VALUATION OF THE WEEK [Sources: Financial times, S&P Capital IQ, Bloomberg, Refinitiv, Forbes]

BUYER TARGET

Figure 1: Overview of the Microsoft and Activision Blizzard transaction

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DEAL DESCRIPTION

Microsoft Corp acquires 100% of Activision Blizzard Inc for US$69.2B (excluding net debt) which represents a
tremendous premium regarding the last weeks’ Activision Blizzard Inc. The bid has been made with a share price offer at
US$95 per share. The transaction will be completed in 2023. The buyout will be executed by cash.

Descriptions:

The American company, Microsoft Corp. is a Redmond, Washington based company that was founded on April 4, 1975.
The Nasdaq-listed company is established on the Software & IT Services sector and operates in many fields. The holding
company develops and wholesales computer software products for many computing devices that include operating
systems for servers, PCs, and intelligent devices, server applications for distributed computing environments,
information worker productivity applications, business solutions applications, and software development tools. It also
provides consulting and product support services such as training and certifying system integrators and developers,
wholesales Xbox video game console and games, PC games, PC peripherals, and provides web-based solutions such as
MSN subscription and other Internet products and services.

Microsoft Corp. employs 180,000 people in more than 100 countries, which represents an increase of 46% from 2017 to
2021. It generates a turnover of US$168.09bn as well as an EBITDA of US$86.53bn.

Activision Blizzard Inc. is also listed on the Nasdaq stock exchange. The Californian-based Technology firm was founded
in 1979 and now offers a large number of services worldwide in the Software & IT Services field (it operated in more
than 15 countries). The organization develops and wholesales interactive entertainment software for a variety of
platforms. It also expands by offering operating systems and videogame set top hardware systems for the Sony
PlayStation, Xbox, and Nintendo. Its video games portfolio is huge: Guitar Hero, Call of Duty, and Tony Hawk, as well as
Spider-Man and many others.

Activision Blizzard Inc. employs 9,500 people in 2020 worldwide. Furthermore, it generates a turnover of US$9.05bn as
well as an EBITDA of US$3.77bn.

Pros:

Through this acquisition and right after the US$2.5bn takeover of Mojang (Minecraft), the second biggest market
capitalization in the world would become the third main actor in the video games sector, after Tencent and SONY. Plus,
the firm operates in many fields through, among other, the recent acquisitions of both LinkedIn and Skype.

‘Gaming is the most dynamic and exciting entertainment category on all platforms today and will play a key role in
the development of metaverse platforms’, said Satya Nadella, CEO and Chairman of Microsoft. As a reminder, a
metaverse is a fictional virtual world. The term is regularly used to describe a future version of the Internet where
virtual, persistent and shared spaces are accessible via 3D interaction. This acquisition will not only allow Microsoft to
add a large portfolio of video games such as World of Warcraft, Call of Duty, and many others, to its service Game Pass
and its 25 million users to retain them and acquire new subscribers, but it may also enable the company to enhance a
universe, already created by Activision Blizzard Inc. the one in direct link with the cryptocurrencies, the blockchain, the
Metaverse and the NFTs. According to people familiar with the matter, we will probably see, soon, a video game created
by Microsoft connected to the blockchain. In fact, other players of the sector are launching and developing such services
like Disney and Google.

Cons:

However, the Redmond-based company is facing huge uncertainty regarding the closing of its US$75bn offer, including
net debt made to Activision Blizzard. Microsoft is fully aware that the deal review won’t be a breeze even if there is no
obvious antitrust violation. Indeed, the biggest deal in Microsoft’s history is set to become a test case for the leaders of
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US antitrust agencies who have vowed to tackle Big Tech’s market power. Plus, the European trade office is working on
potential antitrust violation that this deal can provoke.

Bobby Kotick, the CEO of Activision Blizzard, is currently in the middle of a trial against the Californian State due to
multiple complains about toxic and sexual harassment and potential criminal behavior at work and around. Some
allegations called him for resignation. Already, those complains had led to partnerships ends, managers and employees’
resignations, as well as the delay in the release of the games Overwatch 2 and Diablo 4. This situation could lead to
some difficulties regarding a smooth management-related transition. According to a Wall Street Journal report, Kotick is
expected to leave after the merger is completed, which would likely be in 2023. However, Activision Blizzard had, as of
now, fixed some of the complains.

Since July 2021, many Activision Blizzard employees created a group of people named ‘Activision Blizzard King
Workers Alliance’ in order to organize people at work and create a better work atmosphere. This large-scale trade
union would probably, through its power, force Microsoft to recognize its existence to again, operate the transition
as smoothly as possible.

