In mid-January, shares of Activision Blizzard (ATVI -0.05%) surged when news broke that Microsoft (MSFT -2.61%) was offering to buy the video game publisher in a $68.7 billion deal. In this episode of "The Rank" on Motley Fool Live, recorded on April 11, Fool.com contributors Matt Frankel, Jason Hall, and Brian Withers discuss why the proposed acquisition should be a win for shareholders.
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Matt Frankel: They're a huge gaming company. I'm not a gamer, so if I don't use the correct terminologies for anything, don't get too mad at me.
Jason Hall: I'll correct you.
Frankel: [laughs] But Call of Duty is their big franchise. Correct?
Hall: It's a big franchise, yes.
Frankel: That's the biggest one in their catalog. They have other franchises. They have Tony Hawk's Pro Skater, I know is one of theirs. There is a few others, but they are a very profitable gaming company, their franchise. That's just an off-the-charts popular franchise. But like you said, they are being acquired by Microsoft. If you buy Activision Blizzard today and plan to hold for the next 20 years, you are going to be a Microsoft shareholder. They are acquiring.
Hall: Well, it's a cash transaction.
Frankel: Well, it's a cash transaction, so you would have to choose to buy it. You would have to choose to roll it into Microsoft, which you can. I mean, it's worth pointing out, if your company is being acquired in an all-cash deal, you could use that cash to buy shares of the acquirer if you want to continue to own the business. Microsoft is paying $68.7 billion or just over 2% of their market cap, which just gives you the scale of Microsoft. I don't really need to go into what Microsoft does because I have four Microsoft programs opened on my laptop [laughs] right now. I don't know about you guys, but I'm sure it's at least one I'd be willing to bet is running in the background. Even if you have an Apple computer, I know I've used LinkedIn, I've used Outlook, I'm a subscriber to Microsoft 365 for email and things like that. Their interest in Activision, they have their Xbox gaming division, they have their own hardware and software gaming division. They have the Xbox hardware, they have their own studios, they make the games like, Halo's a big franchise of theirs. Jason's a gamer, Gears of War, I think, is a another big franchise of theirs. I'm sure he can name more than I can.
Hall: Yeah, I'm not going to for the sake of brevity here. But I think Matt's point is with Microsoft, think about the snap test, right? You snap your fingers and the world grinds to a halt, if Microsoft disappears. I think there are a few tech companies that you can say that about to this same extent broadly, and the implications across so many different kinds of companies and industries, very, very well run, Azure, the potential to continue to grow, cloud services is enormous. I think we undersell the importance of its steps into the metaverse. For business applications, for remote work, to start actually replicating the good things of the in-office environments, with the good things of being remote, I think Microsoft has real potential to be a huge leader there. I don't think we appreciate that enough about this business.
Frankel: No, the reason I ranked it as high as I did because it's real compounder. Correct me if I'm wrong, I should've looked at their balance sheet before I came on here. But Microsoft is paying Activision Blizzard with the cash they have sitting around.
Hall: Yeah, I made a joke about an acquisition of another company, but I'm going to use it again. Microsoft won't even have to transfer cash from savings into checking. It's just such a smart move.
Frankel: These acquisitions sustain themselves. They can dominate gaming without borrowing any money or raising a new capital.
Hall: This is building a gaming ecosystem and a platform. Powering like a Netflix kind of model. As much as we talk about Netflix going into gaming for a subscription model, what Microsoft's going to have there is going to be just really impressive. Brian, you and I ranked this very high.
Brian Withers: Yeah. My assumption was, and I forgot that it was all-cash deal, Activision comes into Microsoft and becomes Microsoft in 20 years in front of us. It's the Microsoft gaming ecosystem that you're investing in. I think Microsoft is just what the doctor ordered for Activision. Activision was slowing growth. Their cash-to-debt ratio, actually, that's not too bad, but Microsoft has a better operating income, They have their stock growth. The Glassdoor scores, Activision is 52, Microsoft is 91. I think Microsoft has grand plans for Activision and how it fits into their gaming ecosystem. I think this is similar to Disney buying like a Marvel or a Pixar in the gaming space.