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Video game groups merge | Technology | Guardian Unlimited
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Video game groups merge

Guitar Hero 3 A scene from Guitar Hero 3, one of the most popular Activision titles. Photograph: PR French media conglomerate Vivendi is merging its computer games business with US-based rival Activision in an $18.9bn (£9.2bn) deal that will create the world's largest computer games company.

The move brings together franchises including the world's most popular online game, World of Warcraft developed by Vivendi's Blizzard Entertainment, with Activision hits Guitar Hero and the Call of Duty and Tony Hawk franchises.

The two companies, who have been in talks for over a year, hope to create a 'next generation digital entertainment company' from a deal which will see Vivendi hold 52% to 68% of a new company Activision Blizzard, that will leapfrog current market leader Electronic Arts, home to the Sims and Medal of Honor games.

While traditional media such as film, TV and music struggles to adapt to the digital environment, computer games are increasingly making use of the ability to connect devices to the internet. Advertisers have also become interested in using computer game environments for their products as game franchises become more popular among key demographics - such as the young - than TV programmes and films.

The global computer games market is estimated at more than $30bn (£14.6bn). Development costs, however, are rising because of the proliferation of gaming consoles - the XBox, Playstation 3 and Nintendo Wii - none of which has a commanding lead. Global sales of software for these next generation consoles are forecast to reach $13.9bn by 2009.

The merger comes as these next generation devices move video game consoles from their traditional home in teenagers' bedrooms to the living room, with DVD players and internet connections increasingly making them the hub of the digital home.

The surprise success of Nintendo's Wii, meanwhile, has greatly expanded the potential video game audience by boosting family gaming. At the same time, computer-based gamers are increasingly looking to play in online worlds such as World of Warcraft that bear more resemblance to social networking sites than traditional arcade games.

"Consumer engagement (with games) has changed, whether it's the impact of social gaming; or the Wii where the physical interface now invites an entirely new audience; or the type of community being built in World of Warcraft, that is much more of a social network experience," said Activision chairman and chief executive Robert Kotick. "It is not really just a video games company any more, this is the next generation digital entertainment company we are building."

For instance Activision's popular Guitar Hero series, in which players use a guitar-style plug-in to play music could be expanded by using content from Vivendi's Universal Music catalogue, explained Vivendi Games chairman, Rene Penisson.

"Just thinking about how Guitar Hero can develop, it has to go to downloadable content and when you say downloadable content you say online and you think Blizzard and the fact that we are dominating the online area. When you say content you speak about Universal Music, it is such an obvious area for growth," he said.

The latest instalment - Guitar Hero 3 - released in late October managed sales of more than $115m, or more than a third of the company's second quarter revenues, in its first week.

The deal also gives Activision access to Vivendi's distribution and gaming network not only in Europe but in the Asia Pacific region where its World of Warcraft game has been highly popular.

"We become the world's largest, most profitable pure-play video game publisher, we touch every geography," added Kotick. This year the new company, which will be listed on Nasdaq, will have combined revenues of $3.8bn.

Just last week Activision raised its quarterly earnings outlook as a result of strong sales of Guitar Hero and Call of Duty with analysts saying it had done well over the post-Thanksgiving shopping weekend.

For Blizzard the deal will give management access to shares which it can use as incentives in an increasingly competitive market for game developing talent, according to its chief executive Mike Morhaime.

"From the Blizzard perspective, we are very excited about the partnership... one thing the deal does for Blizzard that really was not available to us before is give us access to a public currency that will really help us out with attracting talent and developer retention," he said.

The mechanics of the deal have been complicated by the desire of management at Activision, which is listed on Nasdaq, to give shareholders the chance to sell at least half their holdings. Vivendi Games is being merged with Activision in return for 295.3m new Activision shares. Vivendi will also buy a further 62.9 m shares at $27.50 each giving it up to a 52% stake.
After the deal, the new company will launch a $4bn share buyback at $27.50 allowing shareholders to sell out. That deal will be part-funded by Vivendi and if fully taken-up the French company will end up with a 68% stake.

The deal is the latest consolidation within the computer games industry. Last month Warner Bros Home Entertainment Group bought TT Games, one of the world's largest independent game developers, and TT Games Publishing, the UK-based game publisher behind the Lego Star Wars videogames.

Time Warner also has a 10% stake in UK-based SCi Entertainment Group, the owner of Lara Croft creator Eidos. SCi announced earlier this year that it was in takeover talks. Vivendi and Electronic Arts have been touted as potential buyers in the past but the most recent talks are understood to have been with France's Ubisoft, maker of Tom Clancy's Splinter Cell.


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