Here’s what the purchase of Microsoft’s Activision Blizzard means for Electronic Arts:

Last month, tech giant Microsoft (MSFT 1.40%). Announced plans to buy one of the world’s largest video game companies. Activision Blizzard (ATVI 0.31%). For about $ 69 billion. The deal still requires regulatory approval before it can be signed, but purchases are reduced as the largest video game acquisition in history.

This news, like some other companies, has had a spillover effect on the entire gaming industry. Electronic Arts (EA 0.44%)., Take to interactiveWhen Nintendo -After the announcement, everyone raised their stock price. That’s why it’s such a big problem for the gaming industry, especially Electronic Arts.

Reach for a video game controller.

Image Source: Getty Images.

Microsoft’s Game Initiative

Especially before jumping into Electronic Arts, it’s worth considering the rationale behind Microsoft’s large purchases.

Microsoft has made a significant presence in the gaming industry since it first introduced the Xbox console in 2001. Today, Microsoft is the fourth generation of Xbox, offering a comprehensive online service on Xbox Gamepass. Gamepass is a monthly subscription that bundles Xbox Live, a live service that allows people to play with friends, and has unlimited access to a catalog of over 100 streaming games. Microsoft is currently marketing more than 25 million Gamepass subscribers, and CEO Satya Nadella has described his aspirations for online services.Netflix For the game. “

With this ambition in mind, Microsoft’s big bid for Activision Blizzard isn’t all that surprising. Building a truly successful Triple A game from scratch is difficult. This is demonstrated each year as the world’s largest franchises constantly occupy the top spot on the world’s best-selling list. By purchasing Activision Blizzard, Microsoft brings some of the most popular franchises in the world. call of duty When World of WarcraftUnder its umbrella, you can easily enhance your Gamepass offering.

With this purchase, Microsoft has essentially earned an average of 400 million monthly active users of Activision Blizzard, a treasure trove of intellectual property, and billing tickets for the creativity of one of the world’s best gaming studios.

How does this affect Electronic Arts?

Electronic Arts (EA) is the second largest American video game publisher by booking, and the company actually operates a business model that is quite similar to Activision Blizzard.

Both EA and Activision spend billions of dollars each year developing new iterations for existing franchises, knowing that they have a huge base of loyal customers to whom they sell. Both companies currently sell their games primarily on digital channels, collecting additional in-game reservations throughout the user’s gameplay. Satya Nadella said in a recent conference call about the appeal of this model: “The economics of a game franchise are also fundamentally like software.”

But Microsoft isn’t the only one interested in games. Amazon, Meta platform, alphabet, Apple, And even Netflix is ​​investing in and showing interest in entering the gaming space. And there’s probably no better time for these companies to enter.

Microsoft has chased one of the world’s largest video game publishers, giving all other companies a regulatory green light to make their own acquisitions. As the acquisition is unlikely to exceed Activision’s $ 69 billion price tag, it seems that regulators need to take an all-or-nothing approach to approval for fairness.

And with only a few publishers big enough to move the needle financially for these tech giants, EA seems to be the most logical takeover candidate.

What EA Shareholders Should Know

Although Microsoft’s offer to buy Activision Blizzard was made at a time when it was compelled, the purchase price was more than 45% higher than what Activision was trading in the public market. From a multiple perspective, the transaction rates Activision Blizzard as more than 28 times operating cash flow over the last 12 months. The likelihood of an EA acquisition may not be the same as that of Activision, but if the same multiple is applied to the acquisition, there will be a premium of approximately 40% over the current market price of the EA.

But even if no one wants to buy EA, today’s investors are in a tailwind-rich industry with a durable, growing business that is 20 times the operating cash flow of the last 12 months. I have it. As a shareholder, it leaves me a lot of excitement.

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