Blizzard parent to acquire Activision, build new gaming empire

In a transaction that can best be described with the word "WOW," the remaining portion of the Vivendi media empire left over from the sale of Universal to NBC will acquire a 68% stake in Activision, the world's first independent game console software company.

The deal will create what Activision CEO Robert Kotick -- presumably the leader of the new venture -- calls the "largest pure-play interactive entertainment publisher in the world." That publisher, which may either rival Electronic Arts or surpass it in market capital, depending on the final numbers, will own and manage what may very well be the jewel in the crown for all game publishing: World of Warcraft, which is currently being produced by the Blizzard Entertainment division of Vivendi.

The new company will be known as Activision Blizzard, which is symbolic of the fact that the Blizzard part of the organization will be given greater operational as well as creative control of the new venture. Executives on this morning's conference call to analysts pointed out that Blizzard's existing contribution to Vivendi had never truly been evaluated or even appreciated, and now it may have more significance.

It's a complex deal, and not your usual big-fish-swallowing-little-fish merger. Over the next month, Vivendi will be handing over its Vivendi Games division in a deal which converts those shares to Activision shares. Vivendi thus becomes a 52% owner in that new, temporary venture.

Then as the majority owner, it will leverage that position to acquire more shares of Activision that are currently outstanding. By the end of the month, Vivendi would become a 68% owner of Activision Blizzard -- a position which may require approval from both US and European federal regulators.

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12:00 pm EST December 3, 2007 - The parent company of the group that publishes World of Warcraft is believed to be France's first privately owned corporation, founded in 1852 quite literally to take over the municipal water authorities of France's various provinces. For about five years beginning in 2000, it was one of the world's largest media companies, having acquired Universal by way of having acquired a stake in Canadian beverage giant Seagram, its one-time owner.

It is such a different world in 2007, and today's merger makes an extraordinary statement about the state of the entertainment industry at large. Vivendi sold Universal to NBC in 2005 because, its chairman and CEO acknowledged this morning, it couldn't effectively manage a California-based entertainment business with such high overhead. But today, it's acquired a California-based entertainment business it feels it can manage, with less overhead and with more profitability.

"When we decided in '03 to sell our Hollywood-based businesses," Vivendi CEO Jean-Bernard Lévy told a Deutsche Bank analyst this morning, "they were comprised of Universal Studios and of two cable networks, USA and Sci-Fi, and we saw that managing these assets were putting us in front of two difficulties: On the film side, I would say a lot of volatility in the movie industry, and also the very high level of investments required for just a single movie, up to $250 million between production and promotion -- quite a high number just for a single project. And on the TV side, I would say [we thought USA and Sci-Fi] were being run successfully, but we thought we could not really optimize their revenues because they were a stand-alone entity, far away from larger media groups.

"So I believe we made the right decision," Lévy continued, "and I believe when we look at the contribution today, both Universal Studios and our cable networks, to NBCU's profits, I believe [it] really speaks for itself."
If you're keeping score at home, that was not a compliment.

Modern entertainment empires are built on the foundation of franchises; and today's merger agreement represents a precedent-setting vote of confidence for World of Warcraft. While on paper Vivendi already owned WOW and will continue to do so, the fact is that Blizzard operated under a kind of protective shell that even its own executives today exclaimed relief at now being able to effectively dispose of.

Now Blizzard's people not only find themselves in a position of control over their own destiny, they find themselves backed by a foundation made up not of the 19th century French irrigation system, but instead of Activision -- the world's first independent game console publishing company, and in many ways, the founder of the American software industry as we know it today. Backing that up somewhat will be Sierra Entertainment, one of the all-time classic PC software publishing titles, which will now be part of the Activision mix.

"I think this is an opportunity to unlock the value that is hidden inside Blizzard," stated the Blizzard division's current and future president and CEO, Mike Morhaime, this morning. "Inside Vivendi Games -- which was a small part of Vivendi -- I don't feel like the shareholders were giving proper credit to the business that we had built, partly because we were such a small part of the business, partly because up until now, the Blizzard numbers were never broken out on a stand-alone basis."

Without the clout to be able to make a stand on its own terms, there was a good chance, Morhaime indicated, that Blizzard could lose not only credibility but its own talent pool.

"So this presents us the opportunity, gives us a currency to attract and retain talent, which is very important in our business," he continued. "We have some of the most talented development teams in the industry; we're a growing business, attracting and retaining that talent is necessary for us to continue to stay competitive."

One of the world's bright spots for video game sales for both consoles and PCs is South Korea; and there, Activision is perceived as a market leader. Vivendi CEO Lévy told analysts today clinching Activision was one way to give it an immediate presence in that emerging market; and both Activision CEO Robert Kotick (who will retain his role in the new company) and Blizzard's Morhaime added he sees the deal as helping WOW establish a much broader Asian foothold.

There's a chance that a good part of this plan may not go off as anticipated, even if US and European regulators are copacetic: Eventually, Vivendi would like to own 68% of the new venture. But that assumes the funding is in place after the initial transaction, which will give Vivendi a 52% stake.

"We hope we'll get to 68%, but maybe we won't," Lévy admitted, "and we'd be happy with 52%, and maybe we will consider buying more shares on the market or the company buying back its own shares, we will [review] that when it's the right time and we will discuss that with the Board [of Directors] in the best interests of Activision Blizzard, all directors having to exercise their fiduciary obligations, of course, as per the regulations. In the future, I have committed that the company will remain publicly traded, as I think it is good for everybody. I think it's good for the shareholders of both companies, and I think it's good for the strategy and human operations of Activision Blizzard."

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