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Vivendi to acquire control of Activision

The $1.7 billion deal creates the biggest independent video game publisher.

In a deal that creates the biggest independent video game publisher in the world, Vivendi announced Sunday it plans to acquire a controlling stake in Activision.

Under the arrangement, the companies said Vivendi would pay $1.7 billion in cash and fold its games operations into Activision's. The deal will leave Vivendi with a 68 percent share of the combined company, to be called Activision Blizzard.

The companies said the new entity would continue to trade publicly on Nasdaq. Blizzard Entertainment is the name of the most successful game studio in Vivendi's game operations.

Under the deal, Vivendi, based in Paris, will pay $27.50 a share for Activision, a 24 percent premium over Friday's close of $22.15.

The deal combines companies with different areas of strength in the booming video game business. Activision's emphasis is on making games for consoles, like the Sony PlayStation 3 and Microsoft Xbox 360. Its game franchises include the Tony Hawk skateboarding games, the Call of Duty war game series and one of the industry's current best sellers, Guitar Hero, which allows players to strum along on a plastic guitar to tunes played on the television.

Vivendi's strength is in online multiplayer games, such as World of Warcraft, which has more than 9 million players worldwide.

The two companies said that their combined revenue for the 2007 calendar year would be $3.8 billion. The new entity will surpass Electronic Arts, with annual revenue of about $3 billion, as the largest video game publisher in the world that is not affiliated with a console maker, like Microsoft or Nintendo. The two companies said they expected operating income for the new company of $1.1 billion, or $1.20 a share, in the 2009 calendar year and also said it would have the highest profit margins in the industry.

In the merger, expected to be completed in the first half of 2008, shares of Vivendi Games will be converted into 295.3 million new shares of Activision common stock, a transaction that values Vivendi Games at $8.1 billion. Vivendi will also buy 62.9 million newly issued shares of Activision for $1.7 billion in cash.

The two companies also said that within five business days after closing the transaction, Activision Blizzard would begin a $4 billion all-cash tender offer to purchase up to 146.5 million Activision Blizzard common shares at $27.50 a share. If the tender offer is fully subscribed, Vivendi said it would own 68 percent of Activision Blizzard on a fully diluted basis.

Despite Vivendi's taking the larger stake in the new company, Robert A. Kotick, chief executive of Activision, will remain as chief executive of the combined companies. Bruce Hack, the chief executive of Vivendi Games, will become vice chairman and chief corporate officer and lead the merger integration as well as head finance, human resources and legal functions, the two companies said.

Even as the deal puts Activision Blizzard in the top spot in terms of revenue, the question that will face investors is whether Activision can duplicate the business model of Electronic Arts.

Electronic Arts has built its business on creating numerous game franchises that deliver reliable streams of annual revenue. For instance, in its 2007 fiscal year, the company had 24 titles that sold more than a million copies each, and four games-- Madden NFL 07, Need for Speed Carbon, FIFA 07, and The Sims 2 Pets --that sold more than five million copies.

It has done that, in part, by buying studios with popular games. Compared with its competitors, Electronic Arts has invested relatively heavily in the new platforms of casual and mobile games, and popular multiplayer games, industry analysts said. The investments have yet to pay off, but if they do, they could be a big boost to Electronic Arts, analysts said.

In recent years, there have been many examples of major publishers' buying video game development studios. But the Activision Blizzard merger represents a substantially more significant deal, and one with immense stakes. The video game software industry is poised for a record year, driven by the recent introduction of the PlayStation 3, Nintendo Wii and Xbox 360 game consoles.

But the industry also needs companies to create hits and be able to sustain them. Kotick has said he is eager for Activision to catch Electronic Arts and become the largest video game company. "By joining forces with Vivendi Games, we will become the immediate leader in the highly profitable online games business and gain a large footprint in the rapidly growing Asian markets, including China and Korea, while maintaining our leading operating performance across North America and Europe," Kotick said in a statement Sunday morning.

Activision, based in Santa Monica, Calif., has been an industry darling of late, in large part because of the popularity of Guitar Hero III, the latest iteration of the franchise. It was introduced on Oct. 28, and sold 1.3 million copies within seven days. Through October, Activision had three of the eight best-selling games in the United States this year, according to NPD Group, which compiles sales data.

Activision's sales and stock have risen with the momentum. The company's revenue for the 2007 fiscal year was $1.5 billion, a 74 percent increase from 2003. During that same period, Electronic Arts' revenue rose 25 percent to $3.1 billion. This year, Activision's stock is up about 28 percent to $22, while EA's is up 13 percent. And since March 2003, Activision's shares are up nearly sixfold from $3.68 (on a split-adjusted basis).

But even as Activision has been on a roll, industry analysts have questioned whether it can build the kind of library of franchises to compete with Electronic Arts. The addition of Vivendi Games gives Activision access to Vivendi's portfolio of multiplayer games.

Kotick also said that because Vivendi owns the Universal Music Group, the transaction "will benefit Guitar Hero and further extend our sizable leadership position in music-based games."