ACTIVISION BLIZZARD, INC. Item 8.01 Other Events.
As previously disclosed, onJanuary 18, 2022 ,Activision Blizzard, Inc. , aDelaware corporation (the "Company" or "Activision Blizzard"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among the Company, Microsoft Corporation, aWashington corporation ("Parent" or "Microsoft"), andAnchorage Merger Sub Inc. , aDelaware corporation and wholly owned subsidiary of Parent ("Merger Sub"). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent. The Company filed a definitive proxy statement (the "Proxy Statement") with theSecurities and Exchange Commission onMarch 21, 2022 , in connection with, among other things, the Merger Agreement. Certain Litigation
As previously disclosed in the Proxy Statement, following the announcement of the Merger and prior to the filing of the Proxy Statement, lawsuits were filed by purported stockholders of the Company in connection with the transactions contemplated by the Merger Agreement under the captions Stein v.Activision Blizzard, Inc. et al., No. 1:22-cv-01560 (S.D.N.Y.); Perry v.Activision Blizzard, Inc. et al., No. 1:22-cv-02074 (S.D.N.Y.); Whitfield v.Activision Blizzard, Inc. et al., 1:22-cv-01182 (E.D.N.Y.); Lande v.Activision Blizzard, Inc. et al., No. 1:22-cv-01267 (E.D.N.Y.); Watson v.Activision Blizzard, Inc. et al., No. 2:22-cv-01268 (C.D. Cal .); Rubin v.Activision Blizzard, Inc. et al., No. 2:22-cv-01343 (C.D. Cal .); Baker v.Activision Blizzard, Inc. et al., No. 2:22-cv-00875 (E.D. Pa.); and David v.Activision Blizzard, Inc. et al., No. 1:22-cv-00339 (D. Del.) (the "Complaints"). The Complaints each assert violations of Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934, as amended, and allege that the preliminary proxy statement filed in connection with the Merger omitted certain purportedly material information which rendered the preliminary proxy statement incomplete and misleading. The Complaints name the Company and its directors as defendants. Following the announcement of the Merger, the Company also received several demand letters from purported stockholders and one lawsuit, Sjunde AP-Fonden v.Activision Blizzard, Inc. , No. 2022-0281-KSJM (Del. Ch.) (the "220 Complaint"), was filed for books and records pursuant to 8 Del. C. § 220. Among other things, the demand letters and the 220 Complaint seek to investigate purported breaches of fiduciary duty related to the Merger. While the Company believes that the disclosures set forth in the Proxy Statement comply fully with all applicable law and denies the allegations in the Complaints, demand letters and the 220 Complaint, in order to moot plaintiffs' disclosure claims, avoid nuisance and possible expense and business delays, and provide additional information to its stockholders, the Company has determined to voluntarily supplement certain disclosures in the Proxy Statement related to plaintiffs' claims with the supplemental disclosures set forth below (the "Supplemental Disclosures"). Nothing in the Supplemental Disclosures shall be deemed an admission of the legal merit, necessity or materiality under applicable laws of any of the disclosures set forth herein. To the contrary, the Company specifically denies all allegations that any additional disclosure was or is required or material. SUPPLEMENTAL DISCLOSURES
This supplemental information should be read in conjunction with the Proxy Statement, which should be read in its entirety, including the cautionary notes regarding the risks and limitations associated with relying on prospective financial information. The inclusion in this supplement to the Proxy Statement of certain summary unaudited prospective financial information should not be regarded as an indication that any of the Company, Parent or their respective affiliates, officers, directors or other representatives, or any other recipient of this information, considered, or now considers, it to be material or to be reliably predictive of actual future results, and the unaudited prospective financial information should not be relied upon as such. To the extent defined terms are used but not defined herein, they have the meanings set forth in the Proxy Statement. For clarity, new text within restated paragraphs from the Proxy Statement is highlighted with bold, underlined text, and deleted text within restated paragraphs from the Proxy Statement is highlighted with strikethrough text.
Adding the following paragraph after the second paragraph under "Proxy Summary-Legal Proceedings Regarding the Merger" on page 10 and the second paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Legal Proceedings Regarding the Merger" on page 72 as follows:
"Activision Blizzard received a voluntary request for information from theSEC and a grand jury subpoena from theDOJ , both of which appear to relate to their respective investigations into trading by third parties - including persons known toActivision Blizzard's CEO - in securities prior to the announcement of the proposed transaction.Activision Blizzard has informed these authorities that it intends to be fully cooperative with these investigations."
