Microsoft Buys Activision With One Eye on the Cloud

T-Pain performs during an event celebrating the launch of Call of Duty: Vanguard

(Image credit: Getty Images)

Long-suffering shareholders — not to mention canny value investors — were rewarded for their patience in Activision Blizzard (ATVI, $65.39) Tuesday when Microsoft (MSFT, $310.20) agreed to pay $68.7 billion, or $95 a share in cash, for the troubled video game publisher.

After all, ATVI, the developer of global hits such as World of Warcraft and the Call of Duty franchise, had an annus horribilis in 2021.

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Allegations of sexual harassment, litigation, a torrent of bad press and calls for CEO Bobby Kotick to step down would have been trouble enough. Tough year-over-year comparisons against 2020's pandemic-fueled growth only made matters worse.

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Shares in Activision Blizzard, which closed at an all-time high of $115.82 in February, lost 28% last year. That lagged the tech-heavy Nasdaq Composite by nearly 50 percentage points.

Shares naturally popped on the Microsoft news – a deal in which the software titan is paying a premium of roughly 30% to the video game maker's Friday closing price. ATVI stock was up more than 25% as of midday Tuesday. (U.S. markets were closed Monday in observance of Martin Luther King Jr. Day.)

Some newer ATVI shareholders will close out their investment with losses, but longer-term holders will go out with a smile.

MSFT shares were slightly lower Tuesday, but Microsoft shareholders should like this arrangement for the long run. The acquisition unites Activision’s considerable talents for content production and distribution with MSFT's Xbox console and subscription-based gaming business.

It's the largest deal in dollar terms in Microsoft's history, and comes as the emergent metaverse and other industry trends are forecast to deliver outsized industry growth for years to come.

Why Microsoft Bought Activision Blizzard

The global gaming market is projected to expand to $546.0 billion in 2028 from $229.2 billion last year, or a compound annual growth rate of 13.2%, according to data from market researcher Fortune Business Insights.

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Not only does the deal create the world's third-largest video game company, but — perhaps more importantly — it gives MSFT another way to leverage its behemoth of a cloud-based services business.

Indeed, gaming's future as a cloud-based product was one of the reasons behind Cambiar Investors' interest in Activision Blizzard, says Chief Investment Officer Brian Barish.

Cambiar, a Denver-based active value manager with $8.1 billion in assets under management, initiated stakes in ATVI in the fourth quarter. The video game publisher accounts for 2% to 2.5% of the funds that own it; namely, Cambiar Opportunity Fund (CAMOX) and Cambiar Aggressive Value Fund (CAMAX).

Barish saw value in a stock beaten down by scandal, negative press and difficult year-over-year comparisons — especially one that was trading at just around 13 times free cash flow.

"The conclusion at the time of purchase was there was some component of 'inevitability' that the management suite drama would conclude in some constructive fashion, along with scarcity value for a major video game studio," Barish says.

And make no mistake: That scarcity value is key at a time when major cloud companies such as Amazon.com (AMZN), Google parent Alphabet (GOOGL) and Microsoft all have designs on the space.

"Eventually we expect video games to become a cloud-based product (as compared to console based), and more content to throw at the customer should expedite this process," Barish adds.

That's the strategic rationale behind Microsoft’s deal for Activision, Barish surmises. "The migration will take a lot of time, however," he cautions.

Bottom Line

It appears investors in ATVI can put the drama surrounding the C-Suite and the stock behind them. MSFT, meanwhile, looks to have made a bold strategic acquisition in a massive and fast-growing industry.

And as for investors in other video game studios? Does the MSFT-ATVI marriage make those assets more valuable?

"Possibly," Barish says.

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Dan Burrows is Kiplinger's senior investing writer, having joined the publication full time in 2016.

A long-time financial journalist, Dan is a veteran of MarketWatch, CBS MoneyWatch, SmartMoney, InvestorPlace, DailyFinance and other tier 1 national publications. He has written for The Wall Street Journal, Bloomberg and Consumer Reports and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among many other outlets. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about markets and macroeconomics.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade individual stocks or securities. He is eternally long the U.S equity market, primarily through tax-advantaged accounts.