Why Microsoft’s $2T+ market cap makes its $68B Activision buy a cheap bet

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Even though consumer gaming is a minor portion of Microsoft’s entire business, the company’s announcement yesterday of a $69 billion all-cash bid to acquire Activision Blizzard demonstrates that the technology behemoth takes the industry very seriously.

We may easily conclude that Microsoft should have put the money into other, perhaps more profitable companies in its portfolio instead of into this one. The good news is that, with a market capitalization of slightly more than $2 trillion (a figure that is difficult to comprehend), Microsoft has the resources to invest in the most rational elements of its company.

Even if Microsoft’s $70 billion wager does not pay off, the company will emerge from the experience relatively undamaged. When a corporation has that type of financial muscle, it has a plethora of alternatives, even if it means making one of the most significant purchases in the history of technology.

Let’s not forget that this transaction follows Microsoft’s acquisition of speech-to-text business Nuance for $20 billion in the spring of this year. Given the magnitude and scale of the Activision Blizzard agreement, it is reasonable to wonder whether authorities in the United Kingdom will wind up taking a careful look at what might be regarded as a land grab in the video game industry.

With that in mind, we’re looking into the financial viability of this deal to see if Microsoft would have been better off putting those resources into the enterprise/business side of the house or if the company’s resources are so vast that it doesn’t have to consider the sorts of tradeoffs that most companies must make when it comes to an M&A of this scale.

Also Read for More Info:   Microsoft to buy video game maker Activision Blizzard for $68.7B

Examining the portfolio is a must.

We can still see the breakdown of how Microsoft generates the bulk of its money from its most recent report, which was released on October 26, 2021, even though the company’s earnings report will be released the following week. Microsoft’s earnings digest revealed that the Redmond, Washington-based software giant generated more than $45 billion in revenue. Its Intelligent Cloud division accounted for $17 billion of the total, and its Productivity and Business Processes group accounted for another $15 billion of the total.

More than $13 billion in revenue was generated on the consumer side of the business. However, gaming was just a tiny part of that division’s total revenue, including some Windows and Surface revenues and searched and advertising revenues.

Despite the disparity in scale between the company’s entertainment work and its enterprise income, Microsoft CEO Satya Nadella singled out gaming in the company’s earnings report call with analysts, praising its growth: “Despite the disparity in scale between the company’s entertainment work and its enterprise income,” Nadella said.

In the gambling industry, revenue climbed by 16 percent in constant currency terms and 14 percent in standard currency terms, exceeding forecasts. Microsoft’s Xbox hardware revenue increased by 166 percent in constant currency and 162 percent in continual volume due to a higher than the projected supply of consoles and ongoing strong demand. When compared against a robust prior-year comparison, Xbox content and services income climbed 2 percent in constant currency and remained largely stable in constant currency. Gross margin dollars grew by 10% in constant currency, while gross margin dollars rose 8%. The percentage of gross margin declined by around one point year over year, mainly due to a change in the sales mix to gaming devices.

Also Read for More Info:   Microsoft to buy video game maker Activision Blizzard for $68.7B

The corporation believes that gaming will be a significant growth driver in the future. What role does this play in the recent announcement of a deal? Not only does the agreement provide the firm with accretive gaming revenues, but according to Constellation Research analyst Holger Mueller, the transaction also provides the company with an opportunity to develop associated incomes via Windows and Azure cloud services.

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