Advisors:

The advisors to the target are, on the financial part, Allen & Co. Inc. and on the legal part, Skadden, Arps, Slate,
Meagher & Flom.

The financial advisor to the buyer is Goldman Sachs & Co and the legal advisor is Simpson Thacher & Bartlett.

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 VALUATION METHODOLOGY
The valuation by multiples approach is based on the idea that companies that are similar in terms of industry,
business function, segment by sales, market capitalization, operational statistics, and geography, can be
valued using comparable companies’ multiples. The following comparable group have been chosen based on
the above-mentioned characteristics:

Market Enterprise
Company LTM Revenue LTM EBITDA LTM EBIT
Capitalization Value
Activision Blizzard, Inc. (NasdaqGS:ATVI) $ 63 682 $ 57 289 $ 9 052 $ 3 407 $ 3 274
Electronic Arts Inc. (NasdaqGS:EA) $ 39 276 $ 39 499 $ 6 396 $ 1 420 $ 1 119
Roblox Corporation (NYSE:RBLX) $ 43 638 $ 41 969 $ 1 660 $ -292 $ -352
Nintendo Co., Ltd. (TSE:7974) $ 56 292 $ 43 405 $ 14 152 $ 5 088 $ 4 992
Ubisoft Entertainment SA (ENXTPA:UBI) $ 7 465 $ 8 126 $ 2 515 $ 315 $ 399
Epic Games $ - $ - $ - $ - $ -
Take-Two Interactive Software, Inc. (NasdaqGS:TTWO) $ 17 997 $ 15 939 $ 3 372 $ 847 $ 734
All figures are in million as of 18th January 2022
Figure 2: Overview of the initial set of comparable companies

Roblox Corporation was evicted from the final list of comparable because of its negative EBITDA & EBIT.

Ubisoft Entertainment SA was also evicted from the final list because of its low market capitalization compared to
Activision Blizzard, Inc.

Epic Games is considered to be the biggest competitor of Activision, but since the company is private, it was evicted.

Market Enterprise
Company LTM Revenue LTM EBITDA LTM EBIT
Capitalization Value
Activision Blizzard, Inc. (NasdaqGS:ATVI) $ 63 682 $ 57 289 $ 9 052 $ 3 407 $ 3 274
Electronic Arts Inc. (NasdaqGS:EA) $ 39 276 $ 39 499 $ 6 396 $ 1 420 $ 1 119
Nintendo Co., Ltd. (TSE:7974) $ 56 292 $ 43 405 $ 14 152 $ 5 088 $ 4 992
Take-Two Interactive Software, Inc. (NasdaqGS:TTWO) $ 17 997 $ 15 939 $ 3 372 $ 847 $ 734
All figures are in million as of 18th January 2022
Figure 3: Overview of the final set of comparable companies

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COMPARABLES TRADING MULTIPLES
In order to value Activision Blizzard, we use multiples such us: Enterprise Value / Revenue, Enterprise
Value / EBITDA and Enterprise Value / EBIT.

The multiples were estimated for the 2021 and 2022 expected values of the attributes.

The source of these estimations is a group of Capital IQ’s broker’s forecasts.

Activision Blizzard, Inc.

EV/Forward Revenue EV/Forward EBITDA EV/Forward EBIT

Company 2021A 2022E 2021A 2022E 2021A 2022E

Electronic Arts Inc. (NasdaqGS:EA) 6,20x 5,00x 25,90x 13,21x 35,30x 25,67x
Take-Two Interactive Software, Inc. (NasdaqGS:TTWO) 4,70x 4,29x 17,90x 19,13x 21,70x 23,57x
Nintendo Co., Ltd. (TSE:7974) 3,10x 2,95x 8,30x 8,63x 8,50x 8,67x

Max 6,20x 5,00x 25,90x 19,13x 35,30x 25,67x

Median 3,10x 2,95x 17,90x 8,63x 21,70x 20,62x
Mean 3,88x 3,57x 15,66x 11,01x 20,48x 18,40x
Min 2,70x 2,77x 5,60x 6,20x 8,50x 8,67x

Figure 4: EV multiples of Activision Blizzard comparable companies

ESTIMATION OF THE IMPLIED ENTERPRISE VALUE

All figures in million Revenue EBITDA EBIT
2021A $ 8 724 $ 3 721 $ 3 625
Activision Blizzard, Inc.
2022E $ 9 062 $ 3 903 $ 3 785

Implied EV 2020A 2021E

Min Mean Median Max Min Mean Median Max
EV/Revenue $ 23 554 $ 33 848 $ 27 044 $ 54 087 $ 25 102 $ 32 333 $ 26 733 $ 45 310
EV/EBITDA $ 20 838 $ 58 271 $ 66 606 $ 96 374 $ 24 199 $ 42 980 $ 33 683 $ 74 664
EV/EBIT $ 30 813 $ 74 240 $ 78 663 $ 127 963 $ 32 816 $ 69 644 $ 78 047 $ 97 161

Figure 5: Implied Enterprise Value of Telecom Italia.

