Tencent-Activision: Finally a Good Match 腾讯竞购动视暴雪

By newsdoug on July 10, 2012

Tencent weighs Activision bid Just a week after leading Internet company Tencent (HKEx: 700) announced a strategic tie-up with top US game developer Activision Blizzard (Nasdaq: ATVI), we’re hearing that this pairing could become a true marriage as Activision’s debt-heavy parent looks to sell the company. After several previous M&A attempts by Tencent that didn’t look too smart to me, I can honestly say that this latest pursuit would be one that I like, and I’ll explain my reasons in a moment.

But first let’s look at the actual news, which is still quite preliminary but still intriguing. According to a foreign media report, France’s Vivendi (Paris: VIV), under pressure from shareholders to reduce its big debt burden, has hired an investment bank to test the market for a potential sale of Activision Blizzard, its successful game development arm whose titles include the popular World of Warcraft franchise. (English article)

The report says a number of potential buyers have been approached to gauge their interest, including not only Tencent but also other big names like media giant Time Warner (NYSE: TWX), Microsoft (Nasdaq: MSFT), and several major private equity firms. Word of a potential sale comes just a week after after Tencent, China’s leading online game operator, announced its own long-term strategic tie-up with Activision that included the licensing of an Activision title for the China market, and the promise of future similar cooperation. (previous post)

Cash-rich Tencent has made a wide range of investments over the last few years, but nearly all have been minority stakes and most were in smaller Internet companies in developing markets. It looked at larger purchases by reportedly bidding for faded social networking giants Friendster and MySpace, but both of those companies were ultimately sold to other buyers.

I personally thought that both the Friendster and MySpace deals looked like bad ideas for Tencent, which had little experience operating global assets and even less experience fixing broken companies. Activision, on the other hand, looks much more interesting. For starters, it’s a leader in its field and thus is already quite healthy, meaning it already has strong leadership and focus. Activision and Tencent are also highly complementary, as the former is one of the world’s top video game developers and the latter China’s biggest online game operator.

The 2 biggest obstacles to a potential purchase would be a relatively high price tag, as well as stiff competition from other bidders. Tencent certainly has plenty of cash, but an expected price tag of up to $10 billion for Vivendi’s 60 percent of Activision would be quite expensive, even for Tencent, and would represent the biggest purchase ever by a Chinese Internet firm. Tencent could also face stiff competition from the other bidders, which not only have much more cash, but are also much more experienced at this kind of big M&A.

For those reasons, I wouldn’t expect Tencent to succeed even if it does decide to bid for Activision, and would peg its chances for success at just 20 percent. But I would still strongly support such this deal, which could create China’s first truly global new media entertainment company if it succeeds.

Bottom line: A bid for Activision by Tencent would create China’s first global new media company, though such a bid would stand only a small chance of success.

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