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The Microsoft-Activision deal will ‘raise a lot of questions from regulators,’ analyst says

Global X ETFs Research Analyst Pedro Palandrani joins Yahoo Finance Live to discuss Microsoft's acquisition of Activision Blizzard and how Microsoft is positioning itself for metaverse prospects.

Video transcript

- [? ADAM ?] Microsoft is making a $69 billion push to dive deeper into gaming. The company announced earlier today, it plans to buy Activision Blizzard, the maker of games, including Call of Duty, Warcraft, and Candy Crush, in an all-cash deal. For more, we're welcoming in Pedro Palandrani Research Analyst at Global X ETFs. Pedro, thank you so much for your time this afternoon. What was your initial reaction to this news? And why Microsoft may have chosen Activision for this purchase?

PEDRO PALANDRANI: Yeah, thanks for having me, [INAUDIBLE]. Well, to be completely honest, this wasn't really unexpected. We were expecting one of these large FAANG names to acquire one video game company this year or in the next few years. But we were not expecting Microsoft to make that move. Actually, personally, I was expecting Amazon to enter that space just because Amazon has been a for about eight years in the video games industry and have published two games. And those two games have been unsuccessful.

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But now, you have Microsoft who you have a huge ecosystem around video games. They have the cloud infrastructure with their Azure business that's going to support cloud gaming. They also have a subscription-based video game in the platform, like Game Pass with about 25 million subscribers. So it really made a lot of sense for a company like Microsoft to acquire Activision Blizzard. Combined, the two companies are going to be the third largest video game company in the world by revenue. They're just going to be behind Sony and Tencent in China.

- Hey, Pedro. So how long does it take, if I'm an investor and I like Microsoft, how long should I, one, expect for this to pay off? And then how do I measure if it's paid off?

PEDRO PALANDRANI: Yeah, absolutely, great question. The companies say that they could expect to close this acquisition in fiscal year 2023. So we'll have a few months ahead to see if this acquisition goes through. Right now, the stock is trading at about $83 per share when the acquisition price from Microsoft is about $95 per share. So you can see that spread there, their merger spread, that, well, the market is pretty much telling us that there is some regulatory risk here if the transaction goes through or not.

We would expect the transaction to go through. But of course, it's going to raise a lot of questions from regulators as naturally will happen with any of these large type of acquisitions.

- What do you think this deal is going to mean for Activision's existing work with Sony? Do you think that this is going to mean that gamers are going to have to switch from PlayStation to Microsoft's Xbox to play some of Activision's most popular games?

PEDRO PALANDRANI: Yeah, that's a great question. We wouldn't expect that to happen. For Activision, the Sony ecosystem will continue to be very important, granted that if you look at Microsoft Game Pass, they'll have probably more access to their users to the Activision titles. But Sony and PlayStation will continue to be important channels for Activision Blizzard in the future.

Beyond the consoles and PlayStation and Xbox, in the next few years, we're going to see a merge towards cloud gaming, where a lot of these video game companies are pretty much going to jump on these cloud platforms to distribute their video games. Pretty much like Netflix disrupted the distribution industry for TV shows and movies, that's going to happen within the next few years in the video game industry.

So a lot of things are going to change. But for Activision, this is a win-win. In reality, Activision was going through a lot of employee-related issues. So now, with this acquisition of Microsoft, things are going to turn in a better way.

- Not related to the business side of this. There is kind of a dark cloud hanging over Activision with accusations of sexual harassment that apparently went unchecked for several years. What happens to that? Microsoft when they acquire this firm, they acquire the liability of that, don't they?

PEDRO PALANDRANI: Well, but they also acquired a company at a discount. This is a company that it continues to grow at a healthy growth rate. And it was trading, to be fair, at a discount to the rest of companies in the video games industry. It was trading at a multiple of below 20 P/E ratio, which for a video company is very, very attractive in this market, even though Microsoft paid a premium on that transaction.

But overall, I think, like I said before, this is going to be a win-win for both companies. For Activision, I think they're going to be able to leave behind all of these issues around the workplace environment. And they're going to be able to focus on retaining and attracting talent, one of the challenges that a company has faced over the last 12 months.

- Over the past several years, we've been really focusing on Microsoft's Azure cloud computing performance as being the key growth driver here for this company. But given that this is more of a consumer push, what do you think the signals to investors about how to value and think about the future of various parts of Microsoft's business?

PEDRO PALANDRANI: I think for Microsoft, this was extremely smart. When you look at the video games industry, you're talking about an industry that needs $180 billion. Just for context, it's larger than the Hollywood industry and the professional sports revenue combined. It's a massive, massive industry. So there are a lot of opportunities ahead.

And also, video games are becoming the new social media outlet in our society. You can see our families or friends connecting on these video game platforms and continue to socialize, and even work and collaborate on these platforms. So video games are going beyond the traditional fact that they're entertainment platforms. And now, they're becoming more social.

In fact, if you look at last year's comment from a Rob Kotick, the CEO of Activision Blizzard, he said, that Call of Duty players that play with family and friends has been three times more time playing on the platform, but they also invest three times more money when they play with family and friends compared to other users that do not play with friends. So from a revenue standpoint and from a business standpoint, this is going to be very powerful for Microsoft and Activision Blizzard.

- All right, we'll leave it there for now. Pedro Pelandrini, Global X ETF's Research Analyst, thank you so much for your time and insight.