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Activision and King: Wrong price, poor fit

By Rob Fahey

Activision and King: Wrong price, poor fit

Tue 03 Nov 2015 10:19am GMT / 5:19am EST / 2:19am PST
MobileBusiness

King is a great business, but Activision's $5.9 billion buyout is the result of desperation to get up to speed on mobile, not a carefully considered strategy

Activision Blizzard

Headquartered in Santa Monica, California, Activision Blizzard, Inc. is a worldwide pure-play online...

activisionblizzard.c...

Activision Blizzard has bought King Digital Entertainment for $5.9 billion, marking not only one of the largest acquisitions in videogame history but one of the largest deals ever made in the entertainment business. Comparing this to previous entertainment deals highlights just how extraordinary the figures involved are; the purchase price values King at significantly more than Marvel Entertainment (acquired by Disney for $4.2 billion), Star Wars owner Lucasfilm (Disney again, for $4.1 billion) and movie studio Metro-Goldwyn-Mayer (acquired by Sony for almost $5 billion). The price dwarfs the $1.5 billion paid by Japanese network SoftBank and mobile publisher GungHo for Supercell back in 2013 - though it's not quite on the same scale as the $7.4 billion price tag Disney paid for Pixar, or in the same ballpark as the $18 billion-odd involved in the merger that originally created Activision Blizzard itself.

How is $5.9 billion justified? Well, it's a fairly reasonable premium of 20% over the company's share price - though if you've been holding on to King shares since its IPO in 2014, you'll still be disappointed, as it's far short of the $22.50 IPO price, or even the $20.50 that the shares traded at on their first day on the open market. The company's share price has been more or less stable this year, but Activision's offer still doesn't make up for the various tumbles shares took through 2014.

A better justification, perhaps, lies in the scale of King's mobile game business. The company is a little off its peak at the moment. Candy Crush Saga, its biggest title, is on a slow decline from an extraordinary peak of success, and other titles aren't growing fast enough to make up for that decline, but it still recorded over half a billion monthly active users (MAUs) in its recently reported second quarter figures. In terms of paying users, the company had 7.6 million paying users each month - more than Blizzard's cash cow, World of Warcraft, and moreover, the average revenue from each of those users was $23.26, far more than a World of Warcraft subscriber pays. King took in $529 million in bookings during the quarter, 81 per cent of it from mobile devices - a seriously appealing set of figures for a company like Activision, which struggles to get even 10 per cent of its revenues from mobile despite its constant lip-service to the platform.

"On paper, this deal turns Activision into a much more broad-based company that's far more in line with the present trajectory of the market at large"

In buying King, Activision instantly makes itself into one of the biggest players in the mobile space, albeit simply by absorbing the company that is presently at the top of the heap. It diversifies its bottom line in a way that investors and analysts have been crying out for it to do, reducing its reliance on console (still damn near half of its revenues) and on the remarkable-but-fading World of Warcraft, and bulking up its anaemic mobile revenues to the point of respectability. On paper, this deal turns Activision into a much more broad-based company that's far more in line with the present trajectory of the market at large, and should assuage the fears of those who think Activision's over-reliance on a small number of core franchises leaves it far more vulnerable than rivals like Electronic Arts.

That's on paper. In practice, though, what has Activision just bought for $5.9 billion? That's a slightly trickier question. The company is, unquestionably, now the proud owner of one of the most talented and accomplished creators and operators of mobile games in the world. King's experience of developing, marketing and, crucially, running mobile games at enormous scale, and the team that accomplished all of that, is undoubtedly valuable in its own right. Those are talents that Activision didn't have yesterday, but will have tomorrow. Are those talents worth $5.9 billion, though? Without wishing for a moment to cast doubt on the skills of those who work at King, no, they're not. $5.9 billion isn't "acquihire" money, and when that's the kind of cash involved we simply can't think of this as an "acquihire" deal. Activision didn't pay that kind of money in order to get access to the talent and experience assembled at King. It paid for King itself, for its ongoing businesses and its IP.

