Activision Merges with Vivendi Games to Dethrone EA

In a surprise move on Sunday morning, Tony Hawk and Guitar Hero publisher Activision announced a blockbuster merger with French conglomerate Vivendi's game division. The deal sees Vivendi fold its games business (valued at $8.1 billion), including World of Warcraft makers Blizzard Entertainment, into Activision, in a transaction valued at $18.9 billion. Vivendi will pay Activision shareholders $1.7 billion in cash and will gain 52 percent ownership of the new video game superpower to be named Activision Blizzard. Furthermore, Vivendi plans to raise its stake to 68 percent through a $4 billion cash tender offer for additional shares in the new group.

The boards of the respective companies have approved the transaction, which is subject to customary closing conditions and the approval of Activision's stockholders, although that likely won't be a concern since the transaction is expected to be at least $0.20 accretive to Activision stockholders in calendar year 2009. The deal is expected to close sometime in the first half of 2008. Note that Activision Blizzard will continue to operate as a public company traded on NASDAQ under the same ticker, ATVI.

While Electronic Arts has been the top third-party publisher for some time, Activision has been coming on strong. With the merger, Activision Blizzard will be the "world's largest, most profitable pure-play video game publisher," the two companies boasted. Vivendi Games and Activision will have a combined $3.8 billion in revenue this year, handily beating EA's $3.1 billion. Moreover, Activision Blizzard expects operating income of $1.1 billion by 2009.

The combination of Activision and Vivendi Games not only leverages Activision's strong portfolio of top franchises such as Guitar Hero, Call of Duty, Tony Hawk, James Bond, Transformers, Shrek, Spider-Man and others, but it also draws on Blizzard's MMO expertise, strength in Asia and the enormous popularity of World of Warcraft. Importantly, Activision Blizzard expects to generate approximately 70 percent of its revenues from owned franchises. "As a result of the business combination, Activision Blizzard expects to have the most diversified and broadest portfolio of interactive entertainment assets in its industry, positioning the combined company to capitalize on the continued worldwide growth in interactive entertainment," the companies said.

"This alliance is a major strategic step for Vivendi and is another illustration of our drive to extend our presence in the entertainment sector. By combining Vivendi's games business with Activision, we are creating a worldwide leader in a high-growth industry. We are excited about the opportunities for Activision Blizzard as a broader entertainment software platform," commented Jean-Bernard Levy, Chairman of the Management Board and Chief Executive Officer of Vivendi. "We believe this transaction will create significant value for Activision Blizzard and Vivendi stockholders. In Activision, we have found a partner with a highly complementary business and strong operating team. Bobby Kotick and Brian Kelly are industry pioneers, well known for creating shareholder value. The combined strength of the existing management teams at both companies will set the stage for further profitable growth of Activision Blizzard. We look forward to being an active and supportive majority stockholder in a company that is poised to lead the worldwide interactive entertainment industry in the years ahead."

Robert Kotick, Activision's Chairman and Chief Executive Officer stated: "This is an outstanding transaction for Activision and our stockholders, as well as a pivotal event in the continuing transformation of the interactive entertainment industry. By combining leaders in mass-market entertainment and subscription-based online games, Activision Blizzard will be the only publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry and reach the broadest possible audiences. By joining forces with Vivendi Games, we will become the immediate leader in the highly profitable online games business and gain a large footprint in the rapidly growing Asian markets, including China and Korea, while maintaining our leading operating performance across North America and Europe. Activision stockholders will benefit from significantly increased earnings power and the recurring nature and predictability of subscription-based revenues, while also having the opportunity, if they choose, to receive $27.50 per share for a portion of their shares in the post-closing tender offer."

He continued: "Vivendi Games provides Activision with unique strategic and financial benefits and will allow us to leverage our franchises into emerging online opportunities as Blizzard has done so successfully. Activision has been very focused on margin expansion, and this transaction will meaningfully increase our overall operating margins as we expand our franchises online and in new geographies. Diversifying our revenue base among subscription-based online, console and PC formats, as well as wireless and casual emerging opportunities, gives us the broadest platform to capitalize on industry growth. With Blizzard's successful franchises, such as World of Warcraft, StarCraft and an exciting pipeline of yet-to-be announced titles, Vivendi Games' and Blizzard's management team will join with Activision's strong and experienced leaders to become an even more powerful force for innovation in online and offline interactive entertainment across a wide range of platforms. This transaction also provides a unique relationship with Universal Music Group – the world's largest music company – which will benefit Guitar Hero and further extend our sizable leadership position in music-based games."

In terms of management structure of Activision Blizzard, Kotick will become President and CEO of the newly merged publisher. Bruce Hack, the current CEO of Vivendi Games, will serve as Vice-Chairman and Chief Corporate Officer of Activision Blizzard, accountable for leading the merger integration and the finance, human resources and legal functions. Mike Morhaime will continue to serve as President and CEO of Blizzard Entertainment. Thomas Tippl will continue as Chief Financial Officer of Activision Blizzard while Jean-Francois Grollemund, currently Chief Financial Officer of Vivendi Games, will be appointed Chief Accounting Officer of Activision Blizzard.

In addition, the Sierra Entertainment, Sierra Online and Vivendi Games Mobile divisions will officially become part of Activision Publishing, for which Mike Griffith will serve as President and CEO.

Interestingly, EA CEO John Riccitiello, recently said that the video game industry was no longer ripe for consolidation. Apparently it was ripe enough for Vivendi and Activision. Not only that, but Vivendi may just be getting started. According to the International Herald Tribune, Jean-Bernard Levy indicated that the company will continue to look for other acquisition opportunities. "This isn't the end of the game," Levy said.