CALL OF DUTY meets Candy Crush!

How long before you can judge the company you have acquired? That will be the question going into 2016 for Activision Blizzard CEO Bobby Kotick who has bought King Digital Entertainment for ……hold on I think I have my sources wrong….HOW MUCH?? $5.9billion, are you mad! Considering that Candy Crush has been on the decline for the last few quarters and that mobile phone games have one of the shortest lifespans in the world, was it worth it? Arguably to a certain extent I can agree because the app rakes in $1 million a day in micro transactions, which although has gone sown slightly, still is huge cash inflows. Activisions current business model is based around hit based games such as the COD titles and World of Warcraft selections, which although are huge profit makers, do not bring in a steady inflow. This is where King can help. Activision need to be balanced around regular steady streams of income, which is why Blizzard bought King and the deal is expected to increase Activision Blizzard expected revenue in 2016 by 30%. A huge motive behind this venture would be society’s addiction to mobile phones, which has progressed immensely over the years. Furthermore, with Blizzard controlling already a huge part of the console market, it makes sense to invest into the app industry in order to diversify the business and sustain its competitive advantage.

Having played Candy Crush, though addictive for the first week or so, I can’t see how the valuation is at $6 billion. Part of me wants to believe this is due to CEO overconfidence from both companied and maybe even complete arrogance in taking over something just because the funds are there to do so. With a transaction this big, I’d expect thorough due diligence to have been taken when completing this overall valuation figure. Firstly, if the market were efficient, it would be safe to say that the market valuation represents a true intrinsic value of the firm. In determining whether the investment is likely to return a profit, it is worth also noting that King produced cash flows of $600 million in cash last year. Considering the value of the company is said to be higher than its cash flows, its definite good news for the gaming brand.

Despite the valuation, I would have said that the company itself has been over evaluated big time, with the biggest contributor to this being management resistance to sell for less.