Open the shopping bag, and you might struggle to understand how the contents reach $5.9 billion at the till. King has one remarkable, breakthrough, enormously successful IP - Candy Crush Saga, which still accounts (not including heavily marketed spin-off title Candy Crush Soda Saga) for 39 per cent of the company's gross bookings. No doubt deeply aware of the danger of being over-reliant on revenues from this single title, King has worked incredibly hard to find success for other games in its portfolio. But even its great efforts in this regard have failed to compensate for falling revenues from Candy Crush, and it's notable that a fair amount of the "non-Candy Crush Saga" revenue that the company boasts actually comes from Candy Crush Soda Saga. Other titles like Farm Heroes Saga and Pet Rescue Saga are no doubt profitable and successful in their own right, and King would be a sustainable business even without Candy Crush. But it would be a much, much smaller business, and certainly not a $5.9 billion business.

"King would be a sustainable business even without Candy Crush. But it would be a much, much smaller business, and certainly not a $5.9 billion business"

Despite being generally bullish about King's prospects, then, it's hard to avoid the feeling that the company has done incredibly well out of this acquisition. The undoubted talent and experience of its teams aside, this is, realistically, a company with one IP worth paying for, and unlike Star Wars or the Avengers, Candy Crush is a very new IP whose longevity is entirely untested and whose potential for merchandising or cross-media ventures is dubious at best. King has done better than most of its rivals in the mobile space at applying some of the lessons of its biggest hit to subsequent games and making them successful, but it shares with every other mobile developer the same fundamental problem: none of them has ever worked out how to bottle the lightning that creates a mega-hit and repeat the success down the line. Absent of another Candy Crush game, the odds are that King's business would slowly deflate as the air escaped from the Candy Crush bubble, until the company's sustainable (and undoubtedly profitable) core was what was left. Selling up to Activision at a healthy premium while the company is still "inflated" by the likely unrepeatable success of Candy Crush is a fantastic move for the company's management and investors, but rather less so for Activision.

Perhaps, though, the whole might be more than the sum of its parts? Couldn't Activision, holders of some of the world's favourite console and PC game IP, work with King to leverage that IP and the firm's reach in traditional games, creating new business at the interaction of their respective specialisations? That's a big part of what made Pixar so valuable to Disney, for example; the match between their businesses was of vital importance to that deal, and the same can broadly be said for Disney's other huge acquisitions, Lucasfilm and Marvel. (SoftBank's purchase of Supercell, by comparison, was rather more of a straightforward market-share land grab.) What could this new hybrid, Activision Blizzard King, hope to achieve in terms of overlap that enhances the value of its various component parts?

"We can expect to see plenty of that $5.9 billion being frittered away in goodwill write-downs over the coming few years"

Certainly, Activision has some properties that could work on mobile (I'm thinking specifically of Skylanders here, though others may also fit); some Blizzard properties could also probably work on mobile, though I very much doubt that Blizzard (which retains a strong degree of independence within the group) is a good cultural fit for King, and is deeply unlikely to work with it in any manner which gives up the slightest creative control over its properties. King's properties, meanwhile, don't look terribly enticing as console or PC games, and conversions done this way would almost certainly defeat the entire purpose of the deal anyway, since the objective is to bolster Activision's mobile business. The prospect of a mobile game based on Call of Duty or another major console IP may seem superficially interesting, but we've been down this road before and it didn't lead anywhere impressive. Sure, core gamers are on mobile too, but they've by and large been nonplussed at best and outraged at worst by the notion of engaging with mobile versions of their console favourites. It's genuinely hard to piece together the various IPs and franchises owned by King and Activision and see how there's any winning interaction between them on the table.

This is what makes me keep returning to those other mega-deals - to Star Wars, to Marvel, to Pixar - and finding the contrast between them and Activision / King so extraordinary. Each of those multi-billion dollar deals was carried out by Disney with a very specific, long-term plan in mind that would leverage the abilities of both acquirer and acquired to create something far more than the sum of its parts. Each of those deals had a very clear raison d'Ítre beyond simply "it'll make us bigger." Each of those companies fitted with the new parent like a piece of a puzzle. King's only role in Activision's "puzzle" is that they do mobile, and Activision sucks at mobile; there's no sense of any grand plan that will play out.

In all likelihood, Activision has just paid a huge premium for a company which is past the peak of its greatest hit title and into a period of managed decline, not to mention a company with which its core businesses simply don't fit in any meaningful way. King's a great company in many respects, but its acquisition isn't going to go down as a great deal for Activision - and we can expect to see plenty of that $5.9 billion being frittered away in goodwill write-downs over the coming few years.

