The main purpose of Microsoft’s purchase of ZeniMax is to make Bethesda’s games an exclusive game on its new Xbox Series X console. Microsoft’s main competitor Sony has launched a large number of high-profile exclusive games for its new PlayStation 5 console.
Tencent Technology News On September 30, Microsoft recently spent $7.5 billion to acquire ZeniMax Media, the parent company of Bethesda, a large video game studio. Game and business media reports on this transaction focused on Bethesda. How will it help Microsoft’s overall game strategy by attracting users to the Netflix-style GamePass service (which provides users with a series of games at a monthly fee of $15), and whether Microsoft will keep Bethesda’s games exclusive and make them Unable to log in to Sony PlayStation 4 and the upcoming PlayStation 5.
In other words, people are always discussing whether the alliance between Microsoft and Bethesda makes sense. But in this process, a larger and in some ways more interesting question was ignored: even though the alliance with Bethesda is important, why did Microsoft do this through the overall acquisition of ZeniMax? This may seem like a stupid question at first, because the acquisition of other companies is a matter of course for most large companies: from 2014 to 2019, in the United States alone, the funds involved in mergers and acquisitions averaged close to US$2 trillion per year.
But all these activities have not changed the basic fact that most transactions are beneficial to the company being acquired, but not so beneficial to the company making the acquisition. As Aswath Damodaran, a professor of finance at New York University, said: “The value of acquisition destruction is greater than any other single action taken by the company.” Microsoft itself is a good example. In 2013, the company spent $7.2 billion to acquire Nokia’s smartphone business, but within two years, it was forced to reduce the full value of the acquisition.
The deal with Nokia is an extreme example. More commonly, the transaction fails because the buyer pays too high a price. This is a serious risk for ZeniMax. Indeed, this acquisition means that Microsoft will obtain all the company’s intellectual property rights and future profits. But in exchange, Microsoft will give up $7.5 billion in cash. This is a lot of money-almost equivalent to the total expenditure of Disney’s acquisition of the two most valuable cultural franchises in history-“Star Wars” and Marvel. In addition, Microsoft will also bear all ZeniMax’s game development costs and the salary costs of 2,300 employees.
Therefore, in order to get a barely reasonable return on Microsoft’s investment, ZeniMax must generate at least $500 million in profits each year. Considering that this is within the company’s estimated annual income in most years, this is a very high requirement.
It is possible that, as many gaming industry reporters have suggested, the main purpose of Microsoft’s purchase of ZeniMax is to make Bethesda’s games an exclusive game on its new Xbox Series X console. Microsoft’s main competitor Sony has launched a large number of high-profile exclusive games for its new PlayStation 5 console. The hypothesis is that Bethesda can help Microsoft provide something similar, so that whenever “Elders Scrolls VI” (Elders Scrolls VI) or the next version of “Fallout” (Fallout) games finally appear, desperate gamers Will pay hundreds of dollars for Xbox Series.
The only problem with this strategy is that Bethesda’s current profits come from selling games on all platforms, including Sony’s platform. If Bethesda stopped making games for PlayStation, it would wipe out a large part of its annual profits, which should have justified the acquisition costs. Paradoxically, if Bethesda made games specifically for Microsoft, its value might be lower, not higher.
Much of the analysis of this deal has succumbed to the fallacy of ownership: that you need to own a company to get value from it. But in fact, it’s not. If Microsoft wants the new Bethesda game to be available on GamePass the first day it is released, it can reach an agreement to arrange this. If it really wants Bethesda to only release certain games exclusively on Xbox Series X, it can reach an agreement, although the price will be high. In fact, Bethesda now has two games that will be exclusively released on PlayStation 5, and Sony obviously does not need to acquire the company to achieve this goal.
But this does not mean that buying is always a bad idea. After all, in 2000, the year before Microsoft launched its first ever console, Xbox, Microsoft spent $40 million to acquire game developer Bungie, and the latter’s game “Halo” became an Xbox The killer application eventually brings billions of dollars in revenue to the company. This is one of the greatest acquisitions of all time.
But the more money the acquisition spends, the higher the return needs. In the case of ZeniMax, Microsoft stated in the press release announcing the deal that its impact on operating profits in 2021 and 2022 will be “minimal”. Since gaming is a cyclical business, this situation will change a few years after the popularity of Bethesda games. But if the transaction does not generate much profit within a year after its completion, Microsoft will not recover its $7.5 billion cost in the short term.
Therefore, from an economic point of view, it is difficult to see the significance of this transaction. But Microsoft doesn’t seem to be too worried about this, perhaps because the deal is not about getting higher profits in the final analysis, but about helping Microsoft gain security. It is not so much a risk, as it is an attempt to hedge the risk.
After all, the acquisition of ZeniMax guarantees something that a partnership cannot do: no one else can buy ZeniMax. It also guarantees that Bethesda’s games will remain on GamePass from the first day of release, which helps ensure that GamePass has the content users want. Although US$7.5 billion still seems to be a very high price, Microsoft has US$130 billion in cash in the bank and its market value exceeds US$1.5 trillion. When it is so rich, it may be more willing to spend 7.5 billion dollars to get a good night’s sleep!