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Activision and King: Wrong price, poor fit

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Activision and King: Wrong price, poor fit

http://www.gamesindustry.biz/articles/2015-11-03-activision-and-king-wrong-price-poor-fit

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 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.
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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?
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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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Yup. Kinda felt this way about the Mojang deal. Buying a company after its key product has already had its best years.

I don't think casual mobile game buyers have been shown to flock to new games by the same developer either.
 
Wrong price? Maybe. Poor fit? Absolutely not. If anyone can solve the mobile conundrum, it's Activision. They have the IPs and the capital to make a long-term play.

Lazy OP though. What's your take? Don't just paste and leave.
 
The wrong fit portion is debatable, but I think everyone can agree that it was the wrong price. Activision definitely overpaid, but it may work out for them despite that.
 
There's basically no such thing as customer loyalty in the mobile space, so I have no idea why companies keep snapping up one-hit wonder mobile devs.
 
Chalupa Batman said:
Wrong price? Maybe. Poor fit? Absolutely not. If anyone can solve the mobile conundrum, it's Activision. They have the IPs and the capital to make a long-term play.

Lazy OP though. What's your take? Don't just paste and leave.
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If what you say is true, then why buy King?

If they have the IPs, and the capital, why the need to spend so much money on something you say then can handle themselves at an arguably cheaper price?

What I'm saying the could hire one of thousands of shops to make Activision/blizzard licensed games, I don't see how this benefits them in the long run. Hearthstone seems like a great success, why not follow that model? Smaller internal teams working on related mobile games.
 
Honestly I think the acquisition fits quite well and they're a very cash rich company, so investing in strategic diversification - even at a premium - is the right move for their future.

There's not much in the Blizzard or Activision pipelines, especially beyond the next year or two. They're hopelessly out of touch with mobile which a field growing by leaps and bounds. King is successful around the world and has fantastic profits and margins. There's almost no overlap with their existing businesses.

This is basically the exact same strategy they engaged in when they merged with Blizzard in the first place. Blizzard had a huge digital presence and a huge PC presence. Activision was a gigantic retail console publisher.

We can even see the core philosophy when looking at their revenue make-up chart:

acti5t2jq0.png


EA diversified this way as well, and it cost them a huge amount up front through both acquisitions and development, but now they have extreme dividends from this strategy and have a market cap exceeding Activision Blizzard's.

Beyond this, as for the price point, mobile is incredibly hard to grow into organically because the market leaders are insanely static. Activision made major mistakes in not getting in early, so this helps them correct in a way that aligns them with someone who has been successful for years on end and across a variety of titles instead of a studio who treads entirely on one game. I'm sure they would have considered Supercell if they were not already owned, and the other options are quickly evaporating. Since entering organically was fundamentally not working for them, I don't think there were other good options on the table, so yes, they need to spend a lot to get here, but it's not a big fee for the company as a whole and it got them exactly where they wanted. What else would they do with the funds? Another special dividend on a company without many obvious growth routes?
 
I thought the price they paid was crazy BEFORE someone pointed out that it was more than what Disney paid for motherfucking LucasArts! Jesus.
 
It seems like an extremely bad idea given how much they stand to lose. When we've seen a company like Zynga completely crash after being at the top of the mobile game and now we've seen Rovio coming down from their high it's easy to see how risky the mobile industry is so I don't understand why you'd invest so much into a product that could be forgotten in a year or two.
 
My guess is that Activision made a choice between building a mobile development arm from the ground up and paying for a turn-key capability in the space.

When you consider the cost of buying King with its existing cash cow products, audience and infrastructure versus spending the necessary time/energy/resources to get there organically, the acquisition probably makes sense on paper.
 
thisisvlad said:
My guess is that Activision made a choice between building a mobile development arm from the ground up and paying for a turn-key capability in the space.

When you consider the cost of buying King with its existing cash cow products, audience and infrastructure versus spending the necessary time/energy/resources to get there organically, the acquisition probably makes sense on paper.
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This is my feeling on this whole thing. It's just way to early to tell.
 
I just feel bad for the guy who created the game that Candy Crush Saga allegedly ripped-off wholesale. Something tells me his slice of this pie will be a miniscule one at best.
 
LakeEarth said:
I thought the price they paid was crazy BEFORE someone pointed out that it was more than what Disney paid for motherfucking LucasArts! Jesus.
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Facebook paid $19 billion for WhatsApp since they were a huge success and a fundamental competitor to their business, whereas Disney had lots of options for making successful films and would have to put in a ton of work to get big money out of LucasFilm and thus paid $3.4 billion less than buying Pixar.

Value is based on the what the company is currently doing, their market position, the conditions of the market they're in, their trajectory, and how important the acquiring company feels they are to their business. It's generally always expensive, but you will see acquisition prices range wildly based on these types of valuations.