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25 Comments

Chris Thomas Director & Co-Founder, Fuzzy Face Studios

1 5 5.0
Popular Comment
Hard to disagree with any of this. Excellent insight as always Rob.

Posted:8 months ago

#1

Darren Adams Managing Director, ChaosTrend

510 1,209 2.4
That's about the size of it.

Posted:8 months ago

#2

Nicholas Lovell Founder, Gamesbrief

245 323 1.3
Tim Wu calls it the Khronos Effect: Large companies have to acquire rivals to destroy them (as the Titan Khronos ate his children to prevent them overthrowing them until he missed one - Zeus - who overthrew them).

I think there is more to it than you argue, but I agree there will be goodwill writedowns. But Activision has just removed a very large, publicly-quoted, competitive threat. Which has some value in its own right.

Posted:8 months ago

#3

John Owens CEO, Wee Man Studios Ltd

1,017 1,330 1.3
I wonder which was cheaper or more effective. EA's strategy of building up their own mobile division or Activision's of buying the market leader.

That would be far more interesting than speculating whether the valuation is right. Ultimately there's no way of knowing that for sure but given the stock price has been relatively stable and the mobile sector has also been relatively stable recently it probably is a fair price.

Posted:8 months ago

#4

Martyn Brown Managing Director, Insight For Hire

150 68 0.5
Bought the wrong company. Supercell is where its at - and a much better fit for their brand audience IMHO.

Posted:8 months ago

#5

Eyal Teler Programmer

118 159 1.3
I think that Activision bought King precisely because its mobile strategy failed. King can do two main things for Activision: it can help it find what doesn't work in current offerings, thanks to its skills in analytics, and it can be used to build its IP's using casual mobile games with wide reach, and so make these IP's more widely known and so more suitable for expansion. For example a successful casual Warcraft game could be just what the company needs to help the flagging sales of WoW or create a bigger audience for a Warcraft movie.

Posted:8 months ago

#6

Jeremiah Moss Software Developer

14 46 3.3
Hearthstone is still on the first page of the Popular Games listing on iOS. I'm fairly surprised that the author of this article completely failed to mention it.

Posted:8 months ago

#7
Popular Comment
I have heard that people can spend a lot of money on Candy Crush but this is ridiculous... :-)

Posted:8 months ago

#8

Dan Tubb Investment manager, Edge

36 198 5.5
Popular Comment
Actually guys there may be some merit in this deal from a purely financial perspective, and thatís because its earnings accretive based on Activisions stock market valuation. Let me explain.

So Activison has revenues of $4.6bn and profit of $1.4bn. However the stock market has decided that it will pay 5.5x that revenue, and 18.2x that profit to derive a valuation.

Yet the deal they did with King was to buy their revenue at 2.6x and their profit at 10.3x times. Almost half what the stock market is valuing Activision themselves at.

So, and here comes the finance magic bit. You add the King revenues to the Activison revenues and you get revs of $6.9bn and profit of $1.9bn. Then letís be generous and assume that the multiple that the stock market is willing to pay for Activision is unchanged; still 5.5x profit or 18.2x profit and the valuation of Activision has goes up to $37bn after a few sets of quarterly reports.
So to recap, Activison starts off being worth $25bn, then its spends $6bn (some mix of retained cash and borrowed cash, which you pay the absurdly low interest rate you get on borrowing these days), and then Activision is now worth an extra $12bn. Not bad spending 6 to get 12 back pretty much immediately.

Now in practical terms I agree with you chaps. The cross selling potential of Call of Duty into middle aged housewives is hard to see. Also I suspect that the multiple that Activision commands in the market will come off somewhat. But itís probably not going to go from 5.5x revenues to 3.7x revenues. Which is the scale of the decline necessary to render this deal non-accretive.

So really the question is not is king worth $6bn. The question is: are the revenue contribution from King worth more to the stock market, inside Activision than $6bn. Clearly the board of Activision believe so. If they actually gain synergies from the deal, or cross sell is additional upside.

