Microsoft to acquire PE-backed ZeniMax for $7.5bn

December 2020 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

December 2020 Issue

Microsoft has agreed to acquire ZeniMax Media, the parent company of several industry-leading video game developers, including most notably Bethesda Softworks, for $7.5bn in cash from private equity firm Providence Capital.

The deal, which is subject to customary closing conditions and completion of regulatory review, is expected to close in the second half of fiscal year 2021 and will have minimal impact to non-GAAP operating income in fiscal years 2021 and 2022.

The planned acquisition includes publishing offices and development studios with over 2300 employees, encompassing Bethesda Softworks, Bethesda Game Studios, id Software, ZeniMax Online Studios, Arkane, MachineGames, Tango Gameworks, Alpha Dog, and Roundhouse Studios. The companies have confirmed that Bethesda’s structure and leadership will remain in place and the studio will continue to operate independently.

The move grows the number of in-house Xbox game development studios to 23, up from 15, giving it control of some of the game industry’s most popular franchises.

“Gaming is the most expansive category in the entertainment industry, as people everywhere turn to gaming to connect, socialise and play with their friends,” said Satya Nadella, chief executive of Microsoft. “Quality differentiated content is the engine behind the growth and value of Xbox Game Pass – from Minecraft to Flight Simulator. As a proven game developer and publisher, Bethesda has seen success across every category of games, and together, we will further our ambition to empower the more than three billion gamers worldwide.”

“This is a thrilling day for this company, our employees, and our fans,” said Robert A. Altman, chairman and chief executive of ZeniMax. “We have enjoyed a close partnership with Microsoft for decades, and this deal is a natural progression of those years working together. The big winners today are our fans. We are continuing to develop our slate of AAA games, but now with Microsoft’s scale and entire Game Stack, our games can only get better.”

For Microsoft, the acquisition comes at an opportune moment. The company’s newest generation of video games consoles, the Microsoft Xbox Series X and Series S, were released in November as the latest round of the ongoing console war with Sony’s PlayStation began anew. The deal will strengthen the appeal of Microsoft’s Xbox Game Pass, a subscription service for video games, by adding Bethesda’s line-up to the service. It may ultimately hurt Sony’s PlayStation in the long run, as future Bethesda games, barring existing agreements, will be released on “other consoles on a case by case basis”, according to Phil Spencer, Microsoft’s head of Xbox.

“We share a deep belief in the fundamental power of games, in their ability to connect, empower, and bring joy,” wrote Todd Howard, director and executive producer at Bethesda Studios. “And a belief we should bring that to everyone –regardless of who you are, where you live, or what you play on. Regardless of the screen size, the controller, or your ability to even use one.”

Microsoft’s acquisition of ZeniMax comes after its failed bid for a stake in TikTok, the China-based social network which has attracted more than 2 billion downloads worldwide and has more than 100 million users in the US. The deal for ZeniMax is the joint third largest in Microsoft history, matching the $7.5bn the company paid for GitHub in 2018 and trailing only the $8.5bn acquisition of Skype in 2011 and the $26.2bn purchase of LinkedIn in 2016.

ZeniMax received $450m in backing from Providence Equity Partners between 2007 and 2010. Providence is currently the company’s only institutional backer, and the firm is set to record a significant return on its investment with the exit to Microsoft. The firm had previously considered a sale of the business in 2016 at a valuation of up to $2.5bn, but ZeniMax has handily surpassed that valuation.

Richard Summerfield