Activision buy King (Candy Crush Saga) for $5.9 BILLION

[Alex W.]

I think Facebook's past its prime as far as free to play games go, it's all mobile now. Wasn't there an article last year about how they'd spectacularly missed their chance to capitalise when Farmville was popular?

[mushashi]

Kotick certainly must have been desperate to have to buy a massive mobile dev instead of attempting to grow their own inhouse efforts, it didn't work out too well for EA when they attempted to chase the casuals with their various buyouts. King Digital have hardly covered themselves in glory on the stockmarket as a standalone company:



The $18 per share proposed purchase price represents a 20% premium over King’s closing price on Oct. 30. But it’s still $4.50 per share lower than its IPO price. (The company made its debut on the New York Stock Exchange in March 2014.) Under Activision, King will operate as an independent unit. Its senior executives will sign long-term employment contracts with terms that are very similar to those used during Activision’s purchase of Blizzard in 2008.

Maybe Kotick can do what he does best and milk the tits off a hit idea, they certainly expect to:

Activision Blizzard believes the Acquisition will be accretive to 2016 estimated non-GAAP revenues and earnings per share by approximately 30% and significantly accretive to 2016 estimated free cash flow per share.

I see part of the reason ATVI can afford to do it is because of the American tax system, it's primarily being funded by all that cash they have sloshing about untaxed abroad, and King Digital is a UK company which makes them a perfect target.

[Halo]

I wonder if the steady decline of CoD, WoW and Skylanders has pushed Activision execs in this direction in an attempt to find new revenue streams.

[NEG]

I doubt Blizzard is making any less money despite WoW's demise mind you, Hearthstone being the biggest cash cow. Heroes of the Storm turned out decent too, Overwatch...not sure about but plenty will probably eat it up short term all the same, etc.

Edit: More so WoW related, but feel like pasting anyway. Sad day for WoW, Blizzard will no longer post subscriber numbers:

[The Bag]

These thoughts about it popped up in my FB feed:

I. FINANCIAL REALITIES

My newsfeed is full of posts claiming that King is worthless, and the acquisition is a financial suicide and the worst purchase ever. They incredulity of people at stupidity of the Activision boss Bobby Kotick is palatable. Yet the extraordinary claims of how King digital has zero value do not jive with the facts and realities. Let us consider King, and Ubisoft, my old employer and one of the giants of the games industry. No-one claims that Ubisoft is worth nothing (for the record, I think Ubisoft is a tremendous company). I present to you the 2014 comparative financial results of the two companies:

Ubisoft

Revenue: 1,55 billion dollars

Profit: 96 million dollars

Workforce: 10 000+

King Digital

Revenue 2.5 billion dollars

Profit: 661 million dollars

Workforce: 1400

We can see that King produces far more money, massive amounts more profit, and does this all with a very small workforce, boasting an incredible efficiency.

So you tell me, which company is worth more money? Almost everyone in the industry claims that it is Ubisoft is worth many multiples of King. Yet you should look at the numbers and set aside your emotions. For reference, a very common acquisition price of a company is 3X the revenue. One can easily argue that Activision got King for cheap at 5.9 billion.

II. REACH

King Digital has an immense reach across the globe, even in Asia where Western companies struggle.

Moreover, King Digital reaches players that thus far has eluded Activision, such as female segment. This will open a huge new horizons to all of Activision-Blizzards games. And the number of new players and die-hard fans King brings into the merger are staggering: 501 million active players each month throng to play the games made by King. This is a very significant proportion of the world population, and even more so when you consider these are some of the most valuable consumers on the planet With their own portfolio, Activision had little to no access to these people. This is a game changer. Moms buying Skylanders as well as dads? Worth billions.

III. SHEER SIZE

Activision is not about being the second best. EA has been beating them consistently for the past few quarters, and to Kotick and co, this is insufferable. At one stroke, this acquisition adds 2,5 billion to Activision revenue, at over 7.2 billion vs EAs 4.5 billion. This will leapfrog them over their hated competitor. Remember the words: quantity has a quality all of its own. Being the biggest matters in the world of business. it is good to be the King.

IV. ACTIVISION HAD NO MOBILE PRESENCE OR EXPERTISE

Thats right. Activision, the big fish of the Western gaming has virtually no presence on mobile space. Apart from Hearthstone, they also have precious little expertise in running F2P games, which is the biggest business model globally. With King, they get a galore of top-tier talent. This can be used in other parts of Activision Business.

