Microsoft: Activision Deal Closes, Kicking Off a New Era in Gaming

On Oct. 13, wide-moat Microsoft MSFT closed its acquisition of Activision, resulting in no change to our $360 per share fair value estimate. The regulatory approval process entangled the $69 billion transaction for 20 months, with the deal being left for dead and eventually revived along the way. We see shares as undervalued, as strength in 2023 for software has waned since mid-July. The company reports first-quarter earnings on Oct. 24, which is when we expect an initial update surrounding the transaction.

We have liked the acquisition throughout the entire journey, as Microsoft bolsters its already strong gaming division with an iconic library that includes traditional console game developer Activision, PC developer Blizzard, and mobile developer King. Microsoft has minimal exposure to mobile, the largest gaming platform, so we think King and its Candy Crush franchise will instantly provide mobile chops. Activision has some of the most popular games of all time under its umbrella, including the Call of Duty franchise, Diablo, and World of Warcraft, which changed the gaming industry in 2004 with not only its multiplayer game, but also its monthly subscription model.

We expect Microsoft to rapidly add Activision content to Game Pass, which we estimate has about 25 million subscribers. Activision has approximately 360 million monthly active users. We tend to think the purpose of deals like this is to gather exclusive content. However, part of the value of Activision is that it develops games across platforms and consoles, so we expect a relatively light slate of exclusive Xbox content over the next several years. We also believe Bobby Kotick, Activision’s CEO, will remain on board through the end of the year, with the gaming division ultimately run by current Microsoft Gaming CEO, Phil Spencer.