Parks Associates Blog

Monday, December 03, 2007

Changing the Gaming World Order

As we head to Germany for our Connections Europe conference, big news broke out in the gaming industry: Vivendi is taking the plunge to acquire a controlling stake of Activision, the No. 2 third-party game publisher in the world. The acquisition price puts Activision's valuation at $10.8 billion ($18.9 billion for the combined company and $8.1 billion for VUG). Based on its FY 2007 revenue, which was $1.5 billion, the acquisition is priced at a 7.5 P/S ratio. However, based on my forecasted FY 2008 sales of $2.3 billion, the forward P/S ratio is approximately 4.7. Compared to EA's 2007 PS ratio of 6, Vivendi is paying a premium for Activision's higher revenue growth potential. Based on the closing price for Activision on Friday, the company's market cap was around $6.5 billion. Vivendi is paying a 60%+ premium.

This is definitely a very interesting acquisition. Vivendi is currently the largest company in the online gaming market. World of Warcraft is pulling in more than $1 billion a year and the subscriber number is still growing, albeit at a slower rate. Its Sierra Online division is also investing in several new online games and business models, including a couple of South Korean imports. There have also been rumors about Vivendi's interest in introducing a mobile or even a console version of the WOW, which the company denies. Activision, on the other hand, is the second largest third-party game publisher and a dominant player in the console gaming market. Its quarterly revenue recently surpassed that of EA's, the first time in company history. The Guitar Hero franchise was extremely successful, the third endorsement selling 1.3 million copies in the first seven days. The Company also owns the popular Tony Hawk and Call of Duty franchises. 77% of its 3rd quarter revenue was from console games. Activision has not been very active in the online space, except for certain downloadable add-ons for games such as Guitar Hero. Activision admits its limited presence in the online space. In its recently quarterly report, it says, "overall, online play functionality is still an emerging area for us. As we move forward, we will monitor this developing functionality and its significance for our products." The combination is very complementary since the two companies are leaders in different spaces and there's very little overlap between their current assets and strengths. Vivendi can help Activision to bring some of its games and franchises online and Activision can help VGU on the console platform. Interested in playing at a Guitar Hero tournament in World of Warcraft, anyone?


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