Edited 1 times. Last edit by Dan Tubb on 3rd November 2015 3:54pm

Posted:8 months ago

#9

Adam Campbell Product Executive, Hopster

1,432 1,467 1.0
I actually thought this was a great deal for both parties. Like any huge acquisition though, you won't necessarily find perfection.

Posted:8 months ago

#10

Richard Browne Partner & Head of Interactive, Many Rivers Productions

208 290 1.4
I'm confused, is it a "fairly reasonable premium" or "a huge premium" they've paid? It's a massive deal and yes when you compare it to the Marvel and Lucas deals seems incredible - but at the end of the day that's where the share price is trading so that's what they've had to pay. I doubt they're considering using Candy Crush to pump Call of Duty mobile sales, they've just elevated the Activision side of the business into the stratosphere on mobile and hopefully will use their extensive talents to grow King beyond it's current product base. Congrats to all I say, massive day for ATVI.

Posted:8 months ago

#11

James Berg Games User Researcher, EA Canada

312 426 1.4
I know we all love being armchair QBs, but I'm surprised that folks assume we know better than the insiders putting together a six BILLION dollar deal. I think they'd have done some pretty serious due diligence, and had some pretty clear ideas of where this was going to go for them :)

Personally, I'm excited about this. I'm not a fan of King's business practices, but it's undeniable that they're a market leader, and they make successful games. Adding the Acti/Blizz IP to that expertise is pretty substantial, and I think it's a case where the whole can be greater than the sum of it's parts. My hope as a gamer is that Acti/Blizz have more impact on King than the other way around, and we see some original content coming out, instead of Star Wars Candy Saga.

Posted:8 months ago

#12

Klaus Preisinger Freelance Writing

1,460 1,822 1.2
How high should we rate King's behavioral data? High, because it completes Activision/Blizzard's set of existing data with a new market segment? Low, because the next generation of users f2p titles will burn through needs new triggers? My inner cynic says, having one giant money sink beats having 10 small ones and it sure beats paying taxes on your profits.

Posted:8 months ago

#13

Derek Fitzgerald Director, Quality Assurance, EA Canada

10 17 1.7
Its important to keep stock of the tax and cash balance aspects of this deal. It might make the pricetag make a bit more sense. King is headquartered in London, which allows Activision to use up all of its foreign cash holdings (~3.6B) in this transaction and not pay a repatriation tax to use the funds within its own business. King comes with ~900M in cash or equivalents on their balance sheet as well. Factoring all of that in and you're taking >2B off the 5.9B acquisition cost.

I think it's still an incredibly expensive acquisition at that revised true cost as I view the likelihood King can recapture lightning in a bottle by generating another Candy Crush level hit exceedingly low, their ability to generate new games within the IP that meet or exceed Candy Crush's peak seem to be following the same path as Rovio's, the cross-application potential of that IP into other revenue opportunities does not seem high, and agree with Rob that the synergy opportunities of King's mobile expertise with Activision IP is low, and the arm's length relationship with Blizzard doesn't suggest that to be fertile landscape for deep cross-functional integration. Generally, I agree that this looks mostly like a land grab into a space Activision's presence is limited, not unlike some of the acquisitions EA made during industry transitions in the past (ex. Playfish), only for an exponentially higher cost. It seems focused on getting bigger, rather than getting better, so I'd be surprised if the early hot takes from analysts that view this move as accretive in any way other than short term tax implications prove accurate.

Posted:8 months ago

#14
The article misses a critical point:

1. King is one of the few mobile publishers that has double-diget % of payers in Free2Play. That is, rather than the 4% or so for most Free2Play games, as much as 30% of Candy Crush players actually spend.

2. Once console games move from shiny discs to network delivery of games, they are sure to follow the race to Free2Play.

Having this expertise is very valuable for Activision.

Posted:8 months ago

#15

Todd Weidner Founder, Big Daddy Game Studio

511 1,279 2.5
and when the market pops, as it will since Fed/central bank injections and corp buybacks can only inflate for so long, this may go down as one of the truly awful purchases just like before the last tech bubble burst. Once again, the MBA and suits going for the short term buck.

Edited 3 times. Last edit by Todd Weidner on 3rd November 2015 10:17pm

Posted:8 months ago

#16
My take on it was that it was similar to when Facebook bought WhatsApp. They didn't do it for the tech they did it for the users. King boasts some 330 million unique users who most likely do not overlap much with their current mobile users. Guessing that the hope is they can transition a good percentage of those to their games through in game ads.

