Recommendation of Our Board of Directors and Reasons for the Merger
Recommendation of the Activision Blizzard Board of Directors to Adopt the Merger Agreement, thereby Approving the Transactions Contemplated by the Merger Agreement.
On January 17, 2022, the Activision Blizzard Board of Directors, after considering various factors described below, unanimously (i) determined that the terms of the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of Activision Blizzard and its stockholders; (ii) declared advisable, approved and authorized in all respects the execution and delivery of the merger agreement by Activision Blizzard, the performance by Activision 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 of Activision Blizzard; and (iv) recommended that Activision Blizzard stockholders adopt the merger agreement.
The Activision Blizzard Board of Directors unanimously recommends that you vote “FOR” the proposal to adopt the merger agreement, thereby approving the transactions contemplated by the merger agreement, including the merger.
Reasons for the Merger
In evaluating the merger agreement and the transactions contemplated thereby, including the merger, the Activision Blizzard Board of Directors held a number of meetings and consulted with Activision Blizzard’s senior management and legal and financial advisors. In reaching its decision to approve the merger agreement and to recommend that Activision Blizzard stockholders vote to adopt the merger agreement, the Activision Blizzard Board of Directors considered a number of factors, including, but not limited to the following (which are not necessarily presented in order of their relative importance to the Activision Blizzard Board of Directors):
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Premium to Market Price. The fact that the merger consideration of $95.00 per share in cash to be received by the holders of shares of Activision Blizzard common stock in the merger represents a significant premium over the market price at which shares of Activision Blizzard common stock traded prior to the announcement of the execution of the merger agreement, including the fact that the merger consideration represents a premium of:
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approximately 19.8% over the volume-weighted average closing stock price of shares of Activision Blizzard common stock for the one-year period ended January 14, 2022;
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approximately 45.3% over the closing stock price of Activision Blizzard common stock on January 14, 2022, the last trading day prior to the approval of the transaction; and
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approximately 50.3% over the volume-weighted average stock price of shares of Activision Blizzard common stock during the 30 trading days ended January 14, 2022.
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Form of Consideration. The fact that the proposed merger consideration is all cash, which provides stockholders certainty of value and liquidity for their shares of Activision Blizzard common stock while eliminating long-term business and execution risks.
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Fair Value. The belief of the Activision Blizzard Board of Directors that the merger represents fair value for the shares of Activision Blizzard common stock, taking into account the Activision Blizzard Board of Directors’ familiarity with Activision Blizzard’s current and historical financial condition, results of operations, business, competitive position and prospects, as well as Activision Blizzard’s future business plan and potential long-term value.
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Growth Opportunities. The belief of the Activision Blizzard Board of Directors, based on discussions between Activision Blizzard and Microsoft and Microsoft’s transaction history, that Activision Blizzard’s business will be an important focus of Microsoft’s growth strategy, which would create professional growth opportunities for many of Activision Blizzard’s employees.
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Benefits to Customers. The belief of the Activision Blizzard Board of Directors, based on discussions between Activision Blizzard and Microsoft and Microsoft’s product portfolio and transaction
history, that Activision Blizzard’s customers will benefit from Microsoft’s complementary product offerings and its greater resources and capabilities to expand the business of Activision Blizzard as part of Microsoft.
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Industry Dynamics. The potential for the merger to enhance the combined company’s ability to compete effectively in the highly competitive market environments in which Activision Blizzard and Microsoft operate by combining Activision Blizzard’s creative DNA and library of premium franchises with Microsoft’s technological and distribution capabilities, including the ability to capitalize on new growth opportunities and to compete for customers and key employee talent.
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Loss of Opportunity. The possibility that, if the Activision Blizzard Board of Directors declined to adopt the merger agreement, there may not be another opportunity for Activision Blizzard’s stockholders to receive a comparably priced transaction with a comparable level of closing certainty.
