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Activision Blizzard to seize mobile gaming crown?

US video game publisher Activision Blizzard Inc. has announced a deal to buy mobile game producer King Digital Entertainment Plc (creator of Candy Crush Saga) in a deal worth a reported $5.9bn, over $1bn less than King Digital’s valuation at its 2014 IPO. Activision Blizzard, publisher of global franchises such Call of Duty and World of Warcraft, will pay $18.00 for each of King Digital’s outstanding shares – a 20% premium on the closing share price on 30th October 2015, but still a knockdown price on King Digital’s $22.50 IPO price from just 18 months ago.

The deal signifies Activision Blizzard’s ambitions to move into the mobile games market where growth continues to outstrip the PC and console game markets. Activision Blizzard stated that the combined companies will have an audience of over 500 million monthly active users – a huge number by any measure, however one of the main challenges Activision Blizzard will face is to keep mobile gamers engaged with new titles and follow-ups to the hugely successful Candy Crush Saga.

Mobile gamers are notoriously fickle and there are numerous well-documented cases of ‘one-hit-wonders’ in the mobile games industry where developers have been acquired for huge sums only for their prize games to nosedive almost overnight. Indeed when King Digital launched its IPO in March 2014, the company was already facing accusations that it was over-reliant on its flagship mobile game Candy Crush Saga. At the time the title was responsible for almost 80% of King Digital’s revenues, and the company was keen to stress that it had new games in the pipeline to reduce its reliance on Candy Crush.

Whilst King Digital has been partially successful in diversifying its revenue stream – Q2 2015 results reported that 61% of revenue was now from non-candy crush games – this can be attributed to a drop in revenues from Candy Crush rather than significant growth in other areas. Revenues for Q2 2015 were down almost 16% YoY, a worrying trend for the company. King Digital has been more successful at generating consistent revenues than some of its contemporaries – notably Zynga which was valued at $7bn in its 2011 IPO but has since plummeted to a market cap of $2.3bn, but any decrease in growth is likely to cause concern for investors.

The recent history of mobile gaming flops means that any slowdown in King Digital’s revenues was always going to be heavily scrutinised, and analysts are delivering mixed verdicts on Activision Blizzard’s acquisition. Opinions ranging from “an absolute steal” to “a daunting task” indicate that even analysts are split on whether or not the deal will be beneficial in the long-term.

Activision Blizzard will be hoping that its experience of operating long-running AAA franchises in the console and PC markets will provide it with the nous to sustain King Digital’s success with Candy Crush and keep mobile players engaged. Activision Blizzard is the publisher of the Call of Duty franchise (CoD) – one of the most successful video game franchises of all time, and the longevity of the CoD franchise should provide some comfort to investors as to Activision Blizzard’s ability to extract long term returns from its assets.

If Activision Blizzard can successfully integrate the mobile business into its current offering then this acquisition has the potential to consolidate Activision Blizzard’s position as one of the largest games publishers in the world, with significant presence across the mobile and PC/console markets. However if interest in Candy Crush Saga and King Digital’s other flagship games begins to wane then Activision Blizzard will be under huge pressure to plug these revenue gaps or face the wrath of investors.

For further information on Activision Blizzard or King Digital check out MarketLine’s case studies below:

Activision Blizzard: Blockbuster success on console and PC

King Digital Entertainment plc: Sweet success of Candy Crush but doubts remain

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