Gaming Industry: Headed for Consolidation?

The gaming industry is in a resurgent phase right now with the talk of the metaverse. Besides that, during the COVID-19 pandemic, masses of gamers turned to their video gaming consoles for entertainment.

This resurgent phase for the gaming industry was further buoyed by the news of two big acquisitions this month. This was Microsoft’s (NASDAQ: MSFT) acquisition of Activision Blizzard (ATVI) and Take-Two Interactive’s (TTWO) acquisition of Zynga (ZNGA).

Microsoft’s Acquisition of Activision Blizzard

Earlier this week, technology giant Microsoft announced that it was going to acquire beleaguered gaming company, Activision Blizzard in an all-cash deal valued at $68.7 billion, with MSFT paying $95 for each share of ATVI.

Activision Blizzard saw its shares jump by around 26% following the acquisition announcement. ATVI had a troubled 2021 after a flurry of legal proceedings against the company, mainly related to charges of sexual harassment that led to the departure of its president, J. Allen Brack.

Activision’s key product franchises include Call of Duty, Warcraft, and Candy Crush.

Microsoft expects to close the deal in fiscal 2023 and with this deal, it will become the third-largest gaming company in the world in terms of revenue, behind Tencent Holdings (TCEHY) and Sony (SONY).

The acquisition is expected to strengthen Microsoft’s Game Pass portfolio, which currently has 25 million subscribers.

“With Activision Blizzard’s nearly 400 million monthly active players in 190 countries and three billion-dollar franchises, this acquisition will make Game Pass one of the most compelling and diverse lineups of gaming content in the industry,” the company stated in its press release.

Microsoft’s management stated on a conference call that this acquisition will “significantly” expand the company’s presence in mobile gaming as ATVI’s King gaming division is “one of the global leaders in mobile gaming.”

Evercore analyst Kirk Materne was also bullish on the acquisition as it will put Microsoft in a unique position “as it relates to the metaverse given its capabilities across infrastructure (Azure), hardware (HoloLens), security, and now content with ATVI.”

Microsoft is one of the top Metaverse stocks on TipRanks.

The analyst also thinks that this will put MSFT in an even more formidable position, as the acquisition will complement MSFT’s existing growth from Azure, its cloud business, and Office365.

Materne’s key concern regarding the acquisition concerns the regulatory process. The analyst estimates that this process could be long, as the deal will get a lot of attention from lawmakers.

Moreover, Materne expects that in case of any regulatory hurdle when it comes to mobile gaming, “Microsoft will argue that it does not control distribution and this deal is about expanding access for gamers and developers.”

The analyst added that MSFT has always had an “open ecosystem for gamers and ATVI content will still be available on non-MSFT platforms.”

What’s more, Materne has projected this acquisition to be accretive in the range of 3% to 4% to MSFT’s earnings per share in CY 2023.

As a result, the analyst is bullish with a Buy and a price target of $370 (22.5% upside) on the stock.

Other analysts on the Street also have a bullish stance on Microsoft, with a Strong Buy consensus rating based on 27 Buys and one Hold. The average MSFT stock prediction of $373.92 implies upside potential of approximately 23.5% to current levels for this stock.

Take-Two Interactive Software’s Acquisition of Zynga

Take-Two snapped up Zynga in a cash-and-stock deal for a total value of $9.86 per share. The deal valued Zynga at an enterprise value of $12.7 billion, representing a premium of 64% to Zynga’s closing share price as of January 7.

Take-Two Interactive generates revenue primarily through the sale of video game titles developed internally or video games developed by third parties. The company publishes and develops its games through Rockstar Games, 2K, Private Division, Social Point, and Playdots.

In contrast, Zynga is a major player when it comes to mobile gaming, developing mobile games (both iOS and Android) as well as social networking platforms among others.

As a result, this acquisition will result in TTWO being “one of the largest and most diversified mobile game publishers in the industry, with $6.1 billion in pro-forma Net Bookings for the trailing twelve-month period ended September 30, 2021.”

Strauss Zelnick, chairman and CEO of Take-Two, commented on the acquisition, “As we combine our complementary businesses and operate at a much larger scale, we believe that we will deliver significant value to both sets of stockholders, including $100 million of annual cost synergies within the first two years post-closing and at least $500 million of annual Net Bookings opportunities over time.”

The acquisition is expected to close in the first quarter of FY 2023, that is, by June 30 this year. TTWO’s upcoming earnings for the fiscal third quarter are expected to be announced on February 7.

Take-Two estimates that in FY 2023, 50% of its net bookings will be mobile, versus 12% in FY 2022. This acquisition could expand TTWO’s mobile gaming portfolio. The company defines net bookings as the net amount of products and services sold through retail or digitally and includes merchandise, licensing fees, and in-game advertising.

TTWO anticipates that the combined company’s net bookings measure could grow at a compounded annual growth rate (CAGR) of 14% between FY 2021 and FY 2024.

Wedbush analyst Michael Pachter is largely positive about the deal, but he remained concerned about a competing bid as Zynga’s Board has opted for a “go shop” provision that will allow Zynga to seek competing bids. TTWO will have the option to match the higher price for a competing bid.

While the analyst refrained from speculating on competing bidders, he did point out that “several tech companies are tangentially involved in gaming and have the balance sheets to make a competitive bid.”

Pachter reiterated a Buy rating and a price target of $222 (33.5% upside) on the stock following the news.

Other analysts on the Street are also upbeat on Take-Two, with a Strong Buy consensus rating based on 14 Buys and four Holds. The average TTWO stock prediction of $208 implies upside potential of approximately 25.1% to current levels for this stock.

Bottom Line

Whether these two acquisitions will set off a wave of acquisitions in the gaming industry remains to be seen. For both the acquirers, that is, Microsoft and Take-Two Interactive, the mobile gaming market seems to be the next big thing, and these acquisitions seem to be targeting that market.

According to Evercore analyst Kirk Materne, citing data from Newzoo, mobile gaming is one of the fastest-growing categories when it comes to gaming, and could exceed $200 billion in 2023.

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