LucasFilm had a very valuable IP and wasn't doing a whole lot with it. King is a major leader in a market with huge barriers to success that's continuing to do well and has a large pipeline of products.
 
Well, do we know what Activison is actually getting?

I mean, King is not just sitting on Candy Crush, but also a lot of users and information about these users. Just like buying Snapchat is not just getting you an app, but also a lot of private information about the people who use it.
 
Wow, that's a seriously shocking article.

It literally says nothing about the transaction other than "Look at how much they're paying, that's too much"

Er, that's not how things work, and the fact that the article barely mentioned the share price offered didn't help. At $18 per share, not even a 20% premium over the preceding trading price, the premium isn't that great.

Further to this, while King is due to report Q3 results tomorrow (Hence Activision moving before-hand), Q2 shown Second quarter 2015 adjusted EBITDA was $207 million So even on a worst case, annual EBITDA was $800 million. On a forward earnings basis, Activision paid 7.4x EBITDA for King, which is pretty bloody cheap.

Also, as King reported Cash and cash equivalents were $786 million at June 30, Activision will take that cash, taking the transaction to $5 billion net, and I couldn't see any mention of debt, so there's probably no debt to take on.

Yes, still a lot of money, but even if King slowly deflates, Activision will still make their money back, and frankly, they're clever/evil enough to find ways to make money from them.

So no, not a bad deal at all really, for Activision, or King, who frankly needed a more established partner to gain a more permanent foothold in the casual gaming marketplace.
 
Is there any precedent at all where an acquisition of a mobile overnight success like this has turned into a success for the buyer?
 
The thing that bothers me about this mobile game acquisitions is they the buyer only sees the end result and not how these mobile juggernauts got there. Rovio, Zygna, King, Supercell all started out as small teams making small games that hit the jackpot. So why not make smaller games with smaller teams internally?

How many designers or artists at activision are tired of working on Call of Duty? Put them on mobile games or smaller projects.

Kotick has proven to be a very smart business man so I'm sure he knows more than me, I'm just not seeing the cost be justified at this time.
 
kenta said:
You're a very smart person and I want to understand why you feel this way. To my mind, I agree with the snippet in the OP that suggests King is past its prime and in a period of managed decline (well said).

What are you seeing that suggests King is capable of making this investment worthwhile?
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I don't think there's anything that fundamentally suggests the company is in a problematic, irreversible decline.

Frankly game companies have wavering earnings and not every mobile game is a hit. The thing that's appealing about King is that they've launched many successful titles, are very good at user acquisition and mobile game design, and have a huge userbase of active users (and extensive knowledge about their buying habits and strong monetization strategies) on which to capitalize for new games.

I don't think there's anyone else available (Supercell has already been effectively bought, they're not going to buy a Japanese company who is only successful in Japan) that could fit the bill of a company with repeated major success in mobile.

None of the games EA got when they bought Playfish were actually useful for them longterm, but their knowledge of monetization and mobile development fueled the successes EA has today in mobile.

Doc Holliday said:
The thing that bothers me about this mobile game acquisitions is they the buyer only sees the end result and not how these mobile juggernauts got there. Rovio, Zygna, King, Supercell all started out as small teams making small games that hit the jackpot. So why not make smaller games with smaller teams internally?

How many designers or artists at activision are tired of working on Call of Duty? Put them on mobile games or smaller projects.

Kotick has proven to be a very smart business man so I'm sure he knows more than me, I'm just not seeing the cost be justified at this time.
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They tried many times and couldn't get it to work. This is why they finally resorted to buying someone who actually had the market figured out (to as much of a degree as that's possible for the 2012+ mobile industry).
 
I think the article is incredibly wrong about the "poor fit." The "wrong price" is obviously very debatable, but I think in terms of fit, it's exactly what they needed.
 
Bobby Kotick bought Blizzard, safe to say it worked out.

he talked with King for three years before buying them below their IPO price, he is smart despite his rep around here.

King demographics are 60% women in 161 countries.
 
Someone correct me on this if im totally wrong on this but, basically what Activision will do with King is havw them be a part of their mobile division basically? So I guess they'll be working on Skylanders and CoD for mobile with their own spin on it to get it even more successful in terms of money?
 
Nirolak said:
EA diversified this way as well, and it cost them a huge amount up front through both acquisitions and development, but now they have extreme dividends from this strategy and have a market cap exceeding Activision Blizzard's.
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Actually Activision passed EA in market cap after they joined the S&P 500 in August. They've been maintaining a $2B+ market cap lead for awhile now.
 
I have to agree that Activision seems to have paid way too much for these guys. And MS buying Mojang is increasingly seeming to be one of the best deals in modern gaming history.
 
RMI said:
their stock price doesn't seem to be suffering on the back of this news.
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Same as Nintendo when they bought 10% of DeNA, now look at their respective stock price.
Investors are like that, they want quick and easy money, at the first sign of problems, they'll run away.
 
i think star wars is a bad comparison, because you've got the intentionally discounted price by Lucas and then also it costs money to invest in Star Wars before you get anything out of it.
 
