After Facebook rebranded as ‘Meta’ in October 2021, we expected to see more big tech companies stepping forward to build the virtual world, known as the “metaverse”.
Virtual worlds aren’t new, as we all know. For years, companies like Roblox, Nintendo, and Epic Games have been developing metaverse-related technology such as virtual reality in the online gaming world.
What’s changed now is that the big tech companies, such as Microsoft, want to seize the opportunity to create a unified metaverse and monetise the entertainment and interaction needs of its millions of inhabitants. After all, by 2025, the metaverse could be worth upwards of 30 trillion dollars, so there’s a lot on the line.
So, Microsoft’s announcement in January 2022 that it plans to acquire gaming company, Activision Blizzard, didn’t come as a complete surprise but caused mixed emotions for investors and gamers. If completed, the $68.7 billion deal would be the largest all-cash acquisition in history and also the most expensive video game acquisition of all time...
Let’s take look at the reasons behind this acquisition and what could be next for Microsoft stock.
Why would Microsoft acquire Activision?
Gaining a foothold into the metaverse
Microsoft is placing a big bet on video games and the future of the internet, looking at games as the ‘building blocks’ of the metaverse. By acquiring Activision, Microsoft will be able to encourage more large and dedicated game communities to develop their own metaverses.
Monopolistic opportunity in video games industry
Most of Microsoft’s gaming revenue comes from its best-selling console, Xbox. It has not been able to produce any blockbuster games on its own and relies heavily on third party game studios like Activision to develop games.
Acquiring Activision would make Microsoft one of the biggest gaming companies in the world. It would propel Microsoft to become the Netflix of the video games industry.
Penetrate the mobile gaming market
Mobile gaming is one of the fastest-growing segments and Microsoft plans to penetrate this market. Microsoft has failed to break into this market over the last several years and currently still has no presence in mobile gaming. Activision owns mobile-gaming studio King, maker of the most popular mobile game of all times: Candy Crush.
Issues with the Acquisition
Greater antitrust scrutiny
The rise of digital technology, which has resulted in increased monopoly, particularly among Big Tech companies, has, in turn, sparked greater antitrust security for this industry. President Biden’s Executive Order, issued in July 2021, only served to strengthen antitrust security for technology companies.
The attack on Big Tech has primarily targeted Meta/Facebook, Google, and Amazon. Microsoft has largely avoided this issue, but the U.S. antitrust review of the proposed acquisition is likely to be handled by the Federal Trade Commission. The merger could fail if regulators believe it would give Microsoft a monopoly in the gaming or technology industries.
Toxic workplace
Activision has received multiple lawsuits since July 2021 due to it’s “frat boy” work culture, apparently promoted by its current CEO, Bobby Kotick, which encourages discrimination against the female workforce. These lawsuits led to large-scale layoffs and a significant decline in Activision’s share price.
It has been rumoured that Activision’s CEO, Bobby Kotick will walk away with a windfall paycheck of at least $390 million, making him one of the biggest winners of the acquisition deal once it closes. Microsoft will have to redesign the workplace culture and restructure Activision’s management team in order to attract new talent to develop blockbuster games.
Outlook on MSFT: Bullish or Bearish?
- On 31 Jan 2022: the outlook is currently uncertain on the market in general, and on the company itself.
- The stock has rebounded well after earnings, and has just crossed back up through its 200-dma.
- Big Money activity has been bullish on the stock since its earnings, but the imminent future is less clear as big money managers are not enthusiastic about this acquisition deal. That would typically hurt the acquirer.
- A break back below the 200-dma could send the stock to retest its recent lows.