What were the alternatives for Activision? EA has proven adept at the mobile space, and Activision did not invest in the space when they should have. Now to get into it, they have to pay 5.9 billion. This is cheap prize for avoiding irrelevancy.

Mobile is the largest segment of gaming globally, and set to grow at a steady clip for the foreseeable future. Activision cannot ignore it.

V. KING IS JUST A FLUKE, AND ONE-TRICK PONY CLAIM

This is perhaps the most common claim I hear: King was lucky with Candy Crush Saga, and once it is gone (which will happen tomorrow the latest) they will implode and disappear completely, any day now. But this all is based on the thinking that CCS intellectual property was the main reason Activision merged with them. It is not. Kotick is not that stupid.

I freely admit that Candy Crush Saga is a Black Swan event that is unlikely to happen again. Gaming franchises that gross over a billion dollars are incredibly rare. But while the press has focused on the CCS alone, King has proven adept at making a hit game after hit game. Are they as big as Candy Crush Saga? No. But how many franchisees like Call of Duty can Activision create, and how fast? How many FIFAs can EA do? King is a reliable hit-maker. It may never produce another game as popular as Candy Crush Saga, but it may well be that it never needs to. Rest of their games are solid hits, just not the scale of the CCS, and they know how to make more of them.

Having said that, even though CCS is waning, it will still pull in billions and billions of revenue, and billions of profit. This is guaranteed, as the game has one of the most loyal and largest fanbases ever seen in the history of gaming. Thata money in the bank.

CLOSING THOUGHTS

Is there a risk with this acquisition? Will there be lots of goodwill write-downs in the coming years? Will Kotick one day regret this acquisition? All very possible. But being craven has never lead into success in the games industry. Adapt or die.

[mikeyl]

So that's why I was collecting sweets on Destiny all week

[mushashi]

I wonder if the steady decline of CoD, WoW and Skylanders has pushed Activision execs in this direction in an attempt to find new revenue streams.

Activision seem to be following the general trend of obfuscation of performance, they are stopping providing membership numbers for WoW now that it's looking terminal and unreplaceable and no longer really super healthy and they've never given out particularly meaningful financial performance metrics for Destiny either, it'll all be about the mobile companies favourite sort of useless financial metric from now on, MAUs, I suppose.

The only time they'll bother to give out concrete data now is if they have something actually impressive to shout about. They've sold 2 Million copies of Diablo III in China. So it seems that could repeat the feat that StarCraft managed all those years ago in South Korea.

They outlined the rationale for the deal on their website, it would seem to basically boil down to it being easier to use really cheap IOUs and all their untaxed foreign earnings to buy in a potentially huge customer base to sell their existing IP to and get somebody with more experience in mobile while they were at it, they've been talking since April about it:

“Other than YouTube or Facebook there isn’t a worldwide network that has a bigger number of audience members,” said Bobby Kotick, Activision’s chief executive. “A big part of the opportunity is to explore the intellectual property that exists at Activision Blizzard and see if it makes sense in that network.”

We can see that King produces far more money, massive amounts more profit, and does this all with a very small workforce, boasting an incredible efficiency.

Comparisons to Supercell or GungHo Online Entertainment aren't quite so flattering though If you choose to find the most bloated traditional publisher and compare them to one of the top 5 mobile publishers, it shouldn't be surprising you can come up with a really nice outcome.

[Alex W.]

Not sure what your point is there, beyond "Activision could've spent even more money on an even bigger mobile company and it would've been an even better idea".

[mushashi]

Who says it is a good idea?, apart from Bobby Kotick and the CEO of King Digital?

King are still effectively a one hit wonder, over-reliant on Candy Crush Saga and its sequel for earnings (hence why they have been punished on the stock market, there isn't much faith they can grow profitability, otherwise they'd command a better share price). I suppose it's a better use of all their useless cash pile than merely letting it rot overseas.

I found it amusing that whoever was quoted there chose Ubisoft as their example, instead of ATVI for example or EA, companies with significantly bigger revenues and bigger profits than U B I Soft, and less employees and also more well diversified.

[mdn2]

I found it amusing that whoever was quoted there chose Ubisoft as their example, instead of ATVI for example or EA, companies with significantly bigger revenues and bigger profits than U B I Soft, and less employees and also more well diversified.

I think the guy chose Ubisoft because he used to work for them. Makes sense to me.

