Here’s What Microsoft’s Activision Blizzard Purchase Could Mean for Electronic Arts

Last month, the tech giant Microsoft (NASDAQ: MSFT) has announced plans to buy one of the world’s largest video game publishers, Activision Blizzard 09.30 NASDAQ: ATVI about $ 69 billion. Although the deal still requires regulatory approval before closing, the purchase will be considered the largest acquisition of video games of all time.

The news also had sharp effects in the gaming industry, as in a number of other companies – including Electronic Arts 04.30 NASDAQ: EA, Take-Two Interactiveand Nintendo – everyone saw the growth of their shares after the announcement. That’s why it’s such a big deal for the gaming industry and Electronic Arts in particular.

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Microsoft’s commitment to gaming

Before delving into Electronic Arts, one should examine the rationale for a large Microsoft purchase.

Microsoft has played an important role in the gaming space since 2001, when the company introduced the first-ever Xbox console. Microsoft is now running its fourth-generation Xbox and even offers a comprehensive online service in the Xbox Gamepass. Gamepass is a monthly subscription that brings together Xbox Live (a live service that allows people to play with friends) with unlimited access to a directory of more than 100 streaming games. Microsoft currently advertises more than 25 million Gamepass subscribers, and CEO Satya Nadella described her aspirations for the Internet service as “Netflix for games ”.

Given these ambitions, Microsoft’s big bid for Activision Blizzard shouldn’t come as such a surprise. It’s hard to build a truly successful Triple-A game from scratch. This is demonstrated year after year, as the largest franchises in the world consistently rank first in the world bestseller list. By buying Activision Blizzard, Microsoft offers some of the world’s most popular franchises, for example A sense of duty and World of Warcraftunder his umbrella, which can easily improve his Gamepass offering.

Thanks to this purchase, Microsoft, in fact, gets 400 million active users of Activision Blizzard on average per month, a treasure trove of intellectual property and a claim to the work of some of the world’s best gaming studios.

How can this affect Electronic Arts?

Electronic Arts (EA) is the second largest U.S. video game publisher in terms of bookings, and the company actually operates a fairly similar business model to Activision Blizzard.

Both EA and Activision spend billions of dollars each year developing new iterations of existing franchises, knowing they have a huge base of loyal customers to sell to. Both businesses also sell their games mostly through digital channels and collect additional in-game bookings throughout the gameplay of their users. Satya Nadella described the appeal of this model during the last conference: “The economics of gaming franchises are also radically becoming much more similar to software.”

But Microsoft isn’t the only big company interested in gaming. Amazon, Meta-platforms, alphabet, Apple, and even Netflix has invested in or expressed interest in the gaming space. And perhaps there is no better time than now for these companies to gain access.

Due to the fact that Microsoft is looking for one of the largest video game publishers in the world, it simply gave all other companies the right to purchase on their own. Since it is unlikely that any acquisition will exceed the price of Activision at $ 69 billion, it seems that regulators will have to follow the “all or nothing” principle to be fair.

And with only a few publishers big enough to push the needle for these tech giants financially, EA would seem the most logical candidate to acquire.

What EA shareholders need to know

Although Microsoft’s offer to acquire Activision Blizzard came under duress, the purchase price was still more than 45% higher than what Activision traded in public markets. In terms of multiplicity, the deal values ​​Activision Blizzard just over 28 times its operating cash flow over the past 12 months. Although any potential acquisition of EA may not be identical to Activision if the same multiplier is applied to the redemption, this will result in approximately 40% premium to the current market price of EA.

However, in the event that no company tries to acquire EA, today investors are still gaining a solid, growing business in a wind-rich industry valued at 20 times the last 12-month operating cash flow. As a shareholder, this leaves me with a lot to worry about.

This article reflects the opinion of a writer who may disagree with the “official” recommendation position of the premium Motley Fool Advisory Service. We are motley! Challenging the thesis of investing – even one of our own – helps all of us think critically about investing and making decisions that will help us become smarter, happier and richer.

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