Switch, Lite & Games Flatlay (1)
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With this week's unprecedented news that Microsoft is kickstarting the process to acquire Activision Blizzard for a little under $70 Billion, there's been a lot of talk about what the company could do next. The likelihood is not very much for the next 12-18 months; like with the Bethesda deal the process will have regulatory hurdles to get through, and in this case Activision Blizzard shareholders will need to agree (they probably will); any challenges to the takeover that are cleared will still cause delays. Even if it goes entirely smoothly, it'll take time.

A topic that also did the rounds yesterday was whether Microsoft could target Nintendo once again. It famously did this 20 years ago and was laughed out of the room, and we suggested in an editorial yesterday that's an outcome that'd probably be repeated. However, maybe it's worth expanding on why a Microsoft takeover of Nintendo is extremely unlikely.

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Corporate culture and law are rather different in Japan, adding resistance and complications to acquiring these companies.

One argument made has been that, prior to the takeover, Activision Blizzard's market capitalisation was in the same sort of region to Nintendo's - remember, the company isn't just Call of Duty and other console gaming IPs, but has a sizeable mobile business. Therefore if Microsoft can pull this move off, why not Nintendo? For one thing, Microsoft picked a smart moment - from an investment point of view - to jump into this deal, with Activision Blizzard coming off the back of an underperforming Call of Duty: Vanguard (by the IP's high standards), and more tellingly a year of court cases and extremely damaging allegations about its corporate culture and behaviours. If there was a point to try and acquire a huge corporation at only a modest percentage over cost, this was it.

But that's not the only big reason that a Microsoft takeover of Nintendo is unlikely. First of all, it's telling that Microsoft's major targets - in gaming and elsewhere in its business - have mainly been other American businesses. Corporate culture and law are rather different in Japan, adding resistance and complications to acquiring these companies. Maybe it'll happen more down the line, but the idea of takeovers and buyouts is still relatively fresh and full of uncertainties in Japan.

Mergers and acquisitions do of course happen, though many are internal to the country. There are a number of deals in and out of the country, for example Sony acquired Crunchyroll, yet sizeable corporate takeovers in which a major American or European company buys out a Japanese company are extremely rare. Part of the reason is entrenched culture and practices - for example Japanese companies often have 'cross-shareholdings' between business partners. This can include banks with which the company does business, for example. As you can see in Nintendo's most recent top 10 shareholders list, below, with the largest being a 'Trust Bank' (essentially an investment administration business), Nintendo's shareholdings reflect a mix of investments and these cross-shareholdings.

Nintendo Shareholders Top 10.JPG
Image: Nintendo

That said, there's a shift taking place in Japan that may open it up to more foreign takeovers in the future, even those that are unsolicited. This is nicely summarised in this M&A Explorer article, as it outlines some key cases and changes that are opening Japanese business up to more global interventions. Interestingly it highlights some things we've seen from Nintendo as it adjusts to new regulations and requirements - greater transparency in its dealings, opening up to shareholder requests, and an expansion in overseas and independent board members. These are all changes that are, without a doubt, opening up the Japanese corporate arena.

Nintendo's IPs are among the highest-regarded in the industry, and the company has given zero indication of being open to a sale.

So, if the sands are slowly shifting in Japanese corporate culture, does it give Microsoft a 'better chance' than it had 20 years ago? Theoretically, yes, but in addition to the remaining challenges of initiating a takeover of that scale in Japan, there's also the question of valuation. At this moment Nintendo's industry value includes a userbase in the tens of millions, not just in terms of online customers but in the hardware business. Nintendo's IPs are among the highest-regarded in the industry, and the company has given zero indication of being open to a sale. In each shareholder's meeting there are questions about the company's plans, how it will sustain success, but there's also a lot of contentment and box ticking. Nintendo's Directors are routinely nominated and accepted with little drama; the business is strong.

While Microsoft would join every other gaming company in desiring Nintendo's iconic franchises, the deal wouldn't make much sense beyond that. Microsoft is betting big on its consoles, PC and the cloud combining to make games available to 'everyone', with streaming to phones and tablets a key part of that. The hybrid hardware nature of the Switch doesn't align cleanly with that, especially in the context of the dizzying amount of money that'd even be needed to attempt a buy-out of Nintendo.

It all seems pretty fanciful. Admittedly, the idea of Microsoft acquiring Activision Blizzard also seemed unlikely, but the spend on that deal alongside all the factors that make purchasing Nintendo more difficult suggests that excitable talk about the mother of all takeovers is just that - excitable talk.

We certainly won't lose any sleep over the prospect at this time, in any case.

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