What are the key brands for Activision Blizzard going forward – and will you be concentrating more on picking up licences or launching your own new IP?
As a result of this combination we probably now have by far the strongest intellectual property portfolio in the entire industry. Look at games like Guitar Hero – which last year sold more than any video game in the history of the industry – or Call Of Duty, which last year was the number one game in units. World Of Warcraft has 11 million subscribers and is by far the market-leader in subscription-based online games.
We feel we clearly have a great portfolio, which we will be focused on growing every year. Our pipeline is equally strong. Blizzard had their own conference recently and showed off StarCraft 2 and Diablo 3 – which in its previous iteration sold about 18 million units. We have our own very strong pipeline, with James Bond coming up, our entry into the racing genre scheduled for next year and franchises that include some great licences like the Dreamworks titles, Spiderman and X-Men.
Our focus will remain on growing the core franchises that we have, but at the same time, we're always on the lookout to add new franchises to our portfolio. We have a couple of new intellectual properties in our own development pipeline, but we will certainly continue to compete for any triple-A licensed properties that are available.
Is Vivendi still looking to increase its stakehold, and does this effectively mean the deal is less of a ‘merger' and more an acquisition of Activision by the Vivendi Group?
As of today, Vivendi owns 52 per cent of Activision shares. So, as of today, they are a majority shareholder of Activison Blizzard. As part of the merger remit, we have put in place a tender offer, which will launch within five days of this deal closing. The tender offer will last for 20 business days. During that period of time, shareholders who want to sell up can do so at a price of $27.50.
Obviously, this will be a quick way to lose five bucks because we're trading at about $32 [at the time of writing], so we're currently not anticipating that a lot of people will give up their shares. Therefore, it's currently unlikely. If circumstances change, you never know, but we'll have to wait until the tender offer is over.
Would you expect the tender offer to rise to match the current share price in future?
That's not currently contemplated. Of course if the tender offer has not expired, we will end up with about $3 billion in cash and, as we've done in the past, we will review our capital structure, we will decide how much powder we should be keeping dry in order to invest it in the business – whether that's organically or in acquisition opportunities.
We then have to sit down with the Board and decide what to do with any excess cash. If we don't think we can invest it profitability and in a way that creates shared value, we'll be returning it to shareholders.
I'm sure Activision Blizzard has had one merger or acquisition enough for now, but looking forward, have you got your eye on any studios – and could you even be pushed to buy out a fellow publisher?
Our acquisition strategy is not going to change as a result of the merger. We have been very disciplined in the past and we haven't been a really prolific acquirer because we had very tough criteria for assets that we would like to add to our portfolio.
We look for proven IP, proven developers with a strong track record, assets that have global appeal and we need to get those on terms that create value for our shareholders. That's a tall order, and we'll keep that in place – it has fared well for our shareholders over the last five to 10 years. Some of our competitors arguably have not been quite as a disciplined, and not fared quite as well as a result. We've seen both sides of the strategy – and we like ours a lot better.
You made no secret of the fact that your acquisition of Bizarre Creations could plug a gap in your portfolio when it came to racing titles. Would you say anything's lacking from your portfolio now?
Racing was the largest segment that we were not competing in, outside of sports. It was a $1.5bn market we were missing out on for many years, but we knew we didn't have the development capability to put out a top game and there were not many external options around. We knew Bizarre was the only way with which we could take on Need For Speed.
It took us a while, and fortunately the Bizarre team thought joining us was a great opportunity for them too. We're looking for opportunities in the rest of our portfolio – and, of course, sports is the largest segment we're not really competing in.
However, sports is a business where if you do not have the top licences, it's difficult to make financial sense competing there – Take 2 has proven that for many years. If the top licences came available and we could get them at the right terms, there's no reason for us not to participate.
Earlier in the year, Bobby Kotick said he was slightly concerned over the EA/Take Two acquisition – mainly because of the sports monopoly the company would have. Do you share his worries?
Whether a merger between EA and Take Two goes through or not, our strategy is to compete with proven IP. It wouldn't be a good proposition for us to enter the football genre, for instance, without the NFL licence. The more dominant the player, the less competition – and generally that's not a good thing for consumers.
