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Collecting points in a computer game serves little purpose other than bragging rights over other players. Yet big tech companies often behave the same way, building up large piles of cash in the name of flexibility. However, Activision – the world’s largest publisher of computer games since merging with Blizzard Entertainment last year in a deal that gave French media conglomerate Vivendi 54 per cent of the company – may be tempted to use the $3bn of cash lying idle on its balance sheet. Successful integration of Blizzard has boosted management credibility with investors, while the credit crunch has helpfully lowered valuations for potential targets.
Who might be in the gunsights? Activision’s recent success has been built on the Guitar Hero franchise (with over $1bn in sales worldwide), and Call of Duty, a soldiering shoot ’em up. So the sporting games of Take Two might round out its portfolio. With Take Two shares currently worth $500m, it would also be a finger in the eye of competitor Electronic Arts, which eventually withdrew a $2bn bid for the company last year.
Yet profitable and growing Activision has typically pursued a strategy of buying small studios or intellectual property. Indeed the rights to Guitar Hero were picked up for a mere $100m. It has then concentrated on a narrow selection of big franchises, plus Blizzard’s World of Warcraft – which boasts 11.5m online users and means that half of group operating profit now comes from a stable subscription base. Lossmaking Electronic Arts, by comparison, has been a serial acquirer.
So Activision should resist letting its cash burn a hole in its pocket. If it must spend, beyond the odd small, opportunistic bargain, then its own shares on a not unreasonable 16 times prospective earnings may be a better bet than empire building. It can always wait for peers to run out of lives.
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