Microsoft Bets Big On Metaverse With $69bln Deal For Activision Blizzard

Okay, welcome to the channel and a conversation that we're going to have about Microsoft and the M&A deal announced yesterday where they're going to spend $69 billion of a cash-funded takeover of Activision Blizzard. MSFT shares were down about 2.5% yesterday. The NASDAQ actually was quite an underperformer, down around the same margin against the other US indices. Activision up around 26%. But I was in the supermarket last night and even the guy on the checkout was trying to talk to me about this deal, which I think says a lot and really is the reason why I want to do this video. And there's no one else better in the Amplify team to get on this call than Eddie Donmez. So Eddie, um, how's it going and initial thoughts on, on the news?

Yeah, so all going well and, um, excited to see the news yesterday. It's, it's definitely a huge deal. I think why it's caught so much attention is because it's got a huge amount of users and it appeals to the consumer because a lot of us are gamers. So yeah, Microsoft buying Activision for $69 billion, it's the biggest tech deal ever. It's actually just eclipsed Dell EMC, which was $67 billion. Uh, yeah, representing a 45% premium to Activision's Friday close, the offer basically equates to about 18 times EBITDA, Activision's EBITDA. And this is pretty much in line with comps. So there was a recent acquisition of Take-Two, they make Grand Theft Auto, which was about 16 times EBITDA as well. So it's kind of in line with comps, but it's such an exciting deal because it really represents, I think, the next kind of secular wave of deal-making. And this is all really centered around gaming, esports, the metaverse, of course, which is, I guess, slightly further along, I would say. But this is definitely a great consumer-facing acquisition for Microsoft and Xbox. And of course, Microsoft is a cloud beast, and this kind of flows into that kind of rhetoric.

Yeah, I know in mainstream, I think people have got way too excited about Meta. And I actually, I remember doing a podcast with Piers, our head of trading, a few months ago, and we were talking about Microsoft. And they're such a beast silently going along in the cloud space, in their professional services that they offer. I mean, they might not have the talent, but they've got the firepower to purchase and then facilitate that kind of infrastructure and Yeah, I think Facebook, credit to Zuckerberg for putting it in the public consciousness. But yeah, I think Microsoft can, like you said, the metaverse is later. There's steps to that process. And I guess this is a really intelligent move in that direction.

Yeah, so what really drove this deal is Activision Blizzard is big. It's a really big company. They have 400 million monthly active users. The best fact ever that I've researched and found. Candy Crush. Remember that game?

Is it still— people still play that?

People still play it and it's the highest grossing mobile game outside of China. They have 273 million monthly active users. It's a huge game. So I think again, this is really all about gaming and I think particularly mobile gaming and this new transition to cloud gaming, which is really following the almost the Netflix subscription route. So, you know, I'm a gamer. I used to game a lot more. I don't really have much time anymore. But Call of Duty, which is one of the biggest titles that Activision Blizzard hold, and this is what it's all about. It's all about IPs and titles and these kind of game franchises which are just massive. And this really kind of sets up the scene between this gaming fight between Facebook, between Apple. So Apple have got Apple Arcade, which they've got a few titles. Some that I play, like NBA, is fantastic. The graphics are incredible, especially with the new M1 processors, particularly in the iPad and the MacBook. So that's really good. But it's not got the big titles just yet. It's really kind of in its infancy. So I'd be looking at Apple, maybe looking at EA Sports, for example, in terms of what deals are to come. But what this does is there's an app called Mobile Pass that it has 25 million subscribers, uh, particularly on— you can download it on, uh, on Apple and things like that. And what this does is essentially brings all of those titles onto that mobile gaming platform. So it's like Fallout, Halo, Call of Duty, and it really represents an exciting kind of move by Microsoft. And this kind of gaming and advertising space could represent an incremental $1 trillion share gain for Microsoft longer term. So this kind of global gaming market generated $180 billion in revenues in 2021, and that's expected to grow to $218 billion just by 2024. So this is the next kind of move in a big addressable market.