[Boozy The Clown]

[Salsa Party Animal]

Waste of money they could set up about 20 new development companies to make games.

[angel]

its not about the money, its about flexing muscles and increasing their stock price - funnily enough actual games are the least of the thinking behind it. excellent bosman there. as he says..activision can use these multi billion deals to do their financial stuff, while financing proper gamer stuff like a platinum games transformers title. good on them.

[mushashi]

I think the guy chose Ubisoft because he used to work for them. Makes sense to me.

Yeah, I can see that. But it just also happens to be a really bad comparison compared to alternative comparisons or a comparison of King Digital versus peers in its own niche. He was putting forth the bull case for why this makes sense afterall.

Somebody wrote an interesting post for a completely different reason for why this deal makes sense, plain old financial engineering/creative accounting. ATVI could be argued are just following a whole bunch of other usually highly valued American companies looking for growth by buying up more lowly valued foreign companies, several other European and British firms have fallen in the last few years due to this discrepancy in valuations:

Actually guys there may be some merit in this deal from a purely financial perspective, and that’s 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 let’s 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 it’s 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.

Surprising that the thought of doing a Tax Inversion hasn't crossed the minds of the management at ATVI, as King are fairly well placed for that kind of con too. Factoring in King Digitals own cash pile and the tax free money savings, Activision aren't even really paying the $5.9 Billion sticker price anyway

while financing proper gamer stuff like a platinum games transformers title. good on them.

Activision have more than enough money to do those sorts of cheap to develop games if they chose to anyway, the only reason they'll carry on their relationship with PG is if they continue to perform at retail. Bobby Kotick has no qualms about cutting the dead weight at his company *brings out the list of the fallen*

[The Bag]

Yeah, I can see that. But it just also happens to be a really bad comparison compared to alternative comparisons or a comparison of King Digital versus peers in its own niche. He was putting forth the bull case for why this makes sense afterall.

Except you're arguing different point, his is King is far from a worthless company as was being shouted by many the morning of the announcement. So is comparing to a large games developer/publisher who people wouldn't call worthless. What does comparing them to their peers, as you suggest, get us? They're not the most profitable mobile company out there, true, but those who are more profitable have had outside investment or aren't selling.

[mushashi]

I suppose whoever your mate is was attempting to counter the complaints from other people who think King Digital are worthless, they clearly aren't, as even the stockmarket still gave them a multiple of their earnings valuation. At the same time, even investors don't have that much confidence in their prospects to continue making lots of money, considering how lowly they are rated for a company in the entertainment sector and in a growing hot segment of it too (most traditional game companies are expected to grow their profits, as they command significantly higher multiples, Nintendo especially). Anybody who was lured in by their IPO is getting out with a 20% loss now on their initial investment.

But a closer look at their financials over the available trading years might put a different slant on their valuation, and make it seem less good than first thought if you view this deal purely from a strategy POV, which is what I suppose is the angle most industry types view this deal from.

King Digital, while apparently growing their total MAUs, is managing to lose paying customers, which isn't being completely offset by the increased milking of the ones they manage to continue to get to buy their virtual currency. Their paying customer base has nearly halfed since it peaked back in 2013, despite the general increase in MAUs and profits have declined since then aswell. Without Candy Crush Saga, the company hasn't proven itself capable of being a hit factory either which reinforces the sceptism. All these casual gaming companies seem to suffer from the same problem, they get one monster hit and then can't follow it up. At least on the hardcore side, EA, Activision and even Ubisoft have proven they can find something new to milk every so often over their long existence.

I can see plenty of reasons to be sceptical about this deal, but as posted above, it can still make sense to do financially in the short term, the overall strategic thinking might be of questionable value however, which even the poster I quoted admits. I'd essentially view it as a landgrab which comes with a declining income stream and a debatable value dev army thrown in for free and a way to use up some tax free money they don't know what to do with otherwise.

[The Bag]

Tuomas Pirinen was the author of that, friend of a friend.

It's totally a land grab by Acti trying to buy their way into a market late. But it gives them a foothold with an established company. Ignoring mobile it gives them a good 'casual' company as well which Acti don't have. I think if they work to hire and place some good design talent with King they will be able to produce more hit.

Teut (my friend who shared Tuomas's bit on FB) did a good talk at Casual Connect breaking down King's business model, it's worth a watch if you're interested in that sort of thing.