Activision's merger with Vivendi will shake gaming biz
NEW YORK (Hollywood Reporter) - Let the games begin.
Activision Inc shareholders Tuesday are expected to approve a merger with Vivendi Games that will allow the deal to close within days and create a new top dog in the fast-growing video gaming world.
The terms of the deal, unveiled in December, valued the new Activision Blizzard at $18.9 billion. Current gaming king Electronic Arts Inc's' market capitalization after Monday's market close stood at $14.1 billion, according to Yahoo Finance.
More important for Wall Street, while EA has been reporting losses, Activision Blizzard, of which Vivendi will own a slight majority, has promised to be the most profitable gaming firm and grow its bottom line at a healthy pace.
"I don't care about who is No. 1 and 2," Hudson Square Research analyst Daniel Ernst said. "Earnings growth is what counts for investors."
Activision Blizzard is positioned to ensure that growth as it brings together some of the hottest gaming franchises, such as Vivendi's massively multiplayer online juggernaut "World of Warcraft" and Activision's "Guitar Hero." Analysts say it also allows the respected Activision sales and marketing machine to tap into Asia, where Vivendi already has a presence, and potentially take the new partner's product, like the Bourne franchise, to new heights.
Despite early expectations from some investors, the deal has not led to a deal wave in the industry. But analysts say the new 800-pound gorilla's reach across the world and various gaming platforms will have a major effect on the way every gaming company thinks about their business.
"What it does is create a (first) truly global gaming company with reach in the U.S., Europe and Asia," including in the fast-emerging Chinese market, said Edward Williams, an analyst with BMO Capital Markets. "It also creates a company that drives revenue from multiple streams, including the massively (multiplayer) online game category that is seeing the biggest growth."
This will force other companies to also approach MMO more aggressively and try to move into other emerging streams and global distribution, he said.
"I don't see a 'deal wave' coming" right now," said Michael Pachter, analyst at Wedbush Morgan Securities. But he and others also expect a focus of game companies on increased global reach and profitability amid ever-rising development costs that drag down profit margins.
Along with outright acquisitions, this could lead to partnerships or significant investments, which could increasingly bring together companies focused on different regions of the world and different gaming platforms, analysts say. Some even see an increased possibility for media companies folding their gaming business into a public game firm and taking a stake in the merged entity.
For now, though, Sterne, Agee & Leach analyst Arvind Bhatia said Activision Blizzard will have the highest margins in the industry by far. "There is potential for the combined entity to reach 30%-plus operating margins," compared with the more common operating margins in the 10%-20% range, he said.
Meanwhile, EA -- known among other things for its "Madden NFL" series -- has been trying to strike its own deal. While it wouldn't significantly build its MMO and global reach, a takeover of Take-Two Interactive could add the hit franchise "Grand Theft Auto" to EA's arsenal.
While various analysts like shares of EA and the new Activision Blizzard for their scale and potential bottom-line improvements, Ernst is most bullish on a foreign player: Nintendo. He said the Wii console is starting to really be "a significant driver" of earnings this year, and Nintendo also should continue to benefit from a sales shift away from the Sony's PlayStation and Microsoft's Xbox.
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