Tencent’s Activision Buy: Any Synergies Ahead?

Tencent buys into Activision Blizzard

I should have a bit more confidence in my predictions, following word that leading Internet firm Tencent (HKEx: 700) has become a major shareholder in top global electronic game designer Activision Blizzard (Nasdaq: ATVI) as part of a deal to buy out the company from its parent. I had predicted last year that Tencent could buy Activision outright, after France’s Vivendi (Paris: VIV) put the US gaming company up for sale to raise cash and divest non-core assets. But then when more than a year passed without any word of a deal, I concluded that Tencent was either unable to raise the financing for a transaction, or perhaps had lost interest.

This new deal is hardly an outright acquisition, and instead has Tencent buying about 6 percent of Activision’s shares, according to a Chinese media report. (Chinese article) Based on data given out as part of the company announcement, Tencent would be paying about $1.4 billion for that stake, becoming its largest ever acquisition as China’s top Internet companies embark on a recent buying binge.

While leading e-commerce and search firms Alibaba and Baidu (Nasdaq: BIDU) have made recent similar purchases in the $600 million to $1.2 billion range, Tencent’s acquisition would become the first major acquisition of a stake in a foreign company by a Chinese Internet firm. But the 6 percent stake would also be a relatively small one, which leads me to my next question, namely whether Tencent will get any strategic value from the purchase.

Before we tackle that question, let’s have a closer look at the actual deal that has Vivendi selling its controlling stake in Activision Blizzard for a combined $8.2 billion. (company announcement) The deal saw Tencent team up with a group of other investors, mostly private equity, to purchase about 25 percent of Activision’s shares for $5.8 billion. A group led by Activision management purchased another 10 percent of the company’s shares for $2.3 billion. Vivendia will retain about 12 percent of Activision’s shares, while the majority of the company’s stock will be publicly traded.

The deal will create a company with many major shareholders, each with their own agendas. But most of those are pure investors with little or no interest in the core business of Activision, the world’s biggest online game developer whose titles include the popular “World Of Warcraft” franchise. The only major strategic stakeholders with an interest in the gaming business will be Tencent and the Activision management group, which includes founder Bobby Kotick.

Against all that backdrop, let’s return to the question of future implications for a Tencent-Activision partnership. The 2 companies actually announced a major strategic tie-up last year, which was part of the reason for my earlier prediction of an equity tie-up to follow. (previous post) But since that time there’s been little or no news on developments in the partnership. What’s more, both companies have recently announced new tie-ups with each others’ rivals, including a new deal between Tencent and US game publisher Electronic Arts (Nasdaq: EA) and a separate deal between Activision and Chinese online game giant NetEase (Nasdaq: NTES). (previous post)

Of course Kotick won’t be able to ignore a new stakeholder that owns 6 percent of his company, and thus we may see a few new game licensing deals between Activision and Tencent in the next couple of years. But I doubt this alliance will produce much meaningful results for Tencent, which has a strong record for operating online games but has been much less effective with its global M&A strategy. Accordingly, I wouldn’t look for much synergies in this new partnership in the years ahead, and wouldn’t be surprised if Tencent ultimately ends up selling its Activision stake in the next 5 years.

Bottom line: Tencent’s new equity tie-up with Activision is unlikely to yield any major synergies, and it could end up selling the stake in the next 5 years.

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