Posted:8 months ago

#17

Paul Jace Merchandiser

1,176 1,962 1.7
5.9 billion? Doing some quick math that's about....5.9 billion more than I have in my own bank account and 5.9 billion more than I'll ever make in my lifetime or several other life times if I came back. Of course it seems excessive but I'm sure they have good reasons for the sale and have thought long and hard before they went through with this deal. When Microsoft bought Minecraft for 2.5 billion that seemed excessive too but they said that they already made more from Minecraft than the amount of interest(which I believe was 25 million) they would have made from that 2.5 billion just sitting in a bank.

Posted:8 months ago

#18

Bob Johnson Studying graphics design, Northern Arizona University

37 71 1.9
Look at Rovio and what happens once people grow tired of your one big mobile game. Why not throw in Farmville and Zynga as well.

I think some have mistaken a hit game for a long term business.

Edited 1 times. Last edit by Bob Johnson on 5th November 2015 6:26am

Posted:8 months ago

#19

Alfonso Sexto Lead Tester, Ubisoft Germany

1,139 1,258 1.1
Popular Comment
Today I heard somebody saying "Activision purchases King for 5.9 Billion dollars, in what probably was the biggest accidental in-app purchase in history."

Posted:8 months ago

#20

Alfonso Sexto Lead Tester, Ubisoft Germany

1,139 1,258 1.1
@William
"Once console games move from shiny discs to network delivery of games, they are sure to follow the race to Free2Play."
I'm not sure how many time I've heard that, but I've been hearing that for years, and I keep hearing it now that the mobile and F2P market is starting to struggle from app saturation and for rising costs in marketing (which beats the purpose of its low production cost)

I'm sorry, but I don't really think that will ever happen. Consoles have proven to be in another market; one that is more in line with AAA and indie games. Sure some F2P games are currently working on them, but their buyers get more excited about Witcher 3 and Fallout 4 than any F2P project that you can throw at them.

Posted:8 months ago

#21

Shane Sweeney Academic

501 597 1.2
I'm the first person to say a crash is coming.... 1983, 2000, 2017.... Nice easily spaced 17 year gaps so we can all pretend explosive growth can be infinite....but....I think I've drank the Coolaide.

Even after all this time King still has a revenue of over 700million dollars per quarter and spend very little of it. They are getting 7% year on year decline. Maybe it will rapidly spike though. Only 40% comes from Candy Crush which means this isn't the same as Angry Birds, Minecraft or even Blizzard back in 2005. Even during the crazy heights of Zynga in 2012 they barely broke 300 million and had massive spending overheads.

Mojang only made around $70 million a quarter and Microsoft acquired them for 2.5 billion. Which sounds like a bad deal unless we factor in IP value.

But even excluding IP value and staff talent am I wrong for thinking that if Activision just gutted the company and ran the games for 5 more years they basically would make their money back? Which then considering the tax break of over 1 billion dollars this weirdly seems like a good deal.

Scratch that, 2017 is coming it's all going to collapse.

Edited 2 times. Last edit by Shane Sweeney on 5th November 2015 8:22am

Posted:8 months ago

#22

Curt Sampson Sofware Developer

682 540 0.8
"Activision purchases King for 5.9 Billion dollars, in what probably was the biggest accidental in-app purchase in history."
It's too bad "LOL" is such an abused phrase, because for once it was literally true for me. (This was so funny I feel compelled to do more than just vote it up.)

Edited 1 times. Last edit by Curt Sampson on 5th November 2015 8:37am

Posted:8 months ago

#23

Alfonso Sexto Lead Tester, Ubisoft Germany

1,139 1,258 1.1
@Curt
I will let the original author know you enjoyed it ;)

Posted:8 months ago

#24

Greg Wilcox Creator, Destroy All Fanboys!

2,576 1,613 0.6
Ha. Someone's kid maybe tapped that "Join Now!" button a few hundred thousand times too many? That said, maybe a mobile Starcraft/Warcraft/Diablo non-Crush Saga series would do really well if done right. As usual, we shall see.

Posted:8 months ago

#25

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