(I share my thoughts regularly in our FB group, join the conversation here)
Microsoft announced a $68.7 billion offer to acquire Activision Blizzard. Alex analyses the deal here.
This is the largest tech deal ever. The previous record was Dell’s acquisition of EMC for $67 billion. Even so, it is just 3% of Microsoft’s market cap.
The offer is a 45% premium over Activision’s closing price.
Sounds too expensive? Well, this is actually consistent with Microsoft’s next largest acquisition of LinkedIn, which was a 50% premium above its market cap. LinkedIn was bought over at $26.2 billion in 2016. So this deal is more than 2x bigger.
Microsoft has also tried to acquire TikTok and Discord but to no avail. Although either one would have been a great addition to the empire in my view.
Just about a week ago, Take-Two offered to acquire Zynga for $12.7 billion. The M&A activity in the gaming world is heating up.
Why Activision Blizzard?
Activision Blizzard is a good target as it would enlarge Microsoft’s already successful gaming ecosystem and will propel Microsoft to become the third largest gaming company in the world after, Tencent and Sony.
The acquisition was couched as a step closer in building the metaverse. It is a buzzword that has been thrown around lately but underneath the hype, there is a real strategic shift that every big tech wants to get onboard or be left behind. Metaverse is believed to be the next growth engine for big tech and if Microsoft doesn’t jump on it, someone else would.
That said, the Metaverse is also a fuzzy concept which everyone is trying to grasp and define. Unfortunately it will remain vague for a long time until the players figure out what is the best way forward.
Games: first step towards metaverse?
Microsoft has a lot of elements that could be integrated to support the development of the metaverse.
The most obvious starting point of the metaverse is games because it provides the virtual space for interactions. Microsoft launched Xbox in 2001 to fight Sony’s Playstation and it has been successful. It built out a separate gaming ecosystem to rival Sony’s.
Buying gaming studios is a way to make certain popular games exclusive to Xbox. This can happen to Blizzard’s World of Warcraft, Hearthstone and Call of Duty. This move could shut out Sony’s access.
Microsoft owns Minecraft and it is a rival to Roblox, which together with blockchain-powered Decentraland and the Sandbox, they are the closest things to what a metaverse is today. They have creators, a social network and an economy. Not just gamers. There are individuals who can make a living in these games.
Metaverse requires heavy computing power because it is graphics intensive and have to accommodate massive online players interacting within a contiguous virtual space at the same time.
Microsoft’s metaverse advantage #1
Microsoft has the advantage in this area as it has Microsoft Azure, the second largest cloud infrastructure provider by market share. It has the experience in cloud gaming via Xbox. These will serve as the foundations of the metaverse.
Microsoft’s metaverse advantage #2
Next would be hardware interfaces that allow users to connect to the virtual world easily. Microsoft failed with its windows phone and it is time to look forward to capture the next hardware interface. Their answer is the HoloLens, an augmented reality glasses. However, it has yet to reach mass adoption and there’s a lack of virtual reality hardware in Microsoft’s stable. Meta Platform’s Oculus is stronger in this aspect.
Microsoft’s metaverse advantage #3
Microsoft has been the de facto office productivity choice for many organisations. It managed to compete with Slack and Zoom by creating Teams. All of which blossomed during Covid as people find new ways to work out of office. Teams could be further developed into a more interactive space for work like what Meta Platforms is trying with Horizons. LinkedIn is highly complementary for the professionals which Microsoft Office and Teams have been serving.
What Microsoft lacks
The only pity is that Microsoft doesn’t have a casual social network that could complement its gaming ecosystem. Microsoft didn’t manage to buy Discord, otherwise it would have a social network loved by the gamers and the crypto communities. They are likely adopters of the metaverse.
Contrast this with Amazon’s ownership of Twitch and Alphabet’s YouTube.
More acquisitions to come
I believe more acquisitions and further integrations among the services within Microsoft will materialise in the near future. Some possible acquisitions include Reddit, Snap, Telegram, Roblox, Unity, Electronic Arts, and Ubisoft.
Tencent has been the most prolific acquirer of game studios and Microsoft has to vie for the remaining ones that are not substantially owned by Tencent. Some of these targets may not want to sell to Microsoft too.
The strategic shift to metaverse is ongoing. Microsoft is a worthy contender in this space but its competitors (Tencent, Meta Platforms, Alphabet, Apple) possess some advantages currently and it won’t be easy for anyone to shape the future of metaverse.
p.s. Looking for an investment strategy that helps you find profitable stocks that could grow your portfolio? Join me at my live webinar to learn how Dr Wealth invests.