Amending and restating the first and second sentences of the fourteenth paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Background of the Merger" on page 34 as follows:
"Also onDecember 6, 2021 , at the request ofActivision Blizzard senior management, in advance of the meeting scheduled for the following day, discussion materials related to theActivision Blizzard's lLong-rRange pPlan (which we refer to as the "Long-Range Plan" as defined below), together with "stretch" goals and objectives of the management teams ofActivision Blizzard's franchises and business units included as an appendix (as described below), were was shared with representatives of Microsoft, and subsequently shared by Microsoft with representatives ofGoldman Sachs & Co. LLC , Microsoft's financial advisor, which we refer to as "Goldman Sachs."Activision Blizzard's long-range plan (which we refer to as the "Long-Range Plan")The Long-Range Plan was approved by the Activision Blizzard Board of Directors onNovember 2, 2021 as the plan to be used for internal business planning purposes forActivision Blizzard's performance for its fiscal years 2021 through 2024.
Amending and restating the third sentence of the thirty-fourth paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Background of the Merger" on page 37 as follows:
"Also at the meeting, the Activision Blizzard Board of Directors discussed certain information provided byAllen & Company regardingAllen & Company's material relationships withActivision Blizzard and Microsoft during the preceding two-year period as previously provided to theActivision Blizzard Board of Directors, which information indicated thatAllen & Company had not provided investment banking services to Microsoft during such preceding two-year period for whichAllen & Company received compensation."
Amending and restating the first sentence of the thirty-eighth paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Background of the Merger" on page 38 as follows:
"
Adding the following sentences to the end of the fifth to last paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Background of the Merger" on page 42 as follows:
"Representatives of Skadden also presented on derivative suits in the context of a merger transaction and taking into consideration the potential value of such claims when considering whether to approve the proposed transaction with Microsoft. The Activision Blizzard Board of Directors discussed the need to consider the potential value toActivision Blizzard of pending derivative litigation claims and noted that even if such litigation claims had material value, the proposed transaction price of$95.00 per share provided more than adequate value for such litigation claims."
Amending and restating the fourth sentence of the second to last paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Background of the Merger" on page 42 as follows:
"After discussions, including as to the matters described below under "- Recommendation of the Activision Blizzard Board of Directors;Activision Blizzard's Reasons for the Merger," the Activision Blizzard Board of Directors unanimously determined to delegate the final resolution of the dividend issue to an ad hoc committee of directors of the Activision Blizzard Board of Directors, consisting of Messers Mr. Morgado,Activision Blizzard's lead independent director,Mr. Corti , an independent director, andMr. Kelly , and (i) determined that the terms of the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests ofActivision Blizzard and its stockholders; (ii) declared advisable, approved and authorized in all respects the execution and delivery of the merger agreement byActivision Blizzard , the performance byActivision Blizzard of its obligations thereunder, and the consummation of the transactions contemplated thereby upon the terms and conditions set forth therein; (iii) directed that the adoption of the merger agreement be submitted to a vote at a meeting of the stockholders ofActivision Blizzard ; and (iv) recommended thatActivision Blizzard stockholders adopt
the merger agreement."
Amending and restating the first and second sentences and adding the fourth sentence to the end of the last paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Background of the Merger" on page 42 as follows:
"Following the approval of the merger agreement and the transactions contemplated thereby (including the merger) by the Activision Blizzard Board of Directors,Activision Blizzard and Microsoft finalized the merger agreement, including the resolution of the outstanding dividend issue, whichMr. Nadella andMr. Kotick discussed during the evening ofJanuary 17, 2022 , and the resolution of which was approved by t. The ad hoc committee of the Activision Blizzard Board of Directors formed to resolve the outstanding dividend issue, comprised of Messrs. Morgado, Corti and Kelly, approved such resolution. Early in the morning onJanuary 18, 2022 ,Activision Blizzard and Microsoft executed the merger agreement, and, prior to the opening of trading onJanuary 18, 2022 , issued a joint press release announcing the execution of the merger agreement. No discussions or negotiations regarding post-closing employment arrangements with Microsoft occurred between Microsoft andMr. Kotick prior to the approval and execution of the merger agreement and the transactions contemplated thereby, or have occurred subsequent to such approval and execution, through the date hereof." Amending and restating the last sentence of the first paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Financial Forecasts-Long-Range Plan" on page 50 as follows:
"Discussion materials related to tThe Long-Range Plan, which included as an
appendix the pre-risk-adjusted franchise and business unit inputs, was provided
to Microsoft on
Amending and restating the first sentence of the second paragraph and adding the first footnote to the corresponding table under "Proposal 1: Adoption of the Merger Agreement-The Merger-Financial Forecasts-Long-Range Plan" on page 50 as follows and adding the following paragraph, table and related footnotes after such second paragraph:
"The following table reflects selected metrics (in millions) of
Fiscal Year Ending December 31,
Long-Range Plan(1) 2021E 2022E 2023E 2024E
Revenue(2) $ 8,856 $ 9,174 $ 11,725 $ 12,405
Operating Income(3) $ 3,718 $ 3,886 $ 4,849 $ 5,597 (1)
reportable segments, including the
which consists of operations in
and sales distribution services to third-party publishers of interactive
entertainment software, Activision's own publishing operations and
manufacturers of interactive entertainment hardware. Revenue and Operating
Income include amounts from such other businesses, in addition to Activision
Blizzard's reportable segments.
