The Logic Behind the Sky-High Candy Crush Deal

In its seemingly exorbitant purchase of the popular app’s creator, Activision Blizzard is just playing the game.

A mascot from Candy Crush Saga walks the trading floor of the New York Stock Exchange. (Brendan McDermid / Reuters)

The fact that Activision Blizzard bought Candy Crush creator King Digital startled people less than the sheer size of the deal: $5.9 billion. As many noted, that’s almost $2 billion more than Disney paid for either Marvel or Lucasfilm. It’s more than twice the $2.5 billion Microsoft paid for Minecraft maker Mojang, a property that feels like it has more long-term staying power than Candy Crush. And it’s about nine times the $650 million Electronic Arts paid for PopCap, creators of Bejeweled, the game whose underlying behavior lies at the heart of Candy Crush.

Six billion dollars is a lot of money, but all dollars are not equal. Activision paid $3.6 billion of the sum in offshore cash. Some analysts say it would have cost Activision nearly a third of that to repatriate that money, which means that the company “saved” $1 billion just by inking the deal.

The remaining $2.3 billion is financed by long-term loans, paid back against the very low interest rates common in the present market. So in real, immediate terms, King cost Activision a lot less liquid cash than the $5.9 billion price tag suggests.

Some have rightly observed that at $18 per share, King is is being bought for roughly 20 percent less than its initial public offering price of $22.50 back in March 2014. But as the investment manager Dan Tubb observed, King’s profit is a more important figure than its share price.

King is currently trading at about 10 times earnings, while Activision’s stock trades at well over twice that figure. The acquisition adds King’s $0.6 billion annual profit to Activision’s current $1.1 billion, a 50 percent bonus. Earnings per share are usually calculated against the previous four quarters, and Activision’s valuation before the deal was about $25 billion. That means that if the street is willing to sustain Activision’s current multiple, a year from now Activision could add something like $12 billion to its value. Not bad for an outlay of $2.6 billion in cash today, factoring in the hypothetical offshore shelter premium.

The fiscal implications of the deal are a reminder that businesses are financial instruments as much as or more than they are providers of goods and services. In the case of digital entertainment, companies like Activision Blizzard and King Digital speculate on the public’s current and future interest in digital-entertainment trends. Whether or not Candy Crush sticks around might be less important to Activision than capitalizing on it before it falls out of favor.

Corporate valuations measure the acceleration of value more than its reality. That’s why hot tech companies sell for so much more than their staid, established brethren. Companies like Marvel and Lucasfilm are worth “less” partly because they are no longer increasing in value rapidly. The cognitive dissonance the public experiences when hearing about these deals derives from an intuitive sense that longevity matters—or that it should. But market value is driven by short-term thinking.

It’s fitting to consider these bigger dynamics in relation to a game that is itself about financial speculation. Candy Crush Saga is a free-to-play game; you download it for nothing, and then the game invites you to spend money on bonuses to make it easier. Back in 2013, King acknowledged that at least 70 percent of its players never spent a dime on in-app purchases. To play King’s flagship game is to attempt to get the most benefit for the least financial outlay. And that’s just what Activision has done.