The acquisition was announced jointly on Thursday by Microsoft Game Studios and U.K.-based Lionhead, the developer of such hit titles as "Fable," "The Movies," "Black & White" and others.
The integration of the two outfits is official as of Thursday, the companies said. They would not disclose the financial terms of the deal.
The idea, the companies say, is that Lionhead will begin creating games exclusively for the Xbox 360 and Windows platforms. And that makes sense, say industry observers, because Lionhead and Microsoft Game Studio already had a close working relationship, what with the Xbox- and Windows-only "Fable" selling more than 2 million copies to date.
Microsoft's "strategy has been, if they have a good track record (of working with an independent studio) and work together well, they acquire them," said David Cole, the president of analyst firm DFC Intelligence. "And that makes more sense than going out and trying to acquire companies you don't have a good track record with."
Microsoft has previously bought studios like Bungie--which made the hits "Halo" and "Halo 2," Ensemble and Rare, and integrated each, while still giving them large amounts of autonomy.
Thus, Lionhead will stay in England, said Shame Kim, the general manager of the Microsoft studio.
Meanwhile, Microsoft is clearly relishing the opportunity to get someone like Molyneux on its payroll.
"It's a great opportunity to bring somebody of the caliber of Peter Molyneux and all the great people at Lionhead into Microsoft Game Studio," Kim said. "We know he's got many other great ideas he wants to develop."
Cole agreed that Microsoft scored a coup by bringing Molyneux into the fold.
"Peter Molyneux has a real good track record and reputation," Cole said, "and his games can bring in a certain group of consumers who are his fans."
For his part, Molyneux lauded Lionhead's working relationship with Microsoft and said he is looking forward to accessing its deeper pool of resources.
"For the independent developer," Molyneux said, "it is more challenging to make a whole game. So for strategic reasons, it made sense for both of us."
The deal comes at a time, however, when Lionhead has gone through some severe growing pains, having laid off as many as 20 percent of its staff last month. Molyneux said that happened because the company made a decision--even before launching acquisition talks with Microsoft--to narrow its focus to two game projects at a time rather than three.
And Kim said Microsoft has no plans to ask Lionhead to cut more staff.
In any case, Molyneux admitted that the acquisition talks had been the reason he had canceled his scheduled appearance at last month's. His absence was widely noted at the conference, especially because no explanation was offered.
Now Microsoft Game Studios and Lionhead will attempt to repeat the success of "Fable" and the Molyneux team's other successes. The two sides would not say what games they will work on next, but it's likely that the much-rumored "Fable 2" is in the works.
"'Fable' was immensely successful for the Xbox and Windows," Molyneux said, adding that the companies hope to pursue projects that can repeat that kind of success.