Software and gaming giant Microsoft (MSFT) has made multiple new acquisitions over the last year or so. Even as COVID-19 slowed development and the pace of new console releases, the company still delivered big news.
Now, it’s brought out perhaps its biggest piece yet: it’s buying gaming company Activision (ATVI) in a massive, 11-figure, all-cash deal. I would have been bullish before such a deal took place, and I’m no less bullish for the deal being made.
Activision’s year in share prices made it look like an attractive buy target even before Microsoft stepped in. ATVI kicked off the last year on a slightly down note, but turned it around to hit its highs for the year, ultimately clearing the $100 per share mark.
It stayed at that point for about a week and a half and then leveled off, circulating between the $90 and $100 points until late July. That was when the slow drop kicked in. Investors saw shares drop from around $91 to just under $80 in the space of about two weeks.
The downward trend continued until mid-September, when a small rally kicked in that briefly brought shares back above $80. That’s when the bottom fell out, and shares dropped to about $65.
That is, until Microsoft stepped in. Microsoft announced plans to shell out fully $68.7 billion in cash to pick up Activision. The move sent Activision shares blasting up as much as 37% in premarket trading Tuesday morning and is currently still up 28%.
The move would give Microsoft control of Activision’s wide array of titles, including flagship shooter “Call of Duty,” as well as PC greats “World of Warcraft” and “Diablo.” It would ultimately make Microsoft the “…third-largest gaming company by revenue, behind Tencent and Sony (SONY)”. The purchase calls for embattled CEO Bobby Kotick to, oddly, remain CEO but report to Phil Spencer, the head of Xbox.
A Huge Win for Activision, A Big Move for Microsoft
Microsoft purchased several studios in the recent past. About a year and a half ago, Microsoft made huge waves with its purchase of Zenimax Media. This put Microsoft in the catbird seat on several major titles. This includes the “Elder Scrolls” series, the “Fallout” series, and of course, “Starfield.” Microsoft also gobbled up major names like Obsidian Games and Rare, along with smaller studios like Undead Labs and Double Fine Productions.
This is a much, much larger development. By way of comparison, Microsoft paid $7.5 billion for Zenimax Media. That was about a year and a half ago. With good reason, too; while Zenimax certainly had long-time gamer favorites under its banner, Activision held some of gaming’s biggest names. With the purchase, Microsoft opens a slew of new possibilities, though MSFT lost around 2% in premarket trading but is now recovering.
MSFT plans to bring multiple Activision titles to its Xbox Game Pass system. Such a move which will make the already-attractive service even better. Additionally, we may see more rapid development now thanks to Microsoft’s resources and operations behind the titles.
The delays for “Diablo 4” hit the gaming community hard when announced back in late November. With Microsoft in charge, though, those delays may get shored up a bit.
Activision was already a good buy, thanks to its dividend as well. Activision’s dividend history shows a dividend not only paid regularly but also increased regularly over the last 10 years.
Wall Street’s Take
Turning to Wall Street, Activision has a Moderate Buy consensus rating. That’s based on 14 Buys, five Holds, and one Sell assigned in the past three months. The average Activision price target of $88.13 implies 4.9% upside potential.
Analyst price targets range from a low of $54 per share to a high of $105 per share.
Concluding Views
It would be easy to second-guess the sheer amount that Microsoft paid for Activision. The company paid a little less than half of that to get LinkedIn. And that move only hit five years ago.
However, with Microsoft’s purchase of Activision, Microsoft establishes itself firmly as a major player in gaming. It already was in many ways; just try and buy one of the new Xbox systems, and this is over a year after release.
The new Microsoft connection is likely to improve Activision’s fortunes substantially. With Microsoft’s expertise and resources backing up the company, Activision should be that much better off. The added respectability Microsoft offers won’t hurt either.
Most of the easy gains have likely been lost to today’s surge. Regardless, getting in on Activision now that it’s a Microsoft arm is still a good idea, in my opinion.
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