I'm not sure I see anything in King to distinguish them from Rovio or to-an-extent Zynga before them. Agreed that the purchase is too much money to play catch up in a highly volatile industry.

It's the highly volatile part that keeps me from thinking this was a good idea. It gives Activision a presence, but I don't see how something like a Skylanders-themed Candy Crush tie in is going to work.
 
jkanownik said:
Actually Activision passed EA in market cap after they joined the S&P 500 in August. They've been maintaining a $2B+ market cap lead for awhile now.
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Ah I missed that. I was mostly looking earlier this year. Thanks for the correction.

I think this will help them stay ahead as well, but in general EA went from a $3.5 billion market cap around 5 or so years ago and had it pay off into a $22.5 billion market cap today on the back of managing diversification and remodeling themselves around Activision's big hit strategy.

Activision itself was the king of this with the Blizzard merger in the first place (plus slimming down their line-up into things they did very, very well), and this fits in the general idea they started.
 
Price seems quite realisitc and not to high. King was worth 7.08billion last year when the IPO happened (March14).

But I don't know much about product and utlook to judge King for myself.
 
codhand said:
Bobby Kotick bought Blizzard, safe to say it worked out.

he talked with King for three years before buying them below their IPO price, he is smart despite his rep around here.

King demographics are 60% women in 161 countries.
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I agree, I'd give Bobby Kotick the benefit of the doubt.
 
valkillmore said:
And MS buying Mojang is increasingly seeming to be one of the best deals in modern gaming history.
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Tell me more, I haven't heard anything about them after the merger, what kind of profits is Mojang currently delivering, and is it all minecraft or have they brought value some other way? Does it look like MS will get a multitude of the 2 billion back when all is said and done?
 
Stop It said:
Wow, that's a seriously shocking article.

It literally says nothing about the transaction other than "Look at how much they're paying, that's too much"

Er, that's not how things work, and the fact that the article barely mentioned the share price offered didn't help. At $18 per share, not even a 20% premium over the preceding trading price, the premium isn't that great.

Further to this, while King is due to report Q3 results tomorrow (Hence Activision moving before-hand), Q2 shown Second quarter 2015 adjusted EBITDA was $207 million So even on a worst case, annual EBITDA was $800 million. On a forward earnings basis, Activision paid 7.4x EBITDA for King, which is pretty bloody cheap.

Also, as King reported Cash and cash equivalents were $786 million at June 30, Activision will take that cash, taking the transaction to $5 billion net, and I couldn't see any mention of debt, so there's probably no debt to take on.

Yes, still a lot of money, but even if King slowly deflates, Activision will still make their money back, and frankly, they're clever/evil enough to find ways to make money from them.

So no, not a bad deal at all really, for Activision, or King, who frankly needed a more established partner to gain a more permanent foothold in the casual gaming marketplace.
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This sort of post should be in all the investment threads in gaming. A lot more insightful than most other posts.

Big companies put a lot of time, effort and due diligence into these acquisitions. I don't think they would have made this decision lightly.
 
If we take this news the other way, King just made the best deal ever.
Honestly, there is big potential in the ever-growing mobile market, I wonder how long it'll take for them to get that cash back.
 
I can't access GI.biz from work any more, but I assume this is a Rob Fahey article? While I agree that they definitely seem to have overpaid and one would assume Candy Crush is entering its twilight years, I also don't think this was a desperate twitch reaction to get into the mobile market, and I don't think Bobby Kotick will have made a dumb acquisition. Almost everything he's done for Activision over the past decade has seen the company proper and grow at an amazing rate.
 
codhand said:
Bobby Kotick bought Blizzard, safe to say it worked out.

he talked with King for three years before buying them below their IPO price, he is smart despite his rep around here.

King demographics are 60% women in 161 countries.
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Did he?! There I was thinking Vivendi bought a controlling share in Activision and merged the two companies!
 
Seems crazy to pay such a high price for a one-hit wonder mobile games studio. Hope it works out for them.
 
Interesting read, I have to say that that echoes my general sentiments about the whole thing. The part I disagree with though, is assuming that Activision did it on an impulse to catch up. That really doesn't strike me as their style, I don't think out of all of the things I could call Activision, impulsive with money would be one of them. If anything all of their products are crafted to a fault to be guaranteed to sell. They know how to make business decisions.

That said, they way overpaid IMO, so maybe I'm giving them too much credit. Even with King being a long-laster as far as mobile game companies go, it just doesn't seem like something that will turn a profit for them for quite a while.
 
lazygecko said:
Is there any precedent at all where an acquisition of a mobile overnight success like this has turned into a success for the buyer?
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King isn't just an "overnight success". They've been very successful for, in context of the mobile space, a long time.
 
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