(2) Revenue excludes the impact of deferrals from
accounting treatment under GAAP on certain of
online-enabled products. Revenue (in millions) from the franchise and
business unit inputs before applying
assessments and judgments included as an appendix to the Long-Range Plan was:
2021E: $8,856 ; 2022E: $9,546 ; 2023E: $12,654 ; 2024E: $13,394 .
(3) Operating Income was calculated in a manner consistent with EBIT (Pre-SBC) as
described below in the management forecasts. Operating Income (in millions)
from the franchise and business unit inputs before applying Activision
Blizzard management's risk assessments and judgments included as an appendix
to the Long-Range Plan was: 2021E:
2024E: $6,391 .
The following table reflects selected metrics (in millions) of
Fiscal Year Ending December 31,
Long-Range Plan 2021E 2022E 2023E 2024ERevenue (1) Activision Publishing(2)$ 3,974 $ 3,982 $ 4,688 $ 4,942 Blizzard Entertainment(3)$ 1,899 $ 2,079 $ 3,750 $ 3,959 King Digital(4)$ 2,584 $ 2,907 $ 3,230 $ 3,444 Operating Income (5) Activision Publishing(6)$ 1,945 $ 1,840 $ 2,200 $ 2,490 Blizzard Entertainment(7)$ 742 $ 780 $ 1,330 $ 1,640 King Digital(8)$ 1,037 $ 1,230 $ 1,320 $ 1,460
(1) Revenue excludes the impact of deferrals from
accounting treatment under GAAP on certain of
online-enabled products.
(2) Revenue (in millions) of
business unit inputs before applying
assessments and judgments included as an appendix to the Long-Range Plan was:
2021E:
(3) Revenue (in millions) of
business unit inputs before applying
assessments and judgments included as an appendix to the Long-Range Plan was:
2021E:
(4) Revenue (in millions) of King Digital from the franchise and business unit
inputs before applying
judgments included as an appendix to the Long-Range Plan was: 2021E:
2022E:
(5) Operating Income was calculated in a manner consistent with EBIT (Pre-SBC) as
described below in the management forecasts.
(6) Operating Income (in millions) of
and business unit inputs before applying
risk assessments and judgments included as an appendix to the Long-Range Plan
was: 2021E:
(7) Operating Income (in millions) of
and business unit inputs before applying
risk assessments and judgments included as an appendix to the Long-Range Plan
was: 2021E: $742 ; 2022E: $816 ; 2023E: $1,790 ; 2024E: $2,065 .
(8) Operating Income (in millions) of King Digital from the franchise and
business unit inputs before applying
assessments and judgments included as an appendix to the Long-Range Plan was:
2021E: $1,037 ; 2022E: $1,140 ; 2023E: $1,270 ; 2024E: $1,395 ."
