Game giants Vivendi and Activision announce a surprise $18.9 billion merger agreement that will combine some of gaming’s largest brands, including Guitar Hero and World of Warcraft, under the umbrella of the largest third-party game publisher Activision Blizzard.

Game publisher Activision, Inc. and French telecom and entertainment giant Vivendi have agreed to combine Vivendi Games, Vivendi’s interactive entertainment business and home to World of Warcraft developers Blizzard Entertainment, with Activision, creating the world’s largest third party game publisher worth $18.9 billion. Activision Blizzard (NASDAQ:ATVI), as the new corporation is called, will earn approximately $3.8 billion in 2007 revenues with the highest operating margins of any of its major competitors.

Vivendi Games, valued at $8.1 billion, will be merged with Activision through the conversion of 295.3 million shares of Vivendi Games stock into priced at Activision common stock. Concurrently, Vivendi will purchase 62.9 million Activision shares for $27.50 per share – a 31 percent premium above Activision’s average closing price over the past 20 trading days – for $1.7 billion in cash, granting Vivendi a 52 percent stake in the freshly formed Activision Blizzard.

The Activision Blizzard board of directors will feature six directors designated by Vivendi, two Activision management directors and three independent directors who currently serve on Activision’s board of directors. Activision’s Chairman and Chief Executive Officer Robert Kotick will be President and Chief Executive Officer of Activision Blizzard. Bruce Hack, the current Chief Executive Officer of Vivendi Games, will serve as Vice-Chairman and Chief Corporate Officer of Activision Blizzard and be responsible for leading the merger integration, finance, human resources and legal functions. Mike Griffith will continue to head Activision Publishing, which will include Sierra Entertainment, Sierra Online and Vivendi Games Mobile divisions in addition to the Activision business after the deal closes.

Activision’s advisory team includes Allen & Company LLC and Skadden, Arps, Slate, Meagher & Flom LLP. Goldman Sachs & Co. and Gibson, Dunn & Crutcher LLP are acting as financial and legal consultants on Vivendi’s behalf. The transaction is subject to approval by Activision shareholders and government regulators.

For those concerned about the merger’s affect on Blizzard Entertainment, the company has taken the liberty to answer questions and provide an Activision FAQ. Activision Blizzard is also providing a fact sheet on its new corporate website which directly states that Activision Blizzard will be a “global leader in dynamic, high margin subscription-based online games business with the opportunity to migrate Activision franchises online.”

Jean-Bernard Lévy, Chairman and Chief Executive Officer of Vivendi said:

This alliance is a major strategic step for Vivendi and is another illustration of our drive to extend our presence in the entertainment sector. By combining Vivendi’s games business with Activision, we are creating a worldwide leader in a high-growth industry. We are excited about the opportunities for Activision Blizzard as a broader entertainment software platform. We believe this transaction will create significant value for Activision Blizzard and Vivendi stockholders. In Activision, we have found a partner with a highly complementary business and strong operating team. Bobby Kotick and Brian Kelly are industry pioneers, well known for creating shareholder value. The combined strength of the existing management teams at both companies will set the stage for further profitable growth of Activision Blizzard. We look forward to being an active and supportive majority stockholder in a company that is poised to lead the worldwide interactive entertainment industry in the years ahead.

Robert Kotick, Activision’s Chairman and Chief Executive Officer, added:

This is an outstanding transaction for Activision and our stockholders, as well as a pivotal event in the continuing transformation of the interactive entertainment industry. By combining leaders in mass-market entertainment and subscription-based online games, Activision Blizzard will be the only publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry and reach the broadest possible audiences. 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. Activision stockholders will benefit from significantly increased earnings power and the recurring nature and predictability of subscription-based revenues, while also having the opportunity, if they choose, to receive $27.50 per share for a portion of their shares in the post-closing tender offer.

Vivendi Games provides Activision with unique strategic and financial benefits and will allow us to leverage our franchises into emerging online opportunities as Blizzard has done so successfully. Activision has been very focused on margin expansion, and this transaction will meaningfully increase our overall operating margins as we expand our franchises online and in new geographies. Diversifying our revenue base among subscription-based online, console and PC formats, as well as wireless and casual emerging opportunities, gives us the broadest platform to capitalize on industry growth. With Blizzard’s successful franchises, such as World of Warcraft, StarCraft and an exciting pipeline of yet-to-be announced titles, Vivendi Games’ and Blizzard’s management team will join with Activision’s strong and experienced leaders to become an even more powerful force for innovation in online and offline interactive entertainment across a wide range of platforms. This transaction also provides a unique relationship with Universal Music Group – the world’s largest music company – which will benefit Guitar Hero and further extend our sizable leadership position in music-based games.

Blizzard head Mike Morhaime said, “Blizzard’s industry-leading PC games business, with a track record of nine consecutive bestsellers and a global subscriber base of more than 9.3 million World of Warcraft players, is an exceptional fit for Activision’s highly profitable console games business. From our interactions with the Activision team, it is clear we have much in common in terms of our approaches to game development and publishing. Above all, we are looking forward to continue creating great games for Blizzard gamers around the world, and we believe this new partnership will help us to do that even better than before.”

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