With the mass migration to mobile games, one of traditional video gaming’s iconic companies didn’t want to be stuck in the past.
So on Nov. 2, Santa Monica’s Activision Blizzard Inc., which was founded in 1979 – ancient by gaming world standards, announced that it has agreed to pay a whopping $5.9 billion for Irish mobile-game developer King Digital Entertainment, maker of the popularly addictive game Candy Crush.
The deal, which would be the third-largest acquisition ever in the video-game industry, has been unanimously approved by both companies’ boards and is expected to close by spring.
On the surface, Activision’s big bet might seem dicey. The price tag is more than twice the $2.5 billion Microsoft Corp. paid to acquire Mojang, maker of wildly popular puzzle game Minecraft, for starters. While King has developed more than 200 games and has a network of 330 million monthly users, its recently slumping revenue has driven its stock price down 31 percent since its initial public offering in 2014. Mobile hits like Candy Crush, where players match three or more matching candies and can use in-app purchases to get additional content, are notorious one-hit wonders that eventually drop off.
Case in point: Rovio, maker of once-viral game Angry Birds, which laid off 130 employees in October of last year and 230 more this August amid declining revenue. Rovio extended itself during times of good fortune, expanding into merchandising with Angry Birds T-shirts and backpacks. But it couldn’t come up with a hit as big as Angry Birds, and customers moved on – many to Candy Crush.
However, gaming experts say Activision – which made 87 percent of its third-quarter revenue from console and computer games like the popular “Call of Duty” and “World of Warcraft” – is more concerned with acquiring King’s mobile expertise to avoid irrelevancy than it is about revenues.
“Activision isn’t buying revenue growth,” said Michael Pachter, an analyst who covers the company for Wedbush Securities in downtown Los Angeles. “They’re buying a proven track record of making successful mobile games.”
Pachter said Activision was expecting King’s profits to decline when it determined what it was willing to pay for the company.
“If they don’t (decline),” Pachter said, “Activision got a bargain.”
Activision Chief Executive Bobby Kotick told analysts in a Nov. 3 conference call about the deal that further expansion into mobile gaming will position the company for future growth.
Mobile gaming is expected to expand at a rate of 15 percent a year, according to a report by San Francisco gaming consulting firm Digi-Capital.
The deal should also expand Activision’s female customer base. While games like “World of Warcraft” are dominated by male players, 60 percent of Candy Crush players are women.
“This acquisition not only makes Activision Blizzard one of the most powerful players in mobile gaming, but it also gives them access to a large female audience,” said Lina Chen, chief executive of Nix Hydra, an L.A. maker of mobile games for women. “It’s a clear signal to the rest of the industry, showing not only the importance of mobile games but also of female players.”
The stock market seemed to buy the reasoning behind the bid. Shares of Activision rose 3 percent on the news and finished the week ended Nov. 4 at $36.99. The company’s stock is up 85 percent over the past 52 weeks.
Activision, which sells products worldwide, is using its international operations to make the deal more favorable financially, planning to fund it with $3.6 billion in offshore cash and $2.3 billion in debt financing. This arrangement is expected to save the company about $1 billion in taxes.
Track record
Some of Kotick’s confidence likely stems from Activision’s prior success making big deals.
Kotick told investors that Activision’s reasoning for acquiring King was similar to its 2008 decision to merge Activision Publishing and Blizzard Entertainment in a $19 billion deal, the largest merger in video-game history. That deal gave Activision more online users, and today, online sales make up two-thirds of the company’s revenue.
For the quarter ended Sept. 30, non-GAAP net revenue from digital channels were a record $697 million, representing 67 percent of the company’s total revenue up 38 percent from the same period a year earlier.
Kotick expects similar growth in the mobile realm, where Activision does not have a footprint. He added that the acquisition would also create the opportunity to cross-promote Activision’s more than 30 years of content.
Some industry experts think Activision’s latest pickup might spur increased activity in the gaming industry.
“Activision’s purchase of King will lead to a lot of their competitors wanting to be similarly aggressive, whether building organically or through acquisitions,” said Andrew Stalbow, chief executive of Venice mobile-game developer Seriously.
Tim Merel, managing director of Digi-Capital, said the acquisition was the first sign of hope in a “dismal” year for mergers and acquisitions in the gaming market. For the first nine months of the year, total deal value across investments, mergers and acquisitions and IPOs decreased 82 percent compared with the same period last year.
“This one deal could be a catalyst for further large-scale consolidation in the next 12 months, but it could also prove to be an isolated megadeal in an otherwise quiet market,” Merel said.