Adding the line items and related information to the table in the second paragraph under "Proposal 1: Adoption of the Merger Agreement-The Merger-Financial Forecasts-Management Forecasts" on page 51 as follows:
"The following table reflects selected metrics (in millions) included in theJanuary 2022 forecasts: Fiscal Year Ending December 31, Management Forecasts 2021E 2022E 2023E 2024E 2025E 2026E Revenue(1)$ 8,354 $ 8,625 $ 10,605 $ 11,125 $ 12,237 $ 12,604 (-) Cost of Sales$ (1,972 ) $ (1,812 ) $ (1,921 ) $ (2,006 ) $ (2,190 ) $ (2,256 ) (-) Product Development$ (1,341 ) $ (1,580 ) $ (2,415 ) $ (2,169 ) $ (2,566 ) $ (2,580 ) (-) Variable Sales and Marketing$ (775 ) $ (943 ) $ (1,023 ) $ (1,123 ) $ (1,285 ) $ (1,260 ) (-) Fixed Sales and Marketing and General and Administrative$ (772 ) $ (871 ) $ (961 ) $ (967 ) $ (1,040 ) $ (1,071 ) (+) Other$ 14 $ 31 $ 16 $ 11 $ 10 $ 10 EBIT (Pre-SBC)(2)$ 3,507 $ 3,450 $ 4,300 $ 4,870 $ 5,166 $ 5,446 (+) Depreciation & Amortization$ 108 $ 103 $ 103 $ 103 $ 100 $ 100 Adj. EBITDA(3)$ 3,615 $ 3,552 $ 4,403 $ 4,973 $ 5,266 $ 5,546 (-) SBC$ (554 ) $ (601 ) $ (526 ) $ (560 ) $ (580 ) $ (600 ) (-) Depreciation & Amortization$ (108 ) $ (103 ) $ (103 ) $ (103 ) $ (100 ) $ (100 ) Taxable EBIT$ 2,954 $ 2,849 $ 3,774 $ 4,311 $ 4,586 $ 4,846 (-) Cash Taxes$ (443 ) $ (528 ) $ (698 ) $ (793 ) $ (826 ) $ (872 ) Net Operating Profit After Taxes$ 2,511 $ 2,321 $ 3,076 $ 3,518 $ 3,761 $ 3,974 (+) Depreciation & Amortization$ 108 $ 103 $ 103 $ 103 $ 100 $ 100 (-) Change in Working Capital -$ (275 ) $ (50 ) $ (50 ) $ (61 ) $ (63 ) (-) Capital Expenditures$ (105 ) $ (100 ) $ (100 ) $ (100 ) $ (100 ) $ (100 ) (-)Capitalized Software Development$ (426 ) $ (541 ) $ (434 ) $ (439 ) $ (489 ) $ (504 ) (+) Amortization of Software Development$ 215 $ 286 $ 818 $ 389 $ 587 $ 504 (-) Restructuring$ (67 ) $ (25 ) $ (25 ) $
(25 )
(1) Revenue excludes the impact of deferrals from
accounting treatment under GAAP on certain of
online-enabled products.
following approximate estimated revenues (in billions): 2021E:
$8.7 ; 2023E:$10.6 ; 2024E:$11.1 ; 2025E:$12.2 ; 2026E:$12.6 .
(2) "EBIT (Pre-SBC)" refers to earnings before interest and taxes (but includes
depreciation and amortization), and excludes stock-based compensation,
restructuring and other costs, net, acquisition-related costs, net and
certain other expenses that result from unplanned events outside the ordinary
course of continuing operations. EBIT (Pre-SBC) is a non-GAAP measure, and
our calculation of EBIT (Pre-SBC) may differ from other companies.
estimated EBIT (Pre-SBC) (in billions): 2021E:
$4.3 ; 2024E:$4.9 ; 2025E:$5.2 ; 2026E:$5.4 .
(3) "Adjusted EBITDA" refers to earnings before interest, taxes, depreciation and
amortization, and excludes stock-based compensation, restructuring and other
costs, net, acquisition-related costs, net and certain other expenses that
result from unplanned events outside the ordinary course of continuing
operations. Adjusted EBITDA is a non-GAAP measure, and our calculation of
Adjusted EBITDA may differ from other companies.
forecasts provided for the following approximate estimated Adjusted EBITDA
(in billions): 2021E:
$5.3 ; 2026E:$5.5 .
(4) "Unlevered Free Cash Flow" was calculated as Adjusted EBITDA less stock-based
compensation, depreciation and amortization and cash taxes to derive net
operating profit after taxes, which was then adjusted by adding back
depreciation and amortization and amortization of software development anddeducting changes in working capital, capital expenditures, capitalized
software development and restructuring costs.
forecasts provided for the following approximate estimated Unlevered Free
Cash Flow (in billions): 2021E:
2025E: $3.8 ; 2026E: $3.9 ."
