Microsoft-Activision Blizzard deal: 'The industrial logic is there,' analyst says

Truist Securities Equity Research Director Matthew Thornton joins Yahoo Finance Live to discuss Microsoft's acquisition of Activision Blizzard and break down Microsoft's revenue.

Video Transcript

AKIKO FUJITA: But we have to start with that blockbuster deal-- news we got out this morning, Microsoft acquiring Activision Blizzard in a deal valued at $68.7 billion. This makes this the largest takeover in Microsoft's history. Let's bring in Yahoo Finance's Dan Howley, who has been all over this story. Dan, so many questions here, including, you know, Microsoft paying this amount for a company that has been under a lot of heat with legal troubles and questions about their company culture.

DAN HOWLEY: That's right, Akiko. The $68.7 billion acquisition is the largest in Microsoft's entire history. And it's actually one of the second massive acquisitions that the company has done in the gaming space in the past two years. Last year, it acquired ZeniMax for $7.5 billion. But this really comes at a fraught time for Activision Blizzard.

The company is basically dealing with a trio of issues related to sexual harassment, discrimination, gender discrimination. They went to settle for $18 million with the Equal Employment Opportunity Commission. And they're also facing a suit by California and an investigation by the SEC as to whether or not they knew about these issues without informing investors.

So really, a number of headaches that Microsoft is seemingly voluntarily taking on. And during the press conference that CEO Satya Nadella of Microsoft and Activision Blizzard CEO Bobby Kotick had-- basically, Microsoft's Satya Nadella had said that culture was a number one priority. He said, this means you must continuously improve the lived experience of our employees and create an environment that allows us to constantly drive everyday improvement in our culture-- obviously alluding to the issues, but not directly discussing them.

Now, as for the gaming side of things, this makes Microsoft the third largest gaming company in the world by revenue. They paid a 45% premium from the January 14 close of Activision Blizzard's stock price. And they do get a big foothold in the mobile gaming space, something that Microsoft doesn't previously have.

AKIKO FUJITA: All right, Dan, stay right there. We're going to bring in our first guest for the hour. We've got Matthew Thornton, Truist Securities Equity Research Director. Matt's joining us on the phone today. Matt, I'll get into the price tag in just a bit, but let me first get your reaction to the news we got this morning.

MATTHEW THORNTON: Yeah. Hey, good morning. Thanks for having me. Look, I think probably two things that we focus in on-- number one, the industrial logic and then, two, the valuation. I think the industrial logic, vertical consolidation within the gaming space, has been talked about for quite some time. Microsoft acquired ZeniMax Bethesda last year, if you recall. So we've seen parts of that.

We've seen Sony with the PlayStation platform having their own studios and content. You've seen Microsoft with the Xbox platform having their own studios and content. So that theme isn't necessarily new, and it's been talked about perhaps heating up as these platforms want to cement their position as the world ultimately goes to a streaming future. So how do you cement yourself as one of the dominant one, or two, or three platforms in that future? And content is a way to do that.

And so I think the industrial logic is there. And then I think just from a valuation perspective, we actually put out a note back in November, we thought Activision just based on a sum of parts basis in an acquisition scenario could be worth between $90 and $97 per share. So the $95 price tag fits neatly within there. So those are the two things that jump jumped out to us this morning.

AKIKO FUJITA: Talk to me about that valuation you just pointed to. I mean, it sounds like you think this is a fair price tag. We're seeing shares of Microsoft down about just over 1% right now. But this is a stock, when we're talking about Activision Blizzard, that's been down nearly 30% since they were sued by the state of California on those company culture issues. Is this a fair price when you consider the baggage that will come with this type of acquisition?

MATTHEW THORNTON: Yeah. If you look at Activision, it's traded, you know, north of $100 fairly recently, even. If you look at the multiples, it's about 25 times earnings. Excluding cash, it's 19 times EV to EBITDA. So again, those multiples aren't eye-popping. Obviously, this is an all-cash deal for Microsoft, so pretty easily accretive for them, as they alluded to.

I think with Activision, I think their internal issues are very well-known. We think the company is, obviously, the top priority is really turning around the morale and the productivity, such that the company can execute on its pipeline and return the company and the stock performance back to kind of where it's been historically.