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Risks Inherent in Activision Blizzard’s Business Plan. Activision Blizzard’s short-term and long-term financial projections and the perceived challenges and risks associated with Activision Blizzard’s ability to meet such projections, including Activision Blizzard’s past track record of meeting internal, long-term projections, the financial results for Activision Blizzard for the year ended December 31, 2021 and the implications of Activision Blizzard’s fourth quarter ended December 31, 2021 for Activision Blizzard’s outlook for 2022 and subsequent years and the competitive threats facing Activision Blizzard, as well as the risks and uncertainties described in the “risk factors” and “forward looking statements” sections of Activision Blizzard’s disclosures filed with the SEC, including the fact that Activision Blizzard’s actual financial results in future periods could differ materially and adversely from the projected results.
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Company Knowledge. The Activision Blizzard Board of Directors’ knowledge of, and discussions with Activision Blizzard management regarding, Activision Blizzard’s business, operations, financial condition, earnings, strategy and future prospects, including Activision Blizzard’s opportunities to create stockholder value in the future on a standalone basis and potential risks in the execution of Activision Blizzard’s strategic plan.
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Arm’s-Length Negotiations. The fact that the Activision Blizzard Board of Directors and Activision Blizzard’s senior management, in coordination with Activision Blizzard’s legal and financial advisors, vigorously negotiated on an arm’s-length basis with Microsoft with respect to price and other terms and conditions of the merger agreement, including obtaining a price increase by Microsoft from its initial indication of interest at $80.00 per share to a price of $95.00 per share as well as the stated position of Microsoft that the agreed price was the highest price per share to which Microsoft was willing to agree.
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Derivative Litigation. The Activision Blizzard Board of Directors’ consideration of the potential value to Activision Blizzard (and derivatively to Activision Blizzard stockholders) of pending derivative litigation claims that have been brought against the Activision Blizzard’s officers and directors, and, even assuming such litigation claims had material value, the Activision Blizzard Board of Directors’ determination that the merger consideration of $95.00 per share provided more than adequate value for such litigation claims.
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Other Potential Strategic Alternatives. The Activision Blizzard Board of Directors’ consideration, from time to time, with the assistance of Activision Blizzard’s senior management and legal and financial advisors, of the various potential strategic alternatives available to Activision Blizzard, including remaining an independent public company and continuing to execute on Activision Blizzard’s strategic plan and the Activision Blizzard Board of Directors’ belief that the merger presents a more favorable opportunity for Activision Blizzard stockholders than the potential value that may result from remaining a standalone public company or pursuing other potential strategic alternatives.
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Board Review of Transaction. The fact that the Activision Blizzard Board of Directors met, along with Activision Blizzard’s senior management and legal and financial advisors, to evaluate and discuss the structure of the merger and the financial and other terms and conditions of, and other matters related to, the merger, multiple times between November 26, 2021, which was the date on which Microsoft first indicated that it would be willing to discuss an acquisition of Activision Blizzard at $80.00 per share and January 18, 2022, which was the date the merger agreement was signed.
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Other Strategic Parties. The fact that the Activision Blizzard Board of Directors authorized and directed management to contact three other strategic parties to assess their interest in a potential acquisition of Activision Blizzard that were viewed, with input from Activision Blizzard’s senior management and legal and financial advisors, as the most likely potential counterparties that could transact at a level that could potentially deliver greater value to Activision Blizzard stockholders than the Microsoft transaction and that could potentially obtain required regulatory approval and that none of the parties contacted by Activision Blizzard’s management determined to proceed with substantive discussions regarding a potential acquisition of Activision Blizzard.
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Opinion of Activision Blizzard’s Financial Advisor. The opinion, dated January 17, 2022, of Allen & Company to the Activision Blizzard Board of Directors as to the fairness, from a financial point of view and as of such date, of the merger consideration to be received by holders of Activision Blizzard common stock (other than, to the extent applicable, Microsoft, Sub and their respective affiliates) pursuant to the merger agreement, which opinion was based on and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken as set forth in such opinion and is more fully described below in the section entitled “Proposal 1: Adoption of the Merger Agreement — The Merger — Opinion of Activision Blizzard’s Financial Advisor” beginning on page .
