Analysis of M&A Deal Lifecycle – Microsoft & Activision Blizzard

You are working as an M&A Analyst at an investment bank. Microsoft planned to acquire Activision Blizzard for approximately $68.7 billion. The deal involved major gaming brands such as Call of Duty, Candy Crush, and World of Warcraft and faced significant regulatory challenges before closing in October 2023.

In this lab, you will first understand the basic stages of an M&A deal and then investigate how Microsoft handled the strategic and regulatory issues surrounding the Activision Blizzard acquisition.

Topic : M&A & Pitch Deck

1) Types of mergers and acquisitions

2) Deal process overview

3) Accretion and dilution basics

4) Role of investment banks in M&A

5) Investment banking pitch deck structure

6) Valuation and transaction slides

An M&A deal normally moves through four important stages.

Read each stage and understand what an M&A analyst does at that stage.

Using the Microsoft–Activision Blizzard acquisition, understand what an M&A analyst would consider at each stage.

Key Learning:
An M&A analyst helps the deal team identify the target, assess its value, check the risks, and support the completion and integration of the deal.

Regulatory Closing Hurdles

The Microsoft–Activision Blizzard acquisition faced significant regulatory scrutiny before it could be completed. Two important regulators were the UK Competition and Markets Authority (CMA) and the US Federal Trade Commission (FTC).

A. Understand the Regulators' Concerns

The CMA ultimately accepted the restructured transaction on 13 October 2023, concluding that the transfer of cloud-streaming rights to Ubisoft substantially addressed its competition concerns.

The FTC argued that the acquisition could allow Microsoft to suppress competition to Xbox and its subscription and cloud-gaming businesses. Microsoft's position was that its long-term commitments to other platforms, including Nintendo and Sony, would address these concerns.

B. For each regulator, answer the following:

1. What was the main competition concern?
The CMA was concerned that Microsoft could gain too much control over cloud gaming by owning Activision's popular games, such as Call of Duty, World of Warcraft and Overwatch.

2. What response or concession did Microsoft provide?
Microsoft restructured the deal so that Ubisoft, an independent company, would receive Activision's cloud-streaming rights outside the EEA for current and future games for 15 years.

3. Did the concession help address the concern?
Yes. The CMA concluded that transferring the cloud-streaming rights to Ubisoft prevented Microsoft from controlling this important content in cloud gaming. The CMA therefore cleared the restructured transaction on 13 October 2023

C. US Federal Trade Commission (FTC)

1. What was the main competition concern?
The FTC was concerned that Microsoft could use Activision's games, particularly Call of Duty, to disadvantage competing gaming platforms and cloud-gaming services.

2. What response or concession did Microsoft provide?
Microsoft entered into long-term agreements designed to keep Activision games, including Call of Duty, available on competing platforms and cloud-gaming services.

3. Did the concession help address the concern?
Partly. The agreements provided competitors with continued access to important Activision content and were intended to reduce concerns about Microsoft restricting access. However, the FTC continued to challenge the transaction rather than treating the agreements as fully resolving its concerns.

Key M&A Learning:

Regulatory concessions can change the structure or conditions of an acquisition to reduce competition concerns. An M&A analyst should therefore examine not only the deal price, but also regulatory risks and proposed remedies before the transaction is completed.

Evidence to Use

Students should use the following official sources:

• https://www.gov.uk/cma-cases/microsoft-slash-activision-blizzard-ex-cloud-streaming-rights-merger-inquiry

Use this to understand the CMA's cloud-gaming concerns and the Ubisoft remedy.

• https://www.gov.uk/government/news/microsoft-concession-a-gamechanger-that-will-promote-competition

Use this to understand why the CMA considered the restructured deal acceptable.

• https://search.ftc.gov/legal-library/browse/cases-proceedings/2210077-microsoftactivision-blizzard-matter

Use this to understand the FTC's competition concerns.

• https://www.ftc.gov/news-events/news/press-releases/2022/12/ftc-seeks-block-microsoft-corps-acquisition-activision-blizzard-inc

Use this to understand the FTC's concerns about Call of Duty, Xbox and competing platforms.

Analyst Perspective:

As an M&A analyst, your role is not simply to identify the regulator's concern. You should assess whether the proposed remedy reduces the competition risk sufficiently for the transaction to proceed

Microsoft announced the acquisition of Activision Blizzard in January 2022 for approximately $68.7 billion in an all-cash transaction. Microsoft stated that the acquisition would strengthen its gaming business across mobile, PC, console and cloud gaming

Analyze the Deal Process

Complete the table using the information provided and the official sources.

An M&A analyst should ask why Microsoft wanted to acquire Activision Blizzard.

Three Strategic Reasons

1. Expand into Mobile Gaming
Activision Blizzard's King business gave Microsoft a strong position in mobile gaming through games such as Candy Crush. This helped Microsoft expand beyond its traditional console and PC gaming businesses.

2. Gain Major Gaming Franchises
The acquisition gave Microsoft access to globally recognised franchises such as Call of Duty, World of Warcraft, Diablo, Overwatch, and Candy Crush. These strong brands could strengthen Microsoft's gaming content and attract more players.

3. Strengthen Xbox, Game Pass and Cloud Gaming
Microsoft planned to add Activision Blizzard's games to Xbox Game Pass and use its technology and cloud capabilities to reach players across different devices. This could help Microsoft grow its gaming ecosystem and reach a larger global audience.

Overall Strategic Rationale:
The acquisition was mainly about expanding Microsoft's gaming ecosystem, gaining valuable gaming content, and reaching more players across mobile, PC, console and cloud platforms.

Analyst Assessment – Answers

3

1. Why was Activision Blizzard strategically attractive to Microsoft?
Activision Blizzard owned highly successful gaming franchises such as Call of Duty, World of Warcraft, Diablo, and Candy Crush. The acquisition also helped Microsoft expand its gaming business across mobile, PC, console and cloud gaming.

2. What were the main risks that could prevent the deal from being completed?
The main risks were regulatory and competition concerns, particularly whether Microsoft could restrict Activision's games from competing platforms and gain too much control over cloud gaming. These concerns led regulators such as the UK CMA and US FTC to closely review the transaction.

3. Do you think the acquisition was strategically justified? Give two reasons.
Yes, strategically it can be justified. First, Microsoft gained valuable gaming franchises and expanded its presence across mobile, PC, console and cloud. Second, the acquisition strengthened Microsoft's gaming ecosystem and provided additional content for services such as Xbox Game Pass.

Useful Evidence

Students should refer to these sources:

• https://news.microsoft.com/source/2022/01/18/microsoft-to-acquire-activision-blizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/?msockid=10c5e58293296dc731f7f31292166ca1

• https://www.sec.gov/Archives/edgar/data/789019/000119312522010667/d301984dex991.htm

• https://www.gov.uk/cma-cases/microsoft-slash-activision-blizzard-merger-inquiry?utm

• https://www.ftc.gov/legal-library/browse/cases-proceedings/2210077-microsoftactivision-blizzard-matter?utm

M&A Learning:
A successful M&A analysis considers both the deal process and the strategic rationale. A good acquisition should create strategic value while managing financial, regulatory and integration risks