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Did Activision Overpay for Candy Crush?

By Ryan Henderson - Mar 6, 2021 at 8:50AM

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Why a $6 billion price tag was still worth the money.

In 2015, Activision Blizzard (ATVI) entered into an agreement to acquire King Digital, the parent company of the popular mobile game Candy Crush. King operates hundreds of social, free-to-play mobile games with millions of users all around the world.

But despite owning one of the most popular mobile titles of all time, King's stock was steadily declining amid poor business performance prior to the acquisition. So why did Activision pay a 20% premium to gobble up King's shares? Let's take a look. 

Woman looking at smartphone

Image source: Getty Images.

How much did it cost Activision Blizzard?

In November 2015, Activision announced that it would be buying King Digital for $5.9 billion in cash. At the time, King Digital was generating $2 billion in revenue and $641 million in operating income. This means Activision was able to acquire King at a price-to-sales ratio of just under three, and a price-to-operating-income ratio of roughly nine times. For reference, other gaming publishers like Electronic Arts (EA 2.46%) and Take-Two Interactive (TTWO 0.83%) currently trade at significantly higher multiples.

  Electronic Arts Take-Two King (in 2015)
Price-to-sales ratio (TTM) 7 6 3
Price-to-operating-income ratio 30.6 38.3 9.2

Source: Koyfin.com. TTM = trailing 12 months

While King appears to have traded at a discount to its peers, there was undoubtedly a good reason why. By the end of 2015, King Digital's number of monthly active users (MAUs) had fallen 16% from the year before. Bookings (total revenue expected to be recognized over the life of a user) and profits followed suit, both declining 10%. 

King was seeing increased competition in the mobile space, and it was beginning to reflect in its financials. For King, this buyout was the logical escape from mounting pressure. 

How is King Digital doing now?

Since the acquisition, King's monthly active user count has continued to decline. While this might concern some shareholders, it's not the only number to pay attention to. Over the last five years, King has steadily grown its operating margin and served as a valuable funnel for Activision Blizzard's other notable franchises. 

In 2020, King generated $2.16 billion in revenue and $857 million in operating income. Over the five years since Activision acquired King, Activision has recouped 60% of its $5.9 billion purchase price in operating income, while steadily expanding the operating margin from 32% to 40%.  

In addition to better profitability, Activision's efforts in utilizing King's massive user base to cross-promote its other popular franchises seem to be bearing fruit. Call of Duty Mobile just delivered its most successful quarter ever, and the new Diablo title, Diablo Immortal, was said to be well-received during its regional testing.

While it's impossible to draw a direct line between King's users and Activision's success with other mobile brands, there's no refuting that it provided Activision with a large and diverse audience to market to. 

Can King Digital grow from here?

The biggest concern shareholders have had with the King acquisition seems to be the plummeting user count. From 2016 to 2019, King's user count dropped by a whopping 37%! However, this decline seems to be stagnating. Over the last year, King's average number of MAUs actually ticked up roughly 1%. While it's nice to see this number trend in the right direction, King certainly isn't out of the woods yet. 

I'd be lying if I said this little one-time uptick in MAUs symbolizes massive change. Competition in the mobile gaming space will likely only grow from here, since mobile is the largest and fastest-growing market for gaming by far. According to one source, mobile made up more than half of all gaming revenue in 2020, and unsurprisingly this has attracted lots of competition, including from Activision Blizzard itself. 

But to be clear, this does not mean Activision overpaid. While competition will inevitably heat up, there will always be an audience that enjoys King's "pass-the-time" type of games. And Activision seems to have found the right ways to monetize the audience. In 2016, King Digital averaged $3.92 a year per monthly active user, but by the end of 2020, that number had increased to $8.38. 

Despite the diminishing user base, King Digital generated $857 million in operating income this year for Activision Blizzard. At this level of operating profits, Activision appears to have gotten an absolute bargain with King Digital.

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Stocks Mentioned

Activision, Inc. Stock Quote
Activision, Inc.
ATVI
Electronic Arts Inc. Stock Quote
Electronic Arts Inc.
EA
$133.98 (2.46%) $3.22
Take-Two Interactive Software, Inc. Stock Quote
Take-Two Interactive Software, Inc.
TTWO
$117.09 (0.83%) $0.97

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