An 800lb French Gorilla in the Game Room?
Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What's the single largest mistake we make as investors?
It's inexcusable, yet we all make it. And frankly, we make it every time we invest: I have bought shares in Activision Blizzard, (NASDAQ: ATVI) on three occasions since 2009, and all three times I have committed this same error. This is one of my favorite companies, and ignoring this one simple step may just mean that it's a poor investment. What's that mistake?
It's simple: We don't look at the past, and weigh how it can impact the future. And I made that mistake with Activision, and missed the biggest risk of all: How Vivendi's majority ownership could cost investors a lot of money.
Let's take a litte history lesson, shall we?
From Wikipedia (Italics mine:)
“Activision Blizzard, Inc., formerly Activision, Inc. is the American holding company for Activision and Blizzard Entertainment. The company is majority owned by French conglomerate Vivendi SA and was created through the merger of Activision and Vivendi Games, announced on December 2, 2007, in a deal worth USD$18.8 billion… …The company believed that the merging of the two companies would create "the world's largest and most subtle pure-play video game publisher"…”
On July 10, 2008, Activision-Blizzard was born. Let’s take a look at the share price of Activision since the merger was official on July 10, 2008, and see whether the merger of these two heavyweights of the gaming world has rewarded investors:
Activision closed at $15.88 per share on the first day measured in the chart above, and closed at $11.79 as of 8/29/2012, the writing date of this post. That's good for a 26% decline in share price since then.
In fairness, the Great Recession kicked into full gear just months after the merger occurred. But while both the NASDAQ composite (where ATVI shares are listed) and the S&P 500 have recovered nicely since their lows, Activision has yet to reach the heights many hoped for. I guess one could say that Activision investors have been left out in a Blizzard...
As I posted here, there are a number of trends that are surely having an impact on Activision's share price, and I'm not going to rehash those arguments. Suffice to say, the advent of "social" games, like those made by Zynga (NASDAQ: ZNGA) are expanding the gaming universe, and while they aren't taking market share from Activisions games, this is a segment of the market that will eventually be a money maker, and a source of income that Activision won't be able to ignore. But as Zynga's most recent earnings showed, the "social" segment of gaming is tough, and free games with a lot of downloads, doesn't pay the bills...
Factor in mobile computing technology like Apple's (NASDAQ: AAPL) IOS-based iPhone and iPad, and Google's (NASDAQ: GOOG) Android-based tablets and phones, the platforms that video games will have to be able to support is expanding, and adding to development costs. But in time, Activision will expand to these technologies, as they continue to grow and improve in capability. The bottom line is mobile computing is the future, and Activision will be there as the technology matures.
But today, Activision's products continue to be massively popular and profitable. Whenever a new title is launched, it is vastly successful. As the chart below shows, Activision runs a very profitable business that has continued to grow since the merger:
ATVI Free Cash Flow TTM data by YCharts
Cash flow and net profits have both trended up significantly since the merger, and that should continue to be the case based on the deep bench of flagship game brands, and the planned releases upcoming for the next several years. Producing innovative content that people will pay for isn't an issue for Activision. So what's holding the share price back?
The Amalgamation that is Vivendi
From the Vivendi website (bold italics mine):
"Vivendi combines the world leader in video games (Activision Blizzard), the world leader in music (Universal Music Group), the French leader in alternative telecoms (SFR), the Morrocan leader in telecoms (Maroc Telecom), the leading alternative broadband operator in Brazil (GVT) and the French leader in Pay-TV (Canal+ Group)."
Vivendi owns just over 60% of Activision Blizzard shares as of this writing, and with that large of a stake, Activision owners need to know a little something about Vivendi. It will have an impact on your investment, and it can be either good or bad. Let's take a little history lesson, shall we?
