a Microsoft deal that hasn’t closed is similar to investing in Unity or another high-value company that might end up in a lucrative merger someday — both are speculative, to a degree. Investors must either accept that risk or choose different stocks that fit their long-term plans better.
Senior Associate Editor Kevin Hamilton contributed to this report.
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