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Terms of the Merger Agreement. The belief of the Activision Blizzard Board of Directors that the provisions of the merger agreement, including the respective representations, warranties and covenants and termination rights of the parties and termination fees payable by Activision Blizzard, are reasonable and customary. The Activision Blizzard Board of Directors also believed that the terms of the merger agreement include the most favorable terms reasonably attainable from Microsoft.
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Conditions to the Consummation of the Merger; Likelihood of Closing. The fact that the Activision Blizzard Board of Directors considered the reasonable likelihood of the consummation of the transactions contemplated by the merger agreement in light of the conditions in the merger agreement to the obligations of Microsoft, including the exceptions to the events that would constitute a material adverse effect on Activision Blizzard for purposes of the merger agreement, as well as Activision Blizzard’s ability to seek specific performance to prevent breaches of the merger agreement, including to cause the merger to be consummated if all of the conditions to Microsoft’s obligations to effect the merger closing have been satisfied or waived.
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Regulatory Approvals. The fact that the merger agreement requires that Microsoft use its reasonable best efforts to take certain actions necessary to obtain regulatory clearance and satisfy the regulatory conditions, including the fact that Microsoft agreed to accept potential remedies in order to obtain regulatory approval, including Microsoft’s commitment to divest or take other actions with respect to businesses or assets of Activision Blizzard, unless such additional remedies would reasonably be expected to result in a material adverse impact on Activision Blizzard and its subsidiaries, taken as a whole, have a material impact on the benefits expected to be derived from the merger by Microsoft or have more than an immaterial impact on any business or product line of Microsoft, and that, if the merger agreement is terminated in certain circumstances related to the failure to obtain antitrust approvals, Microsoft will be required to pay a reverse termination fee of $2,000,000,000 if the notice regarding the termination of the merger agreement is delivered during the first 12 months post-signing, $2,500,000,000 if the notice regarding the termination of the merger agreement is delivered during months 13 to 15 post-signing, or $3,000,000,000 if the notice regarding the termination of the merger agreement is delivered after month 15 post-signing. For a more complete description of Microsoft’s obligations to obtain required regulatory approvals and the reverse termination fee, see the sections below entitled “Terms of the Merger Agreement — Efforts to Close the Merger” beginning on page and “Terms of the Merger Agreement — Reverse Termination Fee” beginning on page . The merger agreement also provides an appropriate “termination date” by which time it is reasonable to expect that the regulatory conditions are likely to be satisfied, which is subject to automatic extension for certain periods if the regulatory conditions are the only conditions not satisfied or capable of being satisfied at such time. For a more complete description of the termination date, see the section below entitled “Terms of the Merger Agreement — Termination of the Merger Agreement” beginning on page .
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No Financing Condition. The fact that Microsoft’s representations contained in the merger agreement include a representation that Microsoft has and will have available at the effective time the funds necessary for the payment of the aggregate merger consideration and the fact that the merger is not subject to a financing condition.
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Ability to Respond to Certain Unsolicited Takeover Proposals. The fact that, while the merger agreement prohibits Activision Blizzard from actively soliciting competing bids to acquire it, the Activision Blizzard Board of Directors has rights, under certain circumstances, to engage in discussions with, and provide information to, third parties submitting unsolicited written takeover proposals and to terminate the merger agreement in order to enter into an alternative acquisition agreement that the Activision Blizzard Board of Directors determines to be a superior proposal; provided that Activision Blizzard pays a $2,270,100,000 termination fee. The Activision Blizzard Board of Directors further considered that the timing of the merger would provide ample opportunity for such third parties to submit proposals.
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Change of Recommendation. The fact that the Activision Blizzard Board of Directors has the right to change its recommendation that Activision Blizzard stockholders vote to adopt the merger agreement in response to a superior proposal or certain intervening events, subject to certain conditions, and the Activision Blizzard Board of Directors’ view that the termination fee of $2,270,100,000 payable to Microsoft under certain circumstances is customary and reasonable and would not preclude or deter a willing and financially capable third party from making an acquisition proposal for an alternative transaction.