So I think moving in under Microsoft, you know, maybe there's a little bit of opportunistic movement here from Microsoft, given the depressed share price on Activision. But you know, I think a lot of those issues are probably already well underway. I think they will continue to be underway under the Microsoft umbrella. I think that will continue to be a top priority and a top focus. It probably just happened with a little less of a microscope on the company, because you're folding into such a larger organization.

- Hey, Matt, you know, while we're thinking about this acquisition, and particularly the cloud as a console in the future, what does it shape up for some of the potential future dealmaking that we could see over the course of the rest of this year as more of these companies are thrusting towards that cloud as a console type of stature and ecosystem as well?

MATTHEW THORNTON: Yeah. Look, I think everyone is pretty well aware of the size of the gaming market and the attractiveness of it. And again, I think for anyone that's looking to be or cement a position as a meaningful player from a platform perspective in that future, you've got to be thinking about, how do I differentiate? How do I ensure that I'm on successful platforms?

And I think the back end and, you know, cloud infrastructure, and user interface, I think those things can get you so far. But content, of course, has been one that has been discussed as a way of differentiating that platform and kind of assuring your position there. And so I think anyone in and around this space-- obviously, the dominant consoles today are Sony and Microsoft.

If you look at mobile, it's, of course, Apple and Google. If you look at streaming, you have, you know, new emerging players around Google Stadia and Amazon Luna. But again, I think for all of these, they have to be looking at, how do I cement that position for the future? And Microsoft's clearly betting on you content and putting that content behind their Xbox Game Pass as a way to differentiate and cement their position.

DAN HOWLEY: Matt, I kind of want to ask about the way that Microsoft is positioning this as far as a Metaverse play. Satya Nadella essentially said that right out of the gate. Do you think that this kind of shows that the metaverse is really going to be focused primarily on gaming? And I guess, do you think that this kind of goes to show that Microsoft needs to catch up here where we see something like Meta, you know, Facebook, and Epic really kind of having a foothold there now?

MATTHEW THORNTON: Yeah. I think, you know, interactive entertainment or gaming is probably the first ring, if you will, of Metaverse and Metaverse ambitions. And as such, you have to have that content and infrastructure to be a player here. And obviously, Epic is well on its way with the "Fortnite" ecosystem. If you look at Roblox and what it's doing, obviously, you know, Facebook now-- Meta has really pivoted position that company, you know, to go after the Metaverse.

If you look at Microsoft now, "Minecraft" is an asset that they've owned for a long time and it's always been looked at a potential Metaverse opportunity. Most of the gaming-- the larger gaming publishers have been considered potential players or potential Metaverses in the future. And so stringing them together and enabling other experiences, whether that be live events and concerts, whether that be brand advertising, and, ultimately, e-commerce, of course, being the largest opportunity. But again, it starts with the content and the experiences that bring the audiences into your respective Metaverse.

DAN HOWLEY: And I guess just as a final, Matt, I want to ask where you think Bobby Kotick belongs in all of this. Obviously, there's a lot of controversy about his continued role at Activision Blizzard as CEO. And now, he's going to be underneath Phil Spencer, who is the head of Microsoft Gaming. Do you think for Microsoft to really wash away these issues that Activision Blizzard brings along, that Kotick needs to kind of go?

MATTHEW THORNTON: You know, I think a lot is going to depend on how quickly they can really turn the morale and the productivity within the organization. Like I said earlier, number one, folding inside of Microsoft, which is just a much, much bigger organization broadly, I think you'll see the headlines and kind of that microscope, you know, go away to a large extent-- because, again, Activision is only one small component of that broader company.

In that vein, I think, look, I think if they can really turn that morale-- return the morale and return the productivity to where it needs to be, I think that'll all die down. And really, what Bobby does or does not do probably will have less of an impact as to the success of the organization. Again, you've got new leadership.

I think you've got initiatives already underway. If they're successful, you know, whether Bobby stays or goes probably isn't really that relevant to the long-term. Obviously, if they don't you turn under his watch, you know, then that scenario, it's probably a little more likely that he'd leave. But like I said, I think those initiatives are well underway, and I would expect them to continue well underway under the Microsoft umbrella.

AKIKO FUJITA: Yes, certainly investors appear to be in agreement if you look at where the stock is moving today. Matt Thornton, Truist Securities Equity Research Director, appreciate you hopping on the call with us today. And our thanks to Dan Howley as well for bringing us that.

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