Activision's Sweet Acquisition

Activision's $5.9 billion acquisition of King Digital (creators of Candy Crush Saga) was a surprise, but it make sense in a number of ways. Still, this is not a move that synergizes with Activision's existing portfolio, and it may or may not pay out well in the long run.

Where did Activision get the money for this all-cash transaction, which paid 20% over King share closing price? According to the company's press release, "The cash consideration payable by Activision Blizzard under the terms of the Acquisition will be funded from approximately US$3.6 billion of offshore cash on the balance sheet of the Activision Blizzard Group and by an incremental term loan committed by Bank of America Merrill Lynch and Goldman Sachs Bank USA, as incremental lenders, under Activision Blizzard's existing credit agreement in the amount of US$2.3 billion."

So Activision used all of its offshore cash, which means that it's an effective discount of somewhere in the range of 30% on that money -- that cash was earned overseas and parked there, and couldn't be returned to the USA without losing a big chunk to the IRS. For the rest, Activision put it on the credit card. It's also worth noting that King has $900 million in cash lying around, which means the purchase price was more like $5 billion. Still, this does mean that Activision is more heavily leveraged, and its ability to make any other major purchases is going to be hampered for some time to come.

On the positive side, King's audience is very different from Activision's -- overwhelmingly female, and with a broad international reach. King's titles are casual, with Candy Crush Saga and Candy Crush Soda Saga accounting for about two-thirds of the company's revenues. Rumor has it that the company has some midcore titles in development, but it's known for its wide range of casual titles.

King is profitable, but the prospects for significant growth are unclear -- one reason, perhaps, why a sale looked good. Finding another hit on the scale of Candy Crush Saga is not predictable -- it could happen next month, or next year, or never. Doing midcore games holds the prospect of a different audience appeal, but looking at the mobile game industry overall one has to conclude that megahits are rare beasts, and companies with more than one are scarce indeed (arguably, Supercell may be the only example, though none of its games does quite as well as Clash of Clans).

As for synergy with Activision's non-mobile properties, that doesn't seem like a strong prospect. Activision has been doing its own mobile games, most notably Skylanders on mobile, and it seems unlikely the company would shift that development to King. Similarly with Blizzard, which has had great success with Hearthstone on mobile -- it seems likely they'd want to handle any future mobile projects in-house. As for King, a match-three game based on Call of Duty seems more than a trifle out of place with the company's current products.

Still, the King acquisition adds a solid profit contribution in a gaming segment where Activision didn't have much presence, so that's a welcome diversification. Activision will leave the King leadership team in place and let it run independently, a wise decision when things are going well. Perhaps one of the significant benefits of the deal is that Activision is now the clear #2 game company in the world, pulling well ahead of Electronic Arts and second only to China's Tencent -- which owns about 10% of Activision. Activision Blizzard King will be making well more than 50% of its revenue digitally, too, which is important as the digital distribution revolution continues.

Activision, congratulations on a sweet in-game purchase. Hopefully now you can get past that pesky level in Candy Crush Saga that's been giving you so much grief.