Will Microsoft be Able to Successfully Acquire Activision Blizzard?

On 21st December 2022, there is news from Reuters that Microsoft may set its sight on Netflix as its next acquisition target in 2023!  As the second top holding in my US Growth Portfolio (behind Tesla), I am concern with Microsoft having too many news on its side in this year.  However, as a tech giant, now may also precisely be a great opportune time for the company to look at potential acquisition candidates in times of market crashes, which allows Microsoft to buy them over at a lower price tag.  

This also brought my attention back on Microsoft's current plan that has yet near completion.  On 18th January 2022, Microsoft announced its intent to acquire Activision Blizzard, a video game company most famously known for its World of Warcraft and Call of Duty series, just to name a few.  The acquisition, if successful, will cost Microsoft USD 68.7 billion in cash.  The acquisition news came about as gaming has become an increasingly important part of Microsoft's balance sheet.  On a personal note, though I am not a gamer, but I am a shareholder of Microsoft, so this acquisition definitely has an impact on my portfolio, and personally I am viewing this acquisition positively.

However, in early December, this acquisition news is back into the spotlight as Federal Trade Commission (FTC) sues Microsoft to block it's acquisition of Activision Blizzard, to prevent Microsoft from gaining monopolistic advantage in the gaming sector.  So how will this acquisition affect Microsoft?

1)    Complementary Blockbuster Games

Revenue from the gaming division in Microsoft increased by 33% in fiscal 2021, outpacing the 18% growth in overall revenue.  However, most of the profits came from hardware sales of its best-selling console, the Xbox.  In the quarters where new editions of Xbox are not released, the division's revenue and profits decline.  Consequently, while Microsoft has produced content for its Xbox, it has no blockbuster franchise under it.  Therefore this acquisition will provide a short cut for Microsoft to ramp up its content portfolio, accessing valuable intellectual property (IP) of the popular games.  

If 'some' of the IP of content under Activision Blizzard became exclusive to Xbox console, this could drive more users to Microsoft's platforms, and licensing the franchise to other gaming hardware makers will help generate more IP revenue for Microsoft.  On the flip side, gamers owning Sony's Playstation and Nintendo's Switch may have limited access to their favourite games, and to play them means a possibly need to convert to Xbox (this is not definite based on past acquisitions.  It depends on negotiations to determine which titles' IP will be selectively moved under Microsoft).  

2)    Impact on Cash Reserves

To some companies, cash reserves are important.  But to others, like Microsoft, the swelling cash reserves in the company could be put into better use for other profit-generative investments.  Record sales during the pandemic years has allowed Microsoft's cash buffer to accumulate to USD 137.7 billion as of November 2021.  If Microsoft can successfully acquire Activision Blizzard, the cash pile that Microsoft has can be put into better use, to generate better returns in the long term. 

3)    Toxic Work Culture in Activision Blizzard

For quite some time, the toxic culture in Activision Blizzard has entered the limelight, more so after the announcement of the intention to acquire.  Female employees has complained and protested against the company's poor handling of ongoing sexual harassment allegations and pregnancy discriminations.  It remains to be seen, in the event the acquisition goes through, how Microsoft will handle these matters to "aspire an inclusive culture that embraces diversity, where everyone can thrive".

All in all, whether this acquisition can be successful remains to be seen.  As mentioned, I view this move positive for Microsoft's continuous growth in the longer term.  As of now, I can only continue to wait for more concrete news regarding this acquisition, and just continue to follow up.  As usual, hope for the best but be prepared for the worst too.  Meanwhile, Barista FIRE, here I come...!