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Microsoft (MSFT) Set to Buy Activision, Expands Gaming Footprint

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Microsoft's (MSFT - Free Report) gaming ambitions are well known. The company is now making a major push into the video game space with the just-announced plan of acquiring Call of Duty maker Activision Blizzard (ATVI - Free Report) .

Microsoft will be paying $95.00 per Activision share, with total transaction value being worth $68.7 billion, making it the company’s largest deal ever. Post completion of the transaction, Microsoft will become the world’s third-largest gaming company, trailing only Tencent (TCEHY - Free Report) and Sony (SONY - Free Report) .

Microsoft, along with Sony, is one of the largest providers of gaming hardware. Its Xbox console has been a direct competitor of Sony’s PlayStation. The Activision acquisition will now add a number of well-known franchises to Microsoft’s gaming portfolio, including World of Warcraft, Diablo, Overwatch and King Digital’s Candy Crush, apart from the most popular Call of Duty.

Activision has been riding on the popularity of these franchises. The company reported third-quarter 2021 (September-ending quarter) revenues of $2.07 billion, up 5.9% year over year. Net bookings increased 6.4% year over year to $1.88 billion. Net bookings from digital channels were $2.34 billion, up 24.5% year over year.

More importantly, for the quarter ended Sep 30, 2021, overall Monthly Active Users were 390 million. Undoubtedly, Microsoft’s Game Pass portfolio will benefit from the addition of this huge user base. Microsoft plans to launch Activision’s games into Game Pass, which has more than 25 million subscribers.

Microsoft will also be able to leverage Activision’s mobile franchises, particularly Candy Crush and Call of Duty: Mobile, with the latter being developed in collaboration with Tencent.

The acquisition will strengthen Microsoft’s game development expertise, as it will add 30 internal game development studios. The deal will also help Microsoft expand its footprint in the esports arena. Activision’s Overwatch League can be considered a pioneer of the esports concept.

Activision’s business will report under the Microsoft Gaming division. Markedly, Gaming revenues increased 16% (up 14% at cc) in the first quarter of fiscal 2022, driven by increased engagement levels. Revenues from Xbox hardware surged 166%, driven by strong demand for new consoles.

For second-quarter fiscal 2022, gaming revenues are anticipated to be up high-single digits year over year on solid demand for the next-generation Xbox Series X and S consoles.

Microsoft’s shares were down 1.6% in pre-market trading. Shares of this Zacks Rank #2 (Buy) company are up 43.3% in the past year, outperforming the Zacks Computer Software industry’s growth of 31.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

 

The deal is expected to close in fiscal year 2023 and will be accretive to Microsoft’s non-GAAP earnings upon completion. The Zacks Consensus Estimate for earnings fiscal 2023 is currently pegged at $10.26 per share, up 0.9% over the past 30 days.

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