Does Microsoft's Acquisition of Activision Blizzard Make Sense?

We're only in the second month of 2022, but it already appears that merger and acquisition activity will be as hot as ever this year. In this segment of Backstage Pass, recorded on Jan. 19, Fool.com contributors Trevor Jennewine, Rachel Warren, and Jose Najarro discuss one of the most prominent acquisition announcements of 2022 so far. 

Trevor Jennewine: In the short term, I think this makes sense.

Activision (ATVI) has a strong portfolio with titles like Overwatch, World of Warcraft, Call of Duty, Candy Crush. I think that adds value to Microsoft's (MSFT -0.25%) Game Pass service, the company's subscription gaming service on the short term.

I know that Satya Nadella on several occasions has talked about the metaverse being a variety of virtual worlds, and I think gaming will be an important part of the metaverse. However, it shapes up and say bringing Activision Blizzard's content on board just means that Microsoft has more to bring to the metaverse. I think it makes sense for the company's short and long term.

Certainly expensive, like you said, $68 billion. Microsoft's next largest acquisition was LinkedIn back in 2016, I believe, for around $26 billion. This is a huge chunk of change. Then again, Microsoft is a huge company. I'll be interested to see how regulators handle this situation. I know that they've taken a little bit more aggressive stance on some of these larger mergers. So I'll be interested to see what shakes out with that.

As far as potential acquisitions, I'm going to build on what Danny said. I think Pinterest is down quite a bit right now. I'm not sure who would make a good fit as far as acquiring it. Maybe a company like Etsy or I don't know, maybe even Shopify.

But I think Pinterest could be a potential acquisition target. Then on Roku, Roku has really focused on original content that's become a core part of its growth strategy and driving engagement with the Roku channel.

I could see Roku going the other direction and not itself being acquired, but Roku acquiring maybe a TV or a movie studio to help with its original content push. That's my crystal ball prediction.

Rachel Warren: Very cool. What about you Jose?

Jose Najarro: Yeah. I mean, to me, this acquisition is pretty crazy. I know Microsoft, I think last year or the year before, acquired another gaming studio for around $7 billion. I knew they were acquiring gaming studios, but I thought they were going to stay around that price point, not 10x it to that $68 billion, $69 billion that they made.

Now this opens up in my opinion a huge market for a lot of these other big tech giants and the acquisition potentials that they have. But right now, with the overall acquisition, I believe it's a great move for Microsoft that increases their market into mobile gaming. Microsoft is really known for their Xbox hardware and their PC hardware, but not really known for the mobile.

Activision has big, big games in the mobile departments, so that's strong there. Just like Danny was mentioning about the subscription-based, and I think Trevor touched a little bit the Game Pass. They did mention that Game Pass, which is Microsoft's Netflix of gaming. They have about 25 million subscribers already, and those subscribers pay about $7 to $8. I think the minimum price is $8, $7 a month.

So now with them getting more content for that subscription service, I believe it can help increase the numbers. I also want to say it's probably the best thing to happen to Activision, like you mentioned earlier Rachel, about all these negative stuff that's happening with the workforce.

Stuff like that, I feel, pushes talent away from a company. But now, I'd feel like you're not going to be saying I'm working for Activision. Talent is going to be, hey, I'm working for Microsoft. I think there's going to be a positive incentive and overall change the work culture to bring more talent, but also keep the talent that's already there that was looking for some form of change.

Now for the crystal ball, I think Facebook, Meta Platforms is likely to buy a gaming studio. They're really focusing in the metaverse right now. I think they're either going to buy something in the gaming studio or they have really talked about how the virtual reality platform has seen strength in virtual fitness.

So maybe a hardware company, maybe Peloton. I don't know if it continues to get cheaper. Now, Facebook might want to acquire them to increase their fitness presence in the virtual reality.

Rachel Warren: Yeah. I love those thoughts from all you guys. I think that when I first read this, I was so shocked because we've been watching what's going to happen with Activision Blizzard, and I don't really think anyone thought that it was going to get acquired, at least of all by Microsoft. I'm curious to see what happens with some of these legal investigations that are ongoing into Activision and will the deal get more scrutiny because of that.

But at the same time, I think that Microsoft has a really key opportunity here to take a business that, as Danny mentioned, was seen some declines even before the pandemic and breathe some new life into it and also very much expand its own portfolio.

I think one of the things we've talked about on a variety of shows lately is this thought that, will the metaverse end up just being a playground for Meta Platforms?

Will other companies have a chance to really get in this space? I think when you're seeing a tech giant like Microsoft, that is making such a clearly bold move that could put it as a really strong competitor within the metaverse. I don't know, I just find that exciting. We're talking about, this is a nearly $69 billion deal.

As of the most recent quarter, Microsoft had about $131 billion in cash equivalents and short-term investments on its balance sheet. This is an all-cash deal. The company's doing very well.

This isn't something that's going to put a real dent in its business and, if anything, I think it's going to really generate tremendous growth for the company in the years ahead.