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The following figure is the result of our valuation using trading comparable valuation.

Figure 6: Football field of 2022E valuation analysis

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DISCOUNTED CASH FLOW

In order to value Activision Blizzard, we discounted the company’s future free cash flow to evaluate the
company’s absolute value.

1 Discounted Cash-Flow

In $ m 2020A 2021A 2022E 2023E 2024E 2025E TV

Revenue 8 419 8 724 9 062 10 309 11 748 15 362

Growth % 3,6% 3,9% 13,8% 14,0% 30,8%
EBITDA 3 481 3 721 3 903 4 507 5 497 6 384
Growth % 7% 5% 15% 22% 16%
Margin % 41,3% 42,7% 43,1% 43,7% 46,8% 41,6%
D&A 197 216 212 197 184 184
% of Capex 252,6% 222,1% 191,5% 161,0% 130,5% 100,0%
EBIT 3 284 3 505 3 692 4 311 5 313 6 200
Margin % 39,0% 40,2% 40,7% 41,8% 45,2% 40,4%
Tax (887) (946) (997) (1 164) (1 435) (1 674)
Tax Rate % 27,0% 27,0% 27,0% 27,0% 27,0% 27,0%
Change in WC (601) (623) (647) (736) (839) (1 097)
% of revenue variation 4% 4% 14% 14% 31%
Capex (78) (97) (110) (122) (141) (184)
% of Revenue 0,9% 1,1% 1,2% 1,2% 1,2% 1,2%

Free Cash Flow 1 915 2 054 2 149 2 485 3 083 3 429 3 429
% Growth 7,3% 4,6% 15,6% 24,0% 11,2%

2020A 2021E 2022E 2023E 2024E 2025E

Discount Factor - 1,0 2,0 3,0 4,0 5,0

WACC Sum
5,8% - 1 942 1 920 2 099 2 461 2 588 11 011
6,8% - 1 924 1 884 2 041 2 370 2 469 10 689
7,8% - 1 906 1 850 1 984 2 284 2 357 10 381

Figure 7: Free Cash Flow Calculation Model

As shown in the table above, we valued the company until 2025.

The FCF grows from US$1.9b in 2020, and will achieve approximately US$3.4 million € in 2025.

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 Terminal Value NPV Enterprise Value
PGR PGR
WACC 0,50% 1,00% 1,50% 0,50% 1,00% 1,50%
5,79% 49 169 54 571 61 233 60 179 65 582 72 244
6,79% 39 451 43 072 47 376 50 140 53 760 58 065
7,79% 32 490 35 056 38 030 42 870 45 436 48 410

Equity Value Share Price

PGR PGR
WACC 0,50% 1,00% 1,50% 0,50% 1,00% 1,50%
5,79% 65 219 70 622 77 284 83,73 90,67 99,22
6,79% 55 180 58 800 63 105 70,84 75,49 81,02
7,79% 47 910 36 789 53 450 61,51 47,23 68,62

Figure 8: Sensitivity Test & Final Enterprise Value

In this DCF Model, we used a cost of debt of 2.74% (Total Debt: US$3.6b ; and Interests: US$99m). We
used a cost of equity equal to 7.13%, by considering the risk-free rate of 1.76%, a levered Beta of 1.27, and
used the equity risk premium of USA equal to 4.24% (Damodaran data). This gave us the company’s WACC
equal to 7.13%.

At the end of this DCF model, we performed a sensitivity test, using a WACC range from 5.79% to 7.79%
and a range of Perpetual Growth Rate from 0.50% to 1.50%.

This gives us an enterprise value of approximately US$53.7b, and a share price of approximately
$75.5/share.

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DISCLAIMER

This report has been prepared by Financial Networking Group for information purposes only. No information
published in this report constitutes a solicitation or offer, or recommendation, to buy or sell securities of any
other financial instruments. Although we have used sources believed to be accurate, we do not guarantee
either the accuracy or completeness of this report. No reliance should be placed on the information in this
document to transact in financial products and no liability is accepted for any loss arising from reliance on it.
Any opinions expressed are subject to change without notice. Investors are expected to make their own
investment decisions without relying on this information. You should obtain specific advice from qualified
experts before making any investment decision.

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