What do you do as an undersized player in a fast-changing, brutally competitive market led by a much larger adversary, in this case Electronic Arts in the gaming space? One answer is to do what Vivendi just announced it intends to do after reportedly failing to auction their isolated electronic games business: buy a competitor.
In a complicated deal structure, Vivendi Games will merge into Activision, and Vivendi the parent will end up owning a majority stake in the combined company. The deal makes a new number-one revenues-wise, and better positions the combined entity to compete in the massively-multiplayer games market. (Disclosure: Updata has transacted with Activision in a prior M&A transaction.)
The pending Vivendi-Activision deal illustrates several themes for M&A in 2008:
Incremental Value in Scale: In some circumstances if a public company has an "orphan" division they can’t divest, they can sometimes unlock value by buying. In this case, the buyer’s stock went up (so far) as a result of the implied increased value of the Vivendi Game business.
Cross-Border European M&A: This is an example of inbound European M&A (although, Activision's management, and not Vivendi's, proposed this transaction). The weak dollar is expected to drive more inbound activity and may help offset other potential declines in M&A volume next year (e.g., drop off in private equity deals).
Financial Engineering: This is at least the second major financial engineering tech deal in a few weeks, following announcement of CA’s strategic partnership with HCL Technologies, which essentially calls for HCL to run the research and product development divisions of CA's threat management security business. According to CA's announcement, the combined assets are expected to enable more profitable growth and gains in market share.
Vivendi said more acquisitions are likely to follow in the fragmented games market. It would not be surprising for Electronic Arts to respond with its own acquisition (e.g., Ubisoft's name has come up). Given the Hollywood-like budgets of big game productions and the similar hit-miss nature of both industries it may not be long before Disney, Bertelsmann and Viacom jump in and take out electronic gaming.