Amending and restating the first sentence of the first paragraph under "Opinion
of Activision Blizzard's Financial Advisor-Financial Analyses-Selected Public
Companies Analysis" on page 55 as follows and by deleting the list of selected
companies immediately following such paragraph:
"Allen & Company reviewed certain publicly available financial and stock market
information relating to Activision Blizzard and the followingthree selected
publicly traded companies, as noted below, with operations in the interactive
entertainment industry that Allen & Company , based on its professional judgment,
considered generally relevant for purposes of analysis, collectively referred to
as the "selected companies.:"
Amending and restating the first sentence of the third paragraph under "Opinion
of Activision Blizzard's Financial Advisor-Financial Analyses- Selected Public
Companies Analysis" on page 56 as follows and additionally supplementing by
adding the following list of selected companies and related information after
such sentence and moving the second and third sentences of such paragraph
thereunder:
"The overall low to high calendar year 2022 and calendar year 2023 estimated
EBITDA multiples observed for the selected companies were 8.4x to 19.1x and 7.3x
to 15.6x, respectively, as indicated below (individual multiples are referenced
below for informational purposes):"
2022E EBITDA 2023E EBITDA
Multiples Multiples
? Take-Two Interactive Software, Inc. 19.1 x 15.6 x
? Electronic Arts Inc. 13.0 x 12.0 x
? Ubisoft Entertainment SA 8.4 x 7.3 x
Amending and restating the second sentence of the third paragraph under "Opinion
of Activision Blizzard's Financial Advisor-Financial Analyses-Selected Public
Companies Analysis" on page 56 as follows:
"Based on these observed multiples and Allen & Company's professional judgment,
Allen & Company then applied selected ranges of calendar year 2022 and calendar
year 2023 estimated EBITDA multiples derived from the selected companies of
13.5x to 18.0x and 12.5x to 15.0x, respectively, to corresponding data of
Activision Blizzard based on the Activision Blizzard forecasts."
Amending and restating the first sentence of the first paragraph under "Opinion ofActivision Blizzard's Financial Advisor-Financial Analyses- Selected Precedent Transactions Analysis" on page 56 as follows and by deleting the list of selected transactions and related information immediately following such paragraph: "Using publicly available information,Allen & Company reviewed financial data relating to the following 11 selected transactions, as noted below, involving target companies with operations in the interactive entertainment industry thatAllen & Company , based on its professional judgment, considered generally relevant for purposes of analysis, collectively referred to as the "selected transactions.:" Amending and restating the first sentence of the third paragraph under "Opinion ofActivision Blizzard's Financial Advisor-Financial Analyses- Selected Precedent Transactions Analysis" on page 56 as follows and additionally supplementing by adding the following list of selected transactions and related information after such sentence and moving the second and third sentencesof
such paragraph thereunder:
"The overall low to high latest 12 months EBITDA multiples observed for the selected transactions were 5.6x to 29.9x, as indicated below (individual multiples are referenced below for informational purposes; transactions for which such data was not publicly available, is referenced below as "NA"):"
Announcement LTM
Date Acquiror Target EBITDA Multiple
Take-Two
Interactive
January 2022 Software, Inc. Zynga Inc. 19.4 x
Electronic Arts
February 2021 Inc. Glu Mobile, Inc. 27.4 x
Electronic Arts Codemasters Group
December 2020 Inc. Holdings plc 29.9 x
Microsoft
September 2020 Corporation ZeniMax Media, Inc. NA
Tencent Music Leyou Technologies
August 2020 Entertainment Group Holdings Ltd. 15.8 x
Aristocrat Leisure
November 2017 Limited Big Fish Games, Inc. 11.9 x
DoubleU Games DoubleDown
April 2017 Co., Ltd. Interactive Co., Inc. 10.5 x
Shanghai Giant
Network Technology Playtika Holdings,
July 2016 Co., Ltd. LLC 13.6 x
Tencent Holdings
June 2016 Ltd. Supercell Oy 9.8 x
King Digital
Activision Blizzard Entertainment Public
November 2015 Inc. Limited Company 5.6 x
SoftBank Group
October 2013 Corp. Supercell Oy 6.5 x
Amending and restating the second sentence of the third paragraph under "Opinion
of Activision Blizzard's Financial Advisor-Financial Analyses-Selected Precedent
Transactions Analysis" on page 56 as follows:
"Based on these observed multiples and Allen & Company's professional judgment,
Allen & Company then applied a selected range of latest 12 months EBITDA
multiples derived from the selected transactions of 14.0x to 20.0x to the latest
12 months (as of December 31, 2021 ) EBITDA of Activision Blizzard based on the
Activision Blizzard forecasts."
Amending and restating the third sentence of the first paragraph under "Opinion
of Activision Blizzard's Financial Advisor-Financial Analyses-Discounted Cash
Flow Analysis" beginning on page 56 as follows:
"Allen & Company calculated implied terminal values for Activision Blizzard by
applying to Activision Blizzard's unlevered, after-tax free cash flows for the
fiscal year ending December 31, 2026 a selected range of perpetuity growth rates
of 2.25% to 2.75%,which range was selected based on Allen & Company's
professional judgment, and a selected range of discount rates of 6.50% to 8.00%
derived from a weighted average cost of capital calculation."
. . .
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