Added On: Monday, December 03, 2007

Vivendi, Activision Form Games Juggernaut

The CEOs behind such hits as Guitar Hero and World of Warcraft talk about the potential of the $18.9 billion tieup: namely, a new No. 1 video game company

Jean-Bernard Lévy and Robert Kotick have had a busy holiday season. On Dec. 2, Lévy, the chief executive of Vivendi (VIV.PA), and Kotick, the CEO of Activision (ATVI), announced an $18.9 billion deal that will create the world's largest independent video game publisher and a fierce competitor to the longtime industry leader, $3 billion Electronic Arts (ERTS). The deal combines Activision, a $1.5 billion maker of the top-selling Guitar Hero, Call of Duty, and Tony Hawk franchises, with Vivendi Games, whose Blizzard Entertainment unit has a huge hit with World of Warcraft. The online fantasy game has 9.3 million members paying monthly subscription fees to play.

Under the terms of the proposed merger, the $29 billion Paris-based entertainment and telecom conglomerate will exchange its Vivendi Games and $1.7 billion in cash for a 52% stake in the new company, which will be called Activision Blizzard. Within four days of that transaction, the new company will make a tender offer for $4 billion worth of Activision shares at $27.50 per share, a 24% premium on the closing price Nov. 30.'s Christopher Palmeri spoke with Kotick, who'll continue to be Activision Blizzard's CEO, and Lévy on the day they announced the merger.

Can each of you describe your reason for this deal?

Lévy: We're very committed to games. We're going to continue to invest in what's the fastest-growing segment in the entertainment industry. This gives us the financial flexibility to grow the asset. Blizzard was a bit hit, but its value was sort of hidden. As a listed company on the Nasdaq, this gives us the opportunity to attract talent [with stock options] and create a currency for further acquisitions. We'll be the majority shareholder for the long term.

Kotick: It has been our aspiration to be the No. 1 video game company. Over the last year, we've looked at lots of options. We're laser-focused on margin expansion. [World of] Warcraft is by the far the most profitable individual franchise that exists in video games. This structure will give our shareholders the opportunity to decide if they want a share in future growth or take money at a premium to the market price. We don't have an online presence. We don't have a strategy for Asia. We didn't have intellectual property that we could capitalize on in Korea and China.

Activision is having one of its strongest years as most of the toy industry struggles. What is driving your growth?

Kotick: You have a full generation of video game consumers becoming parents. On top of that, there are three big changes in the games: the more interactive, physical interfaces with Wii (NTDOY), the increase in production values, and the biggest game-changer, so to speak, is this movement from a solitary media to a social media. World of Warcraft is the stickiest social network. You can play against other people, interact with another person. It's moved from hobbyists to a much broader audience. Families leave the dinner table to play. You have Guitar Hero nights at bars. Thirty percent of Guitar Hero customers are female. When I saw Ellen DeGeneres feature Guitar Hero on her show, I knew we had arrived.

Vivendi is in a lot of businesses that seem to be converging: music, television, video games, and cell phones. How do you see these efforts playing out? Will we all carry a little device that does all of these things?

Lévy: That's what it is all about. Everyone is trying to fight to have that device. Nokia (NOK), Apple (AAPL), Sony (SNE), the Koreans. Look at the way people take pictures: They all use their cell phones. We are there with the networks, the content. We are not going to get into the devices. We are delivering content to these super digital networks, and we want to own a larger piece. We want to take money from the more mature businesses and reinvest them in the faster-growing ones.

Kotick: Traditional forms of media, TV, feature films, are not the growth engines. In Blizzard, we saw a shared vision of interaction. They have tens of millions of casual online gamers, mobile platforms, and a combination of opportunities. When you look at Warcraft, they have a big hit when they release a new version. Then they have all these expansion packs. You pay a subscription in between. They had an option to pay a fee to choose a different server, to get closer to the people you are playing with. In one week, 1 million people signed up. They made $25 million.

Is the subscription-based model how content will be delivered in the future?

Lévy: It's one model that works very well. I wouldn't dare to say we want to be exclusively that. With Warcraft, it's more than a game—it's a social community. When I watch my son play, he speaks with friends over the Internet. He's laughing all the time. It's just a fun experience. People are willing to pay a significant amount of money for it.

Kotick: That's a very difficult thing to duplicate. I don't see a TV company being able to duplicate a network with 9 million paying customers. They have 750 game masters providing customer service. If we thought there was an easy way to duplicate that, we would have done it on our own.


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