Again from the Vivendi website:
"Vivendi was born out of the Compagnie Générale des Eaux (CGE), a group founded in the mid-19th century by imperial decree. When it first began operations on December 14, 1853, the CGE supplied water to Lyon, Nantes and Paris, and later expanded to cover Venice (1880), Constantinople (1882) and Porto (1883). Eventually, it diversified into many different business activities, including waste management and sanitation, energy, transportation, construction, real estate and communication."
What began as a state-founded water supplier has since become a loosely connected group of entertainment and communications companies. In addition to its majority stake in Activision, Vivendi also owns Universal Music Group, is the largest Telecom provider in France and Morocco, and has a very large telecom presence in Brazil. Additionally, there is the Canal+ series of cable channels, which are well established in France and most of Europe. Plus, there's Digitick and SEE Tickets, both established ticketing agents in France and the UK. As you can see, this is a business that has taken a very strange path from its roots as a municipal water and environmental management supplier, to the loose collection of businesses that we see today.
So how has it worked out for Vivendi Shareholders?
Ouch.
Shares closed at 26.97EUR on July 10th, 2008, and closed at 15.11EUR on 8/29/2012. That's good for a loss of nearly 45%. What you will also see is that, compared to the Activision share price from the chart near the top, Activision has remained relatively flat since early 2010, while Vivendi has continued to cost shareholders money.
But to be honest, just because both companies have seen significant share value declines since the merger doesn't give us direct causation, or even correlation. Let’s face it- the world economy has struggled since the start of the Great Recession.
And a company with a large portion of revenues tied to its European operations like Vivendi is in for a tough time for the next few years, as Europe fights its way through a new recession of its own. Add in the fact that the entertainment portion of its business, and to a lesser extent, the telecom business, will suffer as disposable income spending takes a hit in Europe, and you have a double-whammy. But that doesn't really have any impact on Activision's share price, right? Read the articles below, and you'll see how it does:
Where's the impact on Activision?
From Bloomberg, June 29th:
Bloomberg again, 2 weeks later:
From the Financial Times, August 2nd:
From the Wall Street Journal, August 20th (you may need a subscription)
From Reuters, Aug 30th:
Here's what Activision's share price has done since the 29th of June:
What does this tell us? Honestly, not very much, beyond the fact that the expected bumps and dumps that any news like this would have on a stock. But what we can clearly learn from the news about Vivendi, and the challenges that management faces, is that it is a company going through transition.
And transition means uncertainty. That's how Activision shareholders are affected. Mister Market hates uncertainty.
What's an investor to do?
I imagine that many of you reading this were looking for a definitive answer as to what we can expect the Vivendi ownership situation to mean, and how it will impact shareholders of Activision. The honest truth is that nobody can answer that question. There are no charts or measures that can quantify it. The uncertainty is going to be a dark cloud, and my best guess is that it won't be resolved any time soon.
With that said, I think we all need to go back to our investing roots and take a hard look at the reason why we invested in Activision-Blizzard to begin with. For me it's simple. I own shares of Activision Blizzard for the same reasons that I own most of my holdings:
- It is the clear leader in its industry
- It has a sizable competitive advantage, with a moat of very powerful game brands
- It generates significant profits, which it uses to reward shareholders in smart ways
- There is room to grow and expand the business for years to come
In summary, I plan to hold my shares for years. Will I add? I submit to you a definitive, “maybe.” Not much help, I know.
Eventually the "Vivendi situation" will reach a resolution. Vivendi will sell its stake in Activision, or it won't. The truth is that there is the specter of the unknown and uncontrollable with all of the companies that we invest in, but with Activision, the Vivendi situation just makes it more public and news-worthy. And since Vivendi itself isn’t sure what its intentions are, that makes it doubly frustrating. If that makes you uncomfortable as an investor, move on. Just don't look for an answer, because there won't be one, until there is.
But don't make the mistake of not knowing about it before you invest.
elihpaudio owns shares of Apple, Activision Blizzard, and Netflix. The Motley Fool owns shares of Apple, Activision Blizzard, Google, and Netflix. Motley Fool newsletter services recommend Activision Blizzard, Apple, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
