Why would Microsoft pay $68.7 billion for video-game giant Activision Blizzard?
Hope Cochran, managing director at venture capital firm Madrona Venture Group in Seattle, is in a unique position to consider that question. For one, a big focus of her investing is gaming companies. She led Madrona’s investment in Seattle-based Rec Room, for example, and is a member of the VR gaming company’s board.
But she also has direct insights into one component of the deal from a past role: Cochran was previously the chief financial officer of King Digital, the maker of Candy Crush and other mobile games. She led King through its initial public offering in 2014, and its $5.9 billion acquisition in early 2016 by none other than Activision Blizzard.
“Gaming has really become integral to all aspects of our lives,” Cochran says on the GeekWire Podcast. “There’s a tremendous treasure trove of assets in Activision that really can make Microsoft a juggernaut in the gaming industry.”
Microsoft has an established position in console gaming with Xbox, in PC gaming with Windows, and in subscription gaming with its Game Pass service, in addition to its own game development studios. But mobile platforms have always been a weak spot for the company, and gaming is no exception.
Phil Spencer, the newly named CEO of Microsoft Gaming, made it clear this week that King was one of the most compelling parts of the deal for that reason.
“Mobile is the biggest category of gaming,” Spencer said in a call with investors. “And it’s an area where we’ve not had a major presence before. This transaction adds one of the most successful mobile publishers to Microsoft Gaming, and I’m personally looking forward to learning from the innovative teams at King.”
Other potential benefits include strengthening Microsoft’s position in the future metaverse. Cochran makes the point that gaming, the metaverse and media are blending together. By strengthening its gaming business through the Activision deal, Microsoft can give itself a competitive moat from traditional media companies.
Activision also brings a trove of creative and business talent, she said, pointing out that the gaming industry is one of the first adopters of new technologies and business models. “So you get a lot of interesting strategic ideas and thoughts and that employee base, because they’re really trying out new things,” she said.
The biggest risk? In the short term, it’s the likelihood of a lengthy regulatory review. Activision Blizzard CEO Bobby Kotick estimated that the acquisition could be completed by June of 2023, pending regulatory approval. Having lived in this kind of limbo, Cochran said this “feels like a really long time.”
The acquisition of King by Activision Blizzard was much smaller, but for purposes of comparison, it took less than four months from announcement to completion.
“It’s always tricky to run a company when you’re in that period,” Cochran said. “You’ve agreed to a merger, you’re now trying to keep your company independent, and still pursuing a strategy and a plan, and you just want to keep your employees focused. So it’s just a tricky time.”
There are also the well-documented incidents of misconduct at Activision Blizzard, and questions about the culture created by Kotick as the company’s leaders. Cochran spoke to the larger issues facing the gaming industry as a whole in its treatment and portrayal of women.
“I’ve been encouraged to see the boldness at Activision, for those individuals to speak up and make a statement, because I do think it’s something that needs to change,” she said.
One interesting aspect of the deal is the decline in Activision’s stock in the year leading up to the Microsoft announcement, dropping more than 30 percent amid the controversy. That created room for Microsoft to make a deal at a 45% premium to Activision Blizzard’s Jan. 14 share price.
The acquisition price translates into 7-8X revenue, a significant multiple, but it’s important to remember that Activision Blizzard is “a very profitable business,” Cochran said. Through the first nine months of 2021 for example, Activision Blizzard posted more than $2.2 billion in profits on $6.6 billion in revenue.
“It spits off cash. I loved being the CFO of King for the fact that a lot of my conversations were about what to do with all this cash. It’s a wonderful conversation to have as a CFO,” Cochran said. “So when you look at the price that way, a multiple of 7-8X revenue, and a company that is generating quite a bit of bottom-line profit and cash, I think it makes sense.”
After discussing Activision Blizzard deal, we talk about other aspects of Cochran’s career, including her past role as the chief financial officer of Clearwire leading up to its $15 billion acquisition by Sprint; and her current role at Madrona investing in gaming and fintech companies.
We also discuss her leadership role in the Onboarding Women group created by Madrona and several other Seattle-area businesses to increase the percentage of women on public company boards. Cochran herself is on the boards of public companies Hasbro MongoDB and NewRelic.
Cochran majored in economics and music at Stanford, and she gave a fun answer when asked to name the song that best represents her as an investor.
Listen above, or subscribe to the GeekWire Podcast wherever you listen.
More: Hope Cochran on The Room podcast and Madrona’s Founded and Funded podcast.
Audio editing and production by Curt Milton. Theme music by Daniel L.K. Caldwell.
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