High Opportunity Cost for Activision Acquisition

King Digital is best known for its Candy Crush mobile games. Activision views the acquisition as an entry point into mobile gaming, a relatively weak point for the company. We agree with management that mobile gaming may be a high-growth vertical, but are unconvinced that buying King is the most cost-efficient way to gain long-term traction in the space. While Candy Crush Saga and its spin-off, Candy Crush Soda Saga, remain in the top five highest-grossing apps on both iOS and Android, King is still a one-title shop, albeit a long-lasting and profitable one, despite launching several other games.

Despite our misgivings, we acknowledge the financial benefits of the acquisition. The deal is accretive upon close (expected in March 2016), leading to a 30% increase in 2016 non-GAAP revenue and EPS. The transaction is nondilutive, since the company expects to use $3.6 billion in overseas cash and $2.3 billion in debt. Several reports praise the company for using its overseas cash in a more tax-efficient manner than repatriating it. However, this analysis assumes a binary decision: buy King or repatriate. Activision could have held on to the cash, purchased a number of smaller overseas mobile developers, or bought another core gaming company. We note that for $2.5 billion, Microsoft purchased Mojang, another one-title overseas shop (Minecraft) with a significant mobile presence.

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