Activision (ATVI) is merging with Blizzard (the gaming division of Vivendi (OTCPK:VIVEF)), and investors in ATVI are enjoying a nice pop today. The new company will have an interesting lineup of games (or should I say cultural phenomena?) including Guitar Hero and World of Warcraft. The deal's details are interesting (you can read about it at Forbes.com, for example).
From a trading perspective, the Vivendi-Activision deal has provided a nice pop to video game stocks--not only Activision (ATVI)--also other potential takeover targets like THQ (THQI) and Take Two (TTWO). The question now is, should investors take the ATVI money and run, or hold on for the future?
I'm not an expert in financial valuations but I do know a bit about games, and the games will ultimately decide winners and losers in the video game arena. Activision Blizzard will have two of the hottest games in the industry with Guitar Hero and World of Warcraft (WoW). These are, arguably, more than games--they are cultural phenoms. I've heard of Guitar Hero being played in karaoke bars and by pro athletes (hello, Joel Zumaya). I also have a synergistic feeling that we'll be seeing more of Vivendi's Universal Music Group songs on the game. Interesting. As for WoW, it's only played by around 9 million people, according to Wikipedia.
Let's not forget other hits that will be under the ATVI umbrella: Activision's Call of Duty is a huge holiday seller this year, and Blilzzard's Starcraft is the third-best selling computer game in history played by professional video gamers on South Korean television. Yes, on television!
With these games and a heavy footprint in Asia's online market, the future does look promising. So what are the concerns? First, mergers are never without operational growing pains--especially transatlantic ones (Blizzard is part of French behemoth Vivendi). Second, a bigger company sometimes faces creative conflicts in the video game business, because game developers are a notoriously independent and unorthodox bunch. Electronic Arts has had troubles maintaining a fertile vibe because of its sprawl and size. Finally, from the macro-economic department, the consumer is looking a bit tired.
Taking profits is never a bad idea on a big jump, but I plan on holding a good portion of my position in ATVI at least through the current video game cycle. As I've written before, ATVI more than doubled from October 2000-October 2002 while the previous cycle got rolling. Over that same time, the Nasdaq was down more than 50%. What this tells me is that a growing video game cycle can overcome even the worst market.
Even more interesting to me than the deal itself is the possibility of other deals involving video game publishers. This is pure speculation, mind you, but if a successful company like Activision made this deal, other deals are certainly possible.
- Take Two Interactive (TTWO): There have been plenty of Take Two takeover rumors, but no reality so far. Another company would love to have Grand Theft Auto and Bioshock in the holster. Perhaps Microsoft (MSFT) would like to get edgy or Electronic Arts (ERTS) would like to get rid of their sports competition? Another possibility, of course, would be to take Take Two private...
- THQ (THQI): THQ has been struggling this year. Their success has traditionally come through games for kids, most notably through licenses from Pixar for games based on Finding Nemo, Cars, and so on. Are you thinking what I'm thinking? Disney (DIS) has a video game division, and Disney bought Pixar...wouldn't the House of Mouse also like the games?
- Ubisoft: Electronic Arts already owns a stake in Ubisoft. Why am I skeptical that they want more?
- Electronic Arts (ERTS): EA has become so big that it's hard for me to see someone taking them over. Mr. Softy has the cash, but would he use it on EA?
Again, this is speculation. From a trading perspective, the Activision deal will create a lot of buzz and other publishers' share prices could rise on musings no more legitimate than I just spelled out.
Whatever happens, I like the sector even if the US economy slows or the general market tanks. As I wrote in my previous blog post, the last video game cycle first got rolling while the Nasdaq was reeling, and the stocks of video game publishers inflated while the tech bubble deflated. We're still in the first half of this cycle, so although I'll likely take some profits on the ATVI jump, I plan on staying in the game until the next cycle is in sight. When will that be? I'll be watching for the official announcement of the development of the Xbox 720 (or whatever it will be called)...
Disclosure: Author is long ATVI and TTWO.