[Infowarrior] - Vivendi to Acquire Activision

[Richard Forno]

December 3, 2007
Vivendi to Acquire Activision
By MATT RICHTEL

http://www.nytimes.com/2007/12/03/technology/03activision.html?_r=1&hp=&oref
=slogin&pagewanted=print

SAN FRANCISCO, Dec. 2 ‹ Vivendi said Sunday that it planned to acquire a
controlling stake in Activision in a deal that creates a rival to Electronic
Arts as the world¹s largest independent video game publisher.

The deal combines Activision and Vivendi Games, companies with different
areas of strength in the booming video game business. Activision¹s emphasis
is on making games for consoles, like the Sony PlayStation 3 and the
Microsoft Xbox 360. Its game franchises include the Tony Hawk skateboarding
games, the Call of Duty war game series and one of the industry¹s current
best sellers, Guitar Hero, which allows players to strum along on a plastic
guitar to tunes played on television.

Vivendi¹s strength is in online games, like World of Warcraft, which its
Blizzard Entertainment unit has built into a worldwide phenomenon with more
than nine million players worldwide.

The combination of the two companies, to be known as Activision Blizzard,
comes at the end of a record year for video game sales. Recent new game
consoles from Microsoft, Sony and Nintendo have set off the release of new
games and sequels to popular franchises, and expanded the audience to older
men and women.

Behind the boom, the industry¹s competitive landscape is shifting. The
dominance of Sony, with its PlayStation 3, has been upended by the Wii, the
console made by the once also-ran Nintendo. So too, there are indications of
a shift ‹ or at least a change of momentum ‹ on the software side. The sales
growth of the leading game maker, Electronic Arts, lags behind Activision¹s.
Sales at Activision rose to $1.5 billion in 2007, a 74 percent jump from
2003. In the same period, Electronic Arts¹ revenue rose 25 percent, to $3.1
billion.

Vivendi is buying Activision while Activision is in the middle of a hot
streak. Its Guitar Hero III sold 1.3 million copies in just seven days after
it was released late in October. And through October, Activision had three
of the eight best-selling games in the United States this year, according to
the NPD Group, which compiles sales data.

The deal seeks to upend Electronic Arts¹ dominance by creating a company
that can match it in size and breadth. But the new company also faces
formidable challenges as it tries to develop the kind of enduring library of
game titles that has given Electronic Arts its long dominance.

Under the arrangement announced Sunday, the companies said Vivendi would pay
$27.50 a share and make a cash infusion of $1.7 billion to acquire a 52
percent stake in Activision, valuing the combined company at $18.9 billion.
Vivendi will then fold its game operations into those of Activision in the
new company.

The new company plans to repurchase $4 billion worth of its shares for
$27.50 each, a move the merger partners said would increase Vivendi¹s stake
to 68 percent. The purchase price represents a premium of 24 percent over
Activision¹s closing price on Friday of $22.15 a share.

The companies said the new entity would trade on Nasdaq.

Vivendi and Activision estimated their combined revenue for 2007 at $3.8
billion. Their merger will thus challenge Electronic Arts, with projected
2007 revenue around $3.7 billion, as the largest video game publisher in the
world that is not affiliated with a console maker, like Microsoft or
Nintendo.

Robert A. Kotick, the chief executive of Activision, said in an interview
that he thought his company needed to add such a component in an industry
that is being transformed by the Internet. He said that after exploring ways
to develop such expertise within Activision, he decided that the better, if
not only way, was to merge with another company.

³We looked every which way to figure out how to participate in what Blizzard
had created,² he said, ³We couldn¹t find a way to duplicate it, but we could
acquire the expertise.²

Mr. Kotick will retain his position atop the combined company. Bruce Hack,
chief executive of Vivendi Games, will become vice chairman and chief
corporate officer and lead the merger integration as well as head finance,
human resources and the legal section. One challenge for the merger partners
is integration. The new company will have 6,000 employees, and Mr. Kotick
said that if it met its growth targets, it could be double that size in
three or four years.

Another challenge is that the video game industry, though it has grown
steadily as interactive entertainment cut sharply into traditional media, is
a hit-and-miss business. Much like the movie business, every video game
company, including Activision, has had its share of disappointments, failed
games and costly efforts to develop games that eventually flopped.

Largely as a result of Guitar Hero¹s success, Wall Street analysts have been
bullish about Activision. But even the optimists wonder if Activision can
continue its pace of growth.

Activision has "absolutely blown away the Street¹s expectations and their
own guidance," Mike Hickey, an industry analyst with Janco Partners, said
last week, before the merger announcement. "They¹ve done phenomenally. But
can they replicate it?"

Activision and Vivendi maintain that their combination changes the dynamics
because, they said, their new size creates an entity with a broader game
portfolio and greater profitability. In the merger, expected to be completed
in the first half of 2008, shares of Vivendi Games will be converted into
295.3 million new shares of Activision common stock, a transaction that
values Vivendi Games at $8.1 billion. Vivendi will also buy 62.9 million
newly issued shares of Activision for $1.7 billion in cash.

Jean-Bernard Lévy, chairman of the board of management and chief executive
of Vivendi, said the investment represented a long-term commitment to the
video game industry, which he deemed the fastest-growing entertainment
sector.

The two companies also said that within five business days after closing the
transaction, Activision Blizzard would begin a $4 billion all-cash tender
offer to purchase up to 146.5 million Activision Blizzard common shares at
$27.50 each.

Depending on how this works out, Vivendi said it could ultimately own 68
percent of Activision Blizzard on a fully diluted basis.

Even as the deal puts Activision Blizzard in the top spot in terms of
revenue, one question that will face investors is whether Activision can
duplicate the business model of Electronic Arts.

Electronic Arts has built its business on creating numerous game franchises
that deliver reliable streams of annual revenue. For instance, in its 2007
fiscal year, the company had 24 titles that sold more than a million copies
each, and four games ‹ Madden NFL 07, Need for Speed Carbon, FIFA 07 and The
Sims 2 Pets ‹ that sold more than five million copies.

It has done that, in part, by buying studios with popular games. Compared
with its competitors, Electronic Arts has invested relatively heavily in the
new businesses of casual and mobile games, and popular multiplayer games,
industry analysts said. The investments have yet to pay off, but if they do,
they could be a big boost to Electronic Arts, the analysts said.