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Termination Fee. The belief of the Activision Blizzard Board of Directors that the termination fee of $2,270,100,000 is reasonable in amount, including in comparison with the range of termination fees in proportion to equity value payables in comparable third-party transactions considered by the Activision Blizzard Board of Directors.
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Retention of Key Employees. The belief of the Activision Blizzard Board of Directors that a retention program and an enhanced severance plan for certain employees of Activision Blizzard that Activision Blizzard would be permitted to implement in connection with the merger would help assure the continuity of management and other key employees, and increase the likelihood of the successful operation of Activision Blizzard during the period prior to closing.
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Appraisal Rights. The availability of appraisal rights with respect to the merger for Activision Blizzard stockholders who properly exercise their rights under the DGCL, which would give these stockholders the ability to seek and be paid a judicially determined appraisal of the “fair value” of their shares at the completion of the merger.
In the course of its evaluation of the merger agreement and the merger, the Activision Blizzard Board of Directors also considered a variety of risks, uncertainties and other potentially negative factors, including the following (which are not necessarily presented in order of their relative importance to the Activision Blizzard Board of Directors):
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No Stockholder Participation in Future Growth or Earnings. The fact that Activision Blizzard’s stockholders will lose the opportunity to realize additional potential long-term value through Activision Blizzard’s successful execution as an independent public company.
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Impact of Announcement on Activision Blizzard. The fact that the announcement and pendency of the merger, or the failure to complete the merger, may result in significant costs to Activision Blizzard and cause substantial harm to Activision Blizzard’s relationships with its employees (including making it more difficult to attract and retain key personnel and the possible loss of key management and other personnel) and its customers, partners, providers and suppliers, particularly in the event that the merger is not consummated.
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Diversion of Management Attention. The substantial time and effort of management required to consummate the merger, which could disrupt Activision Blizzard’s business operations and may divert employees’ attention away from Activision Blizzard’s day-to-day operations, and the impact of such efforts on Activision Blizzard’s business in the event that the merger is not consummated.
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Tax Treatment. The fact that the all-cash transaction would be taxable to holders of shares of Activision Blizzard common stock for U.S. federal income tax purposes.
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Regulatory Risks. The possibility that regulatory agencies may delay, object to or challenge the merger or may impose terms and conditions on their approvals that adversely affect the business or financial results of Activision Blizzard or Microsoft and the fact that Microsoft is not required to agree to remedies that would reasonably be expected to (x) result in a material adverse impact on Activision Blizzard and its subsidiaries, taken as a whole, (y) have a material impact on the benefits expected to be derived from the merger by Microsoft or (z) have more than an immaterial impact on any business or product line of Microsoft.
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Stockholder Approval. The risk that the holders of shares of Activision Blizzard common stock may not approve the adoption of the merger agreement at the Activision Blizzard special meeting.
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Closing Certainty. The fact that there can be no assurance that, even if approved by the holders of shares of Activision Blizzard common stock, the merger will be completed on the anticipated timeline or at all.
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Pre-Closing Covenants. The restrictions on Activision Blizzard’s conduct of business prior to completion of the merger contained in the merger agreement, including that Activision Blizzard is required to conduct its business in the ordinary course of business, subject to specific limitations, which could delay or prevent Activision Blizzard from pursuing certain business opportunities that may arise or taking other actions with respect to its operations during the pendency of the merger without Microsoft’s consent, and the impact of such delay or loss of business opportunities on Activision Blizzard’s business in the event that the merger is not consummated, including on existing business and employee relationships.
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No Solicitation and Termination Fee. The provisions of the merger agreement that restrict the ability of Activision Blizzard to solicit or negotiate alternative transactions and that such provisions and the potential requirement to pay Microsoft a termination fee of $2,270,100,000 may deter a potential acquirer from proposing an alternative transaction for Activision Blizzard that would provide Activision Blizzard stockholders with greater value than the merger.
