Activision Inc. and Vivendi announced a deal Sunday that would put "Guitar Hero" and "World of Warcraft" under one corporate roof and knock the king of the video game industry, Electronic Arts Inc., into second place.
Vivendi, the French conglomerate that owns Universal Music Group, said it would pay $1.7 billion in cash and contribute its Los Angeles-based games business, valued at $8.1 billion, for a 52% stake in a company to be called Activision Blizzard.
It would be worth an estimated $18.9 billion, eclipsing EA, which has a market capitalization of $17.7 billion.
"We believe the demographics and technology trends very much favor the development of games," said Vivendi Chief Executive Jean-Bernard Levy in an interview. "The growth in video games reflects a shift in where people spend their money to have fun."
Companies in the fast-growing games industry have been racing this year to get bigger so they can absorb skyrocketing costs in a business that sees as many hits as misses. With powerful new game consoles, including the PlayStation 3 and the Xbox 360, that can render movielike graphics, development costs have recently more than doubled to more than $25 million a game.
Activision's rivals -- Electronic Arts, THQ Inc. and others -- have diversified their portfolios of games as a cushion against the higher risks. Last month, EA said it would buy Pandemic Studios and BioWare Corp. for as much as $775 million in cash and stock. Activision has made nine acquisitions in the last five years, including its 2006 purchase of RedOctane Inc., which created "Guitar Hero."
If approved by regulators in the U.S. and Europe, the deal would be completed next year, the companies said. Like Santa Monica-based Activision, Activision Blizzard would be publicly traded, and Activision Chief Executive Bobby Kotick would remain as CEO.
Activision Blizzard would compete in nearly all genres, including music simulation, racing, action, sports and lucrative multiplayer online games. It would be positioned to take advantage of what Wedbush Morgan Securities has projected will be double-digit growth in the $40-billion global games market in the next year.
"It's a very complementary deal," said Michael Pachter, a Wedbush Morgan analyst. "Activision has virtually no online presence and very little in Asia, but Vivendi does. Vivendi also goes from being a minor player in packaged games to becoming a very formidable one."
The crown jewels in Vivendi's Blizzard Entertainment are "World of Warcraft," "Warcraft," "StarCraft," and "Diablo," games that account for four of the top five bestselling computer games of all time.
Blizzard projects 2007 revenue of $1.1 billion, more than three-quarters of Vivendi Games' overall sales of $1.4 billion. With operating margins of more than 40%, the unit is expected to ring up more than half a billion in operating profit this year.
Much of that comes from "World of Warcraft," an online fantasy role-playing game with more than 9.3 million subscribers who each pay about $15 a month to play.
Although the game has garnered an intensely loyal audience, it is almost singular in its success. Numerous companies have spawned similar online games, drawn by the attractive business model, only to see theirs fizzle. Part of the challenge is that these games are expensive to produce and even more costly to maintain. Blizzard, for example, employs 1,700 customer service representatives throughout the world, just for "World of Warcraft."
"It would be virtually impossible for us to take on those businesses without spending an enormous amount of capital and taking on a tremendous amount of risk," Kotick said in an interview.
The merger would also include Vivendi Games' three remaining divisions -- Sierra Entertainment, Sierra Online and Vivendi Games Mobile -- and the rights to "Crash Bandicoot" and "Spyro the Dragon."
Activision has been riding high on the strength of its "Guitar Hero" franchise, a game that lets players rock out to popular tunes. Its latest release, "Guitar Hero III: Legends of Rock," rang up $115 million in sales during its first week in North America. The franchise, which Activision purchased in 2006 for $100 million, is expected to bring in more than $1 billion in sales over its lifetime.
The company last week raised its fiscal 2008 sales forecast to $2.3 billion, from $2.07 billion. It also boosted its earnings projection to 85 cents a share from 65 cents, excluding expenses. Its shares closed Friday at $22.15, up 18 cents.
(BEGIN TEXT OF INFOBOX)
CEO: Bobby Kotick
Revenue: $2.3 billion, projected fiscal 2008
Franchises: "Guitar Hero," "Tony Hawk," "Call of Duty," "Spider-Man," "Shrek"
A unit of Vivendi Universal, based in Paris.
CEO: Jean-Bernard Levy
Revenue: $1.4 billion, 2007
Franchises: "World of Warcraft," "StarCraft," "Diablo," "Crash Bandicoot," "Spyro the Dragon"
Sources: Activision, Vivendi Games
Los Angeles Times