Acquisition season is still upon us, and it’s not going to let up anytime soon. In January alone, Take-Two bought Zynga for $12.7 billion, Activision Blizzard is selling to Microsoft for $69 billion, and Sony capped off the month with its $3.6 billion Bungie deal. It’s natural to expect the acquisition market to cool off after such a hot start to the year, but conditions will likely keep many companies on the hunt.
One of the biggest factors fueling the acquisition arms race is that many of the big players are succeeding in their current strategies. Sony’s PlayStation and Microsoft’s Xbox are both more profitable than ever. They have made desirable consoles that stores cannot keep in stock, and their games continue to set a new bar in terms of quality. With such strong fundamentals, the companies can afford to fund inorganic growth. This extends beyond Microsoft and Sony. The entire gaming market is still on a high from strong sales throughout the pandemic, and they are looking at ways to maintain that momentum for long-term success.
Many publishers are in this position of wanting to turn a temporary upturn into something that can serve as foundational revenue for the next 10 years. Microsoft bringing in King does this. Sony bringing in live-service darling Destiny also accomplishes this goal. But with so many huge corporations looking to expand their businesses, that creates an urgency to make moves sooner rather than later. Bungie has entertained offers for years now, but Sony pulled the trigger now because it didn’t want to miss its chance.
That urgency is crucial to understanding the market because it doesn’t just affect the buying side of these deals. If you started a studio in the last 20 years, now looks like the best time to cash out. If you do, you can potentially sell at a premium. Bungie is privately owned, but no one was putting that studio at a $3.6 billion evaluation. Even with nearly $2 billion in annual revenue, Zynga’s $12.7 billion price tag is on the high side. But the race to grow through acquisitions is pushing the price up, and it’s likely encouraging more stakeholders in private and public companies to consider the possibility of an exit and a big payday.
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Inflation is turning cash into a liability
A little bit of inflation is a good thing for an economy. It encourages people with money to use it or risk losing a little bit of its value every year. The Federal Reserve defines a normal interest rate at about 2%. The U.S. is coming out of 2021 at an inflation rate of about 7%. This is nothing catastrophic, but it does begin to turn cash into a liability for corporations that are sitting on stockpiles of $100 bills.
To put it simply, a $100 bill that you earned in January 2021 can only buy you about $92ish-worth of goods in January 2022. And inflation isn’t expected to just evaporate overnight. The Fed does claim inflation will drop to about 2.6% by the end of 2022, but until then we could see quarterly rates as high as 4-to-5%.
If you have billions of dollars sitting in a bank, you need to move that cash sooner rather than later. And with low interest rates, there’s no real great place to put that kind of money to outpace inflation. That’s what leads a company like Microsoft to make the bold move of making its biggest acquisition ever in Activision Blizzard.
Inflation makes that money worth less every day. But a major acquisition like Activision Blizzard can turn that money into a new, reliable revenue stream thanks to business like King’s Candy Crush games, World of Warcraft subscriptions, and Call of Duty microtransactions.
From a perspective of inflation and liability, these deals are often paying for themselves. This is true even if a company needs to take on debt to fund an acquisition. If you borrow $4 billion today, high inflation is going to make it easier to pay off that debt in the future.
Any acquisition is possible
The entire market is aligned in such a way to encourage mergers and acquisitions right now. Regulation and antitrust may stand in the way, but companies are only making these moves because gaming is so competitive right now. And that will serve as a key defense for Microsoft and especially for Sony, which is still a bigger gaming business than its Xbox counterpart.
In an environment like this, any acquisition is possible. For companies that want to buy, they need to keep up with the rest of the market and while your dollar is still worth something. For studios and publishers that want to sell, you may never get another chance to sell at such a high price. This is a recipe for once unthinkable acquisitions like the ones we’ve already seen, and it means we should expect more of these to happen before the year is over.
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