Microsoft (NASDAQ:MSFT) might be on the verge of an acquisition that could significantly affect its position in the gaming industry. The Wall Street Journal reported Tuesday that Redmond will soon complete a purchase of Mojang AB at a price exceeding $2 billion.
Mojang is an independent developer based in Sweden, and the creator of Minecraft, an incredibly popular game that has had a major impact on the industry landscape. How would this acquisition benefit Microsoft? Would it be a smart purchase for the company at the reported price?
Setting the stage
When CEO Satya Nadella reaffirmed his company's commitment to the Xbox brand, there were strong reasons to believe Microsoft might soon purchase gaming assets and developers. Problems related to the initial introduction and marketing of its Xbox One video console erased much of the goodwill the company had built up in the previous hardware generation. Bulking up its gaming holdings looked like it might be a necessary step to better compete with Sony's (NYSE:SNE) explosive PlayStation 4.
Nadella's reiteration of support for the Xbox also came with the suggestion that the company would seek to better integrate its gaming assets with its mobile platform. Acquiring relevant companies and properties was likely a means of improving Microsoft's ability to achieve this goal, and the Mojang purchase could be the first in a series of related buys.
Why Mojang and Minecraft matter
Minecraft is one of the most successful games in the history of the medium. As of June 25, the title had sold approximately 54 million copies across a wide array of platforms. To give an idea of the game's trajectory, it debuted on personal computers in 2009, but combined sales across Sony's PlayStation 3 and Microsoft's Xbox 360 were still strong enough to make Minecraft the second-best selling game in July 2014. The title also recently launched on PlayStation 4 and Xbox One, and is virtually guaranteed to be a big hit on these platforms.
Minecraft is an industry anomaly of the best kind, and one of the few titles that has found great success across PC, console, and mobile platforms. While the game's social focus fits with current industry trends, its aesthetics and gameplay mechanics set it apart from other modern games of comparable success. Perhaps because of these factors, the game has transcended traditional demographic appeal, achieving significant cache with both older and younger audiences.
Sources suggest Microsoft will not remove versions of the game from Sony's online store if the purchase goes through; but a hypothetical, exclusive sequel to the megahit could be a big draw for Microsoft's ecosystem. On the other hand, Minecraft might also serve as Microsoft's testing grounds for platform agnosticism.
Is Mojang a good deal at a price in excess of $2 billion?
It's important to point out that Mojang is essentially the Minecraft company, in much the same way that King Digital Entertainment (NYSE:KING) can be described as the Candy Crush Saga company. While there are significant differences between the two games makers, their points of similarity might offer a window into the value of the proposed deal.
Prior to its IPO earlier this year, King reported profit of $568 million on sales of $1.9 billion, and the company valued itself at $7.6 billion; its worth, therefore, was estimated at approximately 13.3 times annual earnings. Relative to its current market cap, the company is valued at approximately 7.37 times earnings. Last year, Mojang generated $128 million of profit on $289 million in revenue, meaning Microsoft would pay approximately 19.5 times the company's last annual earnings if it spends $2.5 billion on the acquisition.
Given the histories of, and problems associated with, companies that are so dependent on one game, the price Microsoft will reportedly pay for Mojang can start to look unreasonable. That said, the small company and its Minecraft game offer Microsoft significant resource and positional benefits. Mojang is one of very few companies to bridge the divide between console and mobile markets with a single title, and Nadella's comments on the future of Xbox and mobile suggest the developer is a strong fit with Microsoft's goals.
The notion of paying more than $2 billion to acquire a company that is primarily known for one game is sure to raise some eyebrows; but Mojang and Minecraft may be a special case. Very few titles in the history of gaming have shown evidence of comparable staying power, and few have a similar potential to aid Microsoft's aim of bringing its existing gaming resources together with its mobile and cloud focus. If Mojang can engineer successful follow-ups to its megahit, inside the series and beyond it, the company would justify its asking price and be a significant asset for Microsoft.
Keith Noonan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.