Microsoft Acquisition Of Activision Blizzard

Microsoft Acquisition Of Activision Blizzard

Microsoft acquired Activision Blizzard for $68.7 billion in an all-cash deal (MS has $130 billion in cash and short-term investments). The rationale for this acquisition is the potential demand for gaming and entertainment. However, despite the strategic rationale for this acquisition, i wanted to evaluate the deal purely from a financial standpoint to check whether Microsoft paid a fair price for this acquisition.

Microsoft’s revenue CAGR has been 13% for the last five years, with a 17.2% growth forecast for next year. At the same time, EBIT grew by 20% CAGR over the previous five years, with a 17.8% growth forecast for next year. So, at this point, Microsoft does not face growth or profitability issues.

Activision Blizzard’s closing price yesterday was $82.31/share, and MS would pay $95/share for this deal at a 15.5% premium over the closing price. So i valued Activision Blizzard to check if the stock was trading fairly.

For Activision Blizzard:

1)It has $10 billion in cash reserves, $3.6 billion in debt (5.63% D/E ratio at market prices), and its last five-year revenue CAGR (11.6%), EBIT 5 yr CAGR (16.5%) is impressive. Further, its projection for next year in revenue growth is 7.8%, and 29.1% in EBIT growth is excellent, with a 36.2% TTM EBIT margin.

2)If i project a 10% after-tax EBIT growth for the firm for the next ten years (assuming that the demand for gaming as a market would grow), i value the equity at $98.06/share.

3)Thus, the price/value for the growth is 61.62%, implying that the share is trading at a discount. At $95/stake, Microsoft is not paying any premium for this deal. The price becomes even cheaper when we include the synergies that Microsoft can contribute to this deal.

4)There is integration risk, but Microsoft should not face any challenges with its rich history of acquisitions.

Thus, if i were a shareholder in Microsoft, i would be delighted with this deal.