New Wine, Old Wineskin - Why Activision Shareholders Should Welcome A Break From Vivendi

| About: Activision Blizzard, (ATVI)

On June 7, 2012, Vivendi (EPA:VIV) representatives announced that the company would be meeting on June 22, 2012, to discuss the future of that company's stake in Activision (NASDAQ:ATVI). According to reports, multiple options are still on the table and range from an outright sale of Vivendi's 60 percent interest in Activision, to a restructuring of the company that could group Vivendi's media businesses separately from its telecommunications/content distribution businesses.

In the event Vivendi executes a sale of its majority stake in Activision, this article explores why Activision shareholders should follow the lead of Activision insiders and continue to hold their positions in the company.

Sins Of The Father Visited Upon The Son:

Vivendi's current corporate strategy makes about as much sense as the Maginot Line. Like the ill conceived amalgamation of defense structures established to defend France from German invasion after World War I (but which miserably failed), Vivendi's existing management team and corporate structure is ill suited to today's fast paced business world. To their credit, Vivendi's manager's have recognized this, which is why Activision could be potentially sold.

Historically, poor decisions made by Vivendi's managers and bad news associated with Vivendi has significantly hurt Activision share prices. Take for example the Vivendi decision to sell 35 million shares of ATVI stock on November 15, 2011 for $12.20 a piece. ATVI stock had been trading in the $13.00 - $12.80 range prior to that sale. Afterwards, individual ATVI investors saw their investment drop by approximately 5 percent because of Vivendi's need for a cash infusion.

Then on March 1, 2012, Vivendi reported that it was reducing its outlook for 2013 and Vivendi's stock price plummeted by over 9 percent. Prior to the news, Activision had been trading at around $12.00 - $11.90. As Vivendi's stock price dropped, so did ATVI's, which fell approximately 2 percent to $11.68 on the same day.

On June 7, 2012, Vivendi reported that it was potentially considering divesting itself of its controlling stake in Activision. After the announcement Vivendi stock climbed about 2 percent while Activision fell by about the same amount.

Activision investors can only speculate as to where the stock's current price might be if it had not been punished for events and decisions which were completely unrelated to the core aspects of video game producer's business. Markets penalized Activision stock because of the uncertainty that problems associated with the Vivendi parent company could create. While there is no question that if Vivendi sold off its stake in Activision there would likely be a drop in the stock price short term, investors should actually welcome such an event because it could potentially eliminate a great deal of uncertainty that will always exist as long as the two companies are tied together. Additionally, it would also free Activision from control of Vivendi, which is a company that I consider to be the equivalent of the Maginot Line in the corporate world.

Old Constructs No Longer Apply:

On June 14, 2012, NPD group released its monthly video game report which showed that the video game industry was down by 28 percent for the month. It is important to note that this report had caveats with the disclosure, which indicated that the sales numbers being reported only included physical sales. This caveat is very important because while physical sales are down, Diablo III (the top video game for the month) was also available for digital download directly via ATVI's own website. While the general public does not have access to the current sales figures for Diablo III, we do know that 4 million users tried to access Diablo III servers on the release day (only 2 million had been previously expected) and sales within the first week of release totaled approximately 6.3 million.

We also know that there is a massive disparity between physical sales and digital sales. The number of sales reported by Video Game chartz for Diablo III during the first week was only 803,556. Video Game chartz currently shows that sales of Diablo III stand at 1.09 million units. Assuming that the ratio of physical sales to digital distribution remained constant between the date of first release to today, then the 1.09 million physical units sold would equate to over 8 million copies of the game sold in a little over a month after its release.

While it's unclear exactly how many copies have sold to date, the Q2 earnings report will include revenue from pre-booked copies of the game that were pre-sold to gamers who wanted to reserve their copies, in addition to revenue from those copies sold after the game was released. Investors who fear a drop in the stock price in the short term because of a Vivendi sell off can take solace in knowing that the results of Diablo III should help bring Activision's stock price where it should be.


There is no need for me to repeat all the reasons why Activision investors should continue to hold their positions in the company, even if Vivendi does divest itself of its stake in the video game producer.

Other Seeking Alpha articles have already provided excellent in-depth analysis of the potential that Diablo III's real money auction house could have on Activision's future bottom line, they have already pointed out Activision's strong future product pipeline, and have already shown that the company has strong fundamentals in addition to its potential to offer excellent value to shareholders. There is no need for me to rehash those same arguments here.

But savvy investors will also note that Activision faces headwinds both at the global economic level, in addition to those that are facing Diablo III since its release. The European and global economic crisis will without a doubt have a negative impact on Activision's share price. The disaster that occurred on Diablo III launch day and error 37 "sent the internet into a meme making tizzy." Activision's move to clamp down on digital pirated copies of the game by forcing digital purchasers to wait until they have been authenticated has come with heavy criticism and has potentially damaged the gaming experience for those gamers who purchased Diablo III digitally. And to top it off, the real money auction house has cyber thieves committing digital burglary.

While the concerns outlined above are enough to give investors pause, they should take note of the fact that no Activision insider has sold any stock since March 15, 2012 - which was coincidentally the same day that the company announced that it would be releasing Diablo III on May 15, 2012. Those familiar with the video game industry may remember the various problems that World of Warcraft encountered after its release, and if the Diablo III franchise proves to be even remotely as successful as Activision's WoW franchise, the problems associated with Activision's newest release may be problems that investors will welcome.

Disclosure: I am long ATVI.

Additional disclosure: I do not currently have a position in VIV, but may initiate a short position in the company in the next 72 hours.