Considering Activision Blizzard's size, can you fight EA for licences?
We can certainly compete, but we're never going to pay over the odds for them. We are not on an ego trip with regards to size. Our objective with this merger was not to have the most revenue – our objective was to be the most profitable. We want to be the publisher with the highest operating income margins and the highest return on investor capital.
There's a very strong focus on the bottom line – that's why we haven't spent hundreds of millions of dollars on unproven business models – and that's not going to change.
Are EA's ambitions with Take Two a factor in your thinking – and if they were to acquire them, would it alter your strategy at all?
I don't think it would alter our strategy. Even if they acquire Take Two, we still believe we have the strongest IP portfolio in the industry; we still have, by far, the highest return on investor capital and the highest growth prospects. I don't think Take Two changes that picture. In terms of IP, we have a very successful portfolio in North American and European markets.
We have strategies in place that are working, whilst our competitors are going through a lot of changes. From my perspective, any merger would be a welcome distraction for them.
How much autonomy is Blizzard going to retain – and is there scope to use Activison and Vivendi's licences within that division?
Blizzard has established the most successful business in all of video games. It's not like we need to go there and fix something. Blizzard will continue to operate as they have done in the past – fairly independently.
They have a top notch management and development team and we have a very high degree of confidence that they know how to run the business and a track record to prove it. In addition, they have an extraordinarily strong product pipeline, with Starcraft, Wrath of the Litch King and Diablo 3.
It's tremendous, and it would be a big mistake for us to distract them with new ideas. But there are some opportunities we will be exploring, especially relating to their expertise in Asia. If you consider that Guitar Hero is not in Asia yet and that the only way to create a business there is figuring out ways to work in internet cafes, etc., we hope to benefit from their expertise.
What's going to be the main effect of the merger on your studio network?
It's not about the size, but the quality of the developers. If you look at Vivendi Games, Blizzard is top notch, and within their business, there's some very good development talent there that can complement what we already have. We'll be going through a portfolio review process and the idea is to come out with a stronger team than each company had on a standalone basis.
What about the publishing teams? The Sierra label isn't perhaps in the same league as Activision and Blizzard at the moment. What are its future prospects?
We are currently finalising our operational reviews, then we have to sit down with the Board and review the portfolio changes we recommend. With our own portfolio, we're providing a ‘screen for success' criteria that we hold against our own studios and our own intellectual properties. This will be no different in any other parts of our businesses.
I anticipate that there will be franchises, brands, games, projects and studios that will meet those criteria and there will probably be a few that won't. That shouldn't be surprising – it's good business practice. We'll come out stronger.
Will we still be seeing the Sierra label on the front of boxes this time next year...?
We've not made any decisions on that.
Is there a message you want to send the European staff of Activision and Vivendi about their future prospects? Are you planning to reduce headcounts at these HQs?
We don't have a formal plan at this point. With every merger, there is overlap and redundancy, and so the same will be the case here. Of course, we're going to go to our customers with one face. We obviously don't need two sales forces.
There will be overlap that we will have to address. Having said that, if you look at our industry, it's rapidly growing – last year it grew 30 per cent. And we've been growing more than three times that speed. In fact, over time I fully expect our headcount to grow. But in the short term we will exterminate some of our overlap through redundancy – but we will treat people fairly and respectfully in that process.
Is it more likely those overlaps will come on the Vivendi side rather than Activision – or vice versa?
We will try to put the best team together – the all-star team. We'll update both companies' skill and experience levels and become a formidable company through it.
You're the top independent publisher in the world now. Will you maintain that position – and maybe even widen the gap on rivals?
We're very focused on the operating income performance. There's no doubt we'll maintain that and we're very focused on expanding our competitive advantage. Besides, as a result of the merger, we're already expanding the gap. The company objective for 2009 are operating income margins in excess of 25 per cent. EA this year – based on their guidance for the fiscal year to March 2009 – are at 12 per cent. So, I think that's a pretty good gap...