As the guy leading M&A at Playtika, a deal like the Activision Blizzard / King is music to my ears. Not every day do we see such a large transaction and to be honest I get very excited when deals like this happen. I have spent some time studying and thinking about the deal and have placed some of these thoughts below. *Disclaimer: Views expressed are my own.
Some back ground first. Why do games companies buy other games companies?
When acquiring a company there are two main goals that drive a deal. These are reducing your risk and/or increasing your financial performance. With these in mind there are multiple strategies that the acquirer can employ to achieve these goals. Some examples are:
- Expansion of a product portfolio
- Expansion of regional reach
- Expansion of demographic reach
- Creating an upside due to cross promotional potential
- Creating an upside from knowledge sharing
- Creating an upside from technology sharing
- Creating an upside from operational efficiencies
- Blocking your competition from expansion
- Risk and upside diversification
- Talent acquisition
- Securing the future via a legacy pivot
These strategies are not mutually exclusive and many times they overlap.
Here are some examples of deals which employed some of the above mentioned strategies:
Playtikas acquisition of Pacific Interactive (makers of House of Fun). What were we looking to achieve by acquiring Pacific Interactive? Product portfolio expansion, creating an upside due to cross promotional potential and knowledge sharing, talent acquisition, and risk diversification. The assumption was that our players play and pay on more than one slots game at any given time and that adding an additional slots game to our portfolio would allow us to get more share of a users overall budget both in terms of time and in terms of money.
Tencents acquisition of Miniclip: Tencents goals were expansion of regional reach, talent acquisition, creating an upside via cross promotional activities and risk diversification. By acquiring Miniclip, Tencent acquired mass access to the western games market in which it was lacking prior to the acquisition.
Churchhill Downs acquisition of Big Fish:The goal behind this deal was mainly to secure the future via a legacy pivot and upside/risk diversification. By acquiring Big Fish, Churchill downs secured a position in the social casino market to which they had no previous access to, even though they are one of the leaders in offline casino entertainment industry.
So why did Activision Blizzard acquire King?
At first glance the $5.9B deal announced by Activision Blizzard and King may seem counter intuitive. The companies have quite contrasting profiles:
- An old-school market leader
- Specializes in hard and midcore console and PC games
- Specializes in the pay per download and subscription business model
- Targets mainly a male demographic
- A new-school market leader
- Specializes in casual Facebook and mobile games
- Specializes in the free to play business model
- Targets mainly a middle aged female demographic
So where are the synergies? Where is the upside? How do the combined companies create value for the shareholders?
Given the contrasting profiles of both companies, in my opinion, the Activision Blizzard acquisition was mainly about a Diversification Strategy. After the acquisition Activision Blizzard will span a wider demographic (male and female), a wider product offering (from hardcore games to casualgames), a wider distribution in terms of platforms (from console to mobile), a wider knowledge base in terms of business models (pay per download to free to play). Bottom line, Activision Blizzard widened their sphere of influence and power to a substantially wider part of the games industry spectrum.
The combined company will create a games industry monster corporation with over 500M monthly active users, over $2.5B of EBITDA, and 10 of the most popular games franchises on the globe. The deal will transform Activision Blizzard into the second largest publicly listed games company in the world (the first being China-based Tencent). This diversification and the added scale will minimize overall risk and allow the combined company to make money from the many lucrative sub-markets within the games industry.
That being said, there are several key challenges and questions in a deal like this which the combined company will face overtime:
- Given that King is in decline (due to it’s over reliance on Candy Crush which is past its peak), will King be able to sustain and grow its core business. This is a question that has been on the mind of everyone since King IPO’d. The question remains relevant today. Many are left wondering how they will address this issue?
- Will the combined company be able to leverage the mobile and free to play knowledge in King to allow Activision Blizzards current and future titles to succeed on mobile
- Although there are opposing demographics between the two companies there is no doubt a sub-segment of users that overlap between the companies games. How big is this sub-segment? If substantial, how to they cross promote effectively to create an upside via increasing user LTV on a company level.
Time will tell if they are able to overcome these and many other challenges that come with such a deal. In my mind, overcoming these will be the key to whether this was a good deal at a good price.
Some other immediate considerations that were probably taken into account with the deal
Though $5.9B sounds like a hefty price, the reality is that the price is a fraction of their $25B market cap on the day prior to the deal being announced.
The Activision Blizzard stock increased several percent on the day after the deal was announced adding over $1B to their marketcap.
The $3.6B in cash that will be paid by Activision to King shareholders (the rest will be financed) is sitting overseas and thus by using these funds, Activision is essentially saving approximately $1B of taxes were the company to decide to repatriate the funds and bring them to the USA.
What does the deal mean for the industry?
In my opinion this deal will bring with it a wave of consolidation in the games industry. If Activision can acquire King, the other mega corps will begin to think about their next large acquisitions as well. As long as the growth of the games industry continues (which I am sure it will) we will see other large deals in the coming quarters and years which will look and feel like a land grab from the days of the gold rush. We have interesting times ahead of us. Hold on to your hats!
Good luck to our colleagues at Activision Blizzard and King.