Microsoft Corp. made a big bet on gaming Monday when it announced that it intends to purchase ZeniMax Media, the parent of game publisher Bethesda Softworks, for $7.5 billion in cash.
The company wasted little time beefing up its consumer business after falling short in its attempt to buy the U.S. business of TikTok. With the ZeniMax Media acquisition, it sees room to enhance its Game Pass streaming service by adding Bethesda’s franchises, including “The Elder Scrolls” and “Fallout.”
Microsoft’s stock (MSFT) was down 0.6% in midday trading Monday.
Read: Big Tech is turning on one another amid antitrust probes and litigation
Wedbush analyst Daniel Ives called the planned acquisition a “smart strategic move” that strengthens Game Pass, brings in new creation teams, and lets the company capitalize on “Starfield,” a much anticipated game that’s currently being developed.
“We note that this acquisition comes in the wake of the failed TikTok deal as Nadella continues to remain laser focused on growing the consumer side of the house, while the flagship enterprise/cloud Azure and Office 365 business is humming along at an accelerated growth pace,” Ives wrote, while maintaining an outperform rating and $260 target price on the stock.
He said that the deal makes sense strategically heading into Microsoft’s “highly anticipated new console release” and that it highlights how Microsoft “recognizes its need for consumer-based revenue growth,” which this acquisition could help drive.
Microsoft Chief Executive Satya Nadella said in a release that “quality differentiated content is the engine behind the growth and value of Xbox Game Pass,” while heralding gaming as “the most expansive category in the entertainment industry.”
The company intends to bring existing Bethesda titles to Game Pass and add future games to the service on the same day that they launch for Xbox and PC.
Microsoft anticipates that the ZeniMax Media deal will close in the second half of fiscal 2021 and that it will have “minimal impact” on the company’s operating income for fiscal 2021 and fiscal 2022.
Don’t miss: Microsoft says Apple’s threat against ‘Fortnite’ maker would hurt entire videogame industry
“While we expect this acquisition to be largely immaterial to Microsoft near-term given the company’s scale, we believe this acquisition signals that Microsoft is serious about gaming,” Evercore ISI analyst Kirk Materne said in a note to clients.
Materne argued that gaming could become the “third pillar” of Microsoft’s investment narrative in the coming years as gaming-as-a-service becomes a more prominent part of the industry. In that world, “vendors that can provide gamers with a unique experience through the combination of having great content and a great platform are best positioned to take share in the $109 billion gaming market,” he wrote, while maintaining an outperform rating and $250 price target on Microsoft’s stock.
Microsoft shares have added about 1% over the past three months as the Dow Jones Industrial Average (DJIA) has risen 3.4%.