Blizzard Has Activision Investors Singing "Let It Snow"

Hoping that battle-axes can coexist with guitar axes, Activision (Nasdaq: ATVI  ) is set to hook up with Vivendi's video games unit in a deal that will challenge Electronic Arts (Nasdaq: ERTS  ) for market supremacy.

Each company brings beefy properties to the table. Activision has been feasting on the Guitar Hero, Call of Duty, and Tony Hawk franchises. Vivendi watches over World of Warcraft, the most popular online game on the planet.

Vivendi also owns Sierra, which die-hard gamers from the 1980s will remember fondly as the company behind the King's Quest and Leisure Suit Larry titles. Its early strength in PC gaming has parlayed well into the video game console front, with licensed kid-friendly Spyro and Crash Bandicoot games.

The pieces fit, if only because World of Warcraft will transform Activision Blizzard (the eventual name of the combined company) into a master of video games and Internet games.

That is what the deal really boils down to: cashing in on the "warcrack" addiction. There are 9.3 million global subscribers to the multiplayer fantasy game. When the World of Warcraft: The Burning Crusade expansion pack rolled out earlier this year, it sold a PC-gaming-record 3.4 million copies in its first month. A company like The9 (Nasdaq: NCTY  ) relies on its distribution of the game in China as its primary source of income.

It's that important.

EA or AB?
Terms of the deal aren't as straightforward as most corporate combos. Vivendi will kick in with its gaming unit and $1.7 billion in cash for an initial 52% stake. Activision will then initiate a cash tender offer for as many as 146.5 million shares at $27.50 apiece. If completely subscribed, the company will return $4 billion to the stock sellers, inflating Vivendi's stake to 68% of the outstanding shares.

The deal is valued at $18.9 billion based on the $27.50 price point, although the subsequent $4 billion repurchase will mark Activision Blizzard's market cap well below the $17.4 billion that Electronic Arts is commanding at the moment. Of course, now it's up to the market to decide which one is worth more.

Activision Blizzard edges out Electronic Arts in terms of revenue and profitability -- but EA's franchises, like Madden and The Sims, have proven worthy over long spans of time.

Consolidators, arm those rumor mills
This probably won't be the last deal. Now that EA and Activision are locked in an arms race, consolidation is bound to continue. Shares of Take-Two Interactive (Nasdaq: TTWO  ) and THQ (Nasdaq: THQI  ) opened higher this morning, although Take-Two is the better buyout candidate of the two.

THQ's portfolio of licensed character games is appealing, but Take-Two's the one with the knockout franchises Grand Theft Auto, Manhunt, and BioShock, among others.  

Activision's move to get up to speed in online gaming should also mean a flurry of activity in that space. EA has already acquired Mythic, although it may behoove a stateside player to take a stake in some of China's top Web-based gaming upstarts, like NetEase (Nasdaq: NTES  ) and Giant Interactive (NYSE: GA  ) . (Electronic Arts already has a stake in Chinese online game operator The9.)

In short, the industry is a lot like some of its games -- players are jockeying for position to make the perfect kill. Then again, some of the more popular online games have as many as hundreds of thousands of players participating at once, and jockeying for that position isn't so easy in a crowd.

You may only get one shot, so aim well.

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