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Potential Litigation. The potential for litigation relating to the merger and the associated costs, burden and inconvenience involved in defending any such proceedings.
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Loss of Key Personnel. The risk that, despite retention efforts prior to consummation of the merger, Activision Blizzard may lose personnel and the impact of such losses during the period prior to the closing and also in the event that the merger is not consummated.
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Transaction Costs. The transaction costs and retention costs to be incurred in connection with the merger, regardless of whether the merger is completed.
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Timing of Closing. The amount of time it could take to complete the merger, including that completion of the merger depends on factors outside of the control of Activision Blizzard or Microsoft, and the risk that the pendency of the merger for an extended period of time following the announcement of the execution of the merger agreement could have an adverse impact on Activision Blizzard, including its customer, supplier and other business relationships and potentially impact the trading price of its common stock, and the fact that an extended period of time may exacerbate the impact of other risks considered by the Activision Blizzard Board of Directors described herein.
The Activision Blizzard Board of Directors considered the factors described above as a whole, including through engaging in discussions with Activision Blizzard’s senior management and legal and financial advisors. Based on this review and consideration, the Activision Blizzard Board of Directors unanimously concluded that these factors, on balance, supported a determination that the terms of the merger agreement and the transactions contemplated thereby were advisable, fair to and in the best interests of Activision Blizzard and its stockholders, and to make its recommendation to Activision Blizzard stockholders that they vote to adopt the merger agreement.
In considering the recommendation of the Activision Blizzard Board of Directors that Activision Blizzard stockholders vote to adopt the merger agreement, Activision Blizzard stockholders should be
aware that Activision Blizzard’s directors and executive officers may have certain interests in the merger that are different from, or in addition to, the interests of Activision Blizzard stockholders generally, including the treatment of equity awards held by such directors and executive officers in the merger. For a description of the interests of our directors and executive officers in the merger, see “Proposal 1: Adoption of the Merger Agreement — The Merger — Interests of the Non-Employee Directors and Executive Officers of Activision Blizzard in the Merger” beginning on page . The Activision Blizzard Board of Directors was aware of and took these interests into account when approving the merger agreement and determining that the terms of the merger agreement and the transactions contemplated thereby were advisable, fair to and in the best interests of Activision Blizzard and its stockholders.
The foregoing discussion of the information and factors that the Activision Blizzard Board of Directors considered is not, and is not intended to be, exhaustive. The Activision Blizzard Board of Directors collectively reached the conclusion to approve the merger agreement and the consummation of the transactions contemplated thereby, including the merger, in light of the various factors described above and other factors that the Activision Blizzard Board of Directors believed were appropriate. In view of the complexity and wide variety of factors, both positive and negative, that the Activision Blizzard Board of Directors considered in connection with its evaluation of the merger, the Activision Blizzard Board of Directors did not find it useful to, and did not attempt, to quantify, rank or otherwise assign relative or specific weights or values to any of the factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Activision Blizzard Board of Directors. In considering the factors discussed above, individual directors may have given different weights to different factors. It should be noted that this explanation of the reasoning of the Activision Blizzard Board of Directors and certain information presented in this section is forward-looking in nature and should be read in light of the factors set forth in “Forward-Looking Statements” beginning on page .
Financial Forecasts
Activision Blizzard does not, as a matter of course, normally publicly disclose long-term forecasts or internal projections as to its future performance, revenue, earnings or other results given, among other reasons, the uncertainty, unpredictability and subjectivity of the underlying assumptions and estimates, including the difficulty of predicting general economic and market conditions, other than, from time to time, estimated ranges of certain expected financial results and operational metrics for the current year and certain future years in its regular earnings press releases and other investor materials. However, in connection with the proposed merger, Activision Blizzard’s management provided certain unaudited prospective financial information to the Activision Blizzard Board of Directors for purposes of considering and evaluating the merger and the merger agreement and to Activision Blizzard’s financial advisor, Allen & Company. Certain of such prospective financial information also was shared