Yeah, you mentioned there before about is this going to be a wave of consolidation in this space now as they all compete to kind of try to eat up all of the existing ones. So I saw Sony shares were down, obviously a big competitor with the PlayStation, they were down 10% or more than that actually overnight in Japan. That's $20 billion off their market cap right there on the back of the news. Um, shares in Square Enix and Capcom, they were up about 5% in overnight Asia-Pac trade as well. So are we going to see a bit of a broader land grab in the space now as they go after these names?

Absolutely. I think this is definitely the next kind of, as I mentioned, secular deal, uh, trend where the big kind of firms are going to start, or even mid-cap, are going to start purchasing up these kind of, uh, franchises and these game providers, all to consolidate. So you'd be looking at Apple, for example. I would say like an EA would be super attractive to them, and a metaverse, looking at potential targets. And that's why you saw the kind of comps for, uh, you know, similar companies to Activision Blizzard, really get a nice kind of move up yesterday. Um, so I think that is going to be the next kind of, uh, driver of deal flow. But also cybersecurity, then, as you're kind of moving people, more and more users into gaming and things like that, then you've got, you know, a potential real attractive opportunity for lots of kind of smaller to mid-sized cybersecurity security names as well.

Yeah, I mean, you mentioned at the start that Microsoft were offering a 45% premium. I was looking at the 5-year average for that space of video game producers, other entertainment software, and it normally over the 5-year average is around 24%. But Microsoft are getting a fairly good price, right, if we look back at the last 12 months?

Absolutely. So yeah, you in the, in the general tech space, you generally see some anywhere from a kind of 20 to 30% premium. That's kind of standard. But there's been blood in the streets, if you like. So there's been a huge amount of kind of culture problems, let's say, well, to put it lightly, Activision. I think that is putting it too lightly, and sexual misconduct and lots of kind of scandals rumbling on. And this is one, I guess, big concern in terms of the integration of the two cultures, like the Xbox culture and the Activision Blizzard culture moving together. But the shares were down since that kind of scandal uh, emerged, uh, down about 30%. So yes, the 45% premium seemed pretty hefty, but actually, uh, you're getting a very good kind of— you're buying when there's blood in the streets. But then there is the potential concerns in terms of the culture, uh, and there's going to be a lot of work to be done there.

Yeah, what I was reading was that, um, the— in terms of the deal timeline, Microsoft expects the deal to close in fiscal year 2023. In terms of the CEO of Activision, so Bobby Kotick, who's just been the person in a lot of focus recently, he's going to stay there until the deal fully closes is what they're talking about at the moment. But just given what you're saying then, if we do get this wave of consolidation, surely at some point— and just given the general size of the deal, this is going to get regulators sniffing around thinking, right, was it— am I right in saying this is going to be like the third largest gaming like, yeah, so they're in the market now.

Yes, it's the third— Microsoft will become the third largest game gaming kind of platform by revenue. So you're absolutely right, it's a huge deal. Like, let's not underestimate, this is $69 billion. This is a massive deal. However, Microsoft have paid actually a— well, they've agreed to pay a $3 billion break-free, so, of the deal. So if it falls through, they have to pay Activision Blizzard $3 billion. So they— that's basically suggesting that they're very confident in this passing. But I guess if you're a listener, you'll be thinking, what, big, big cap tech doing M&A? Like, that's a no-go, right? Anti-drug, antitrust, you know, they're actually talking about breaking these kind of big, uh, kind of giants. So M&A was kind of off the table, um, but, you know, Microsoft seemed very confident in this kind of deal getting done. So I, and from the root kind of whispers that I've heard, I've actually, um, that everyone's very confident in this deal passing. Um, so yeah, looks, looks like this is going to be A great acquisition, and probably from the premier CEO in Nadella. And that looks like it's going to be another really, really good move. And yes, it's $69 billion. It's only 3% of Microsoft enterprise value. So it's tiny. They've got tons of cash. They're looking for something to do with it. And this represents a really nice consumer-facing acquisition, I would say.

Okay, good conclusion there. We'll leave it there. Thanks very much, Eddie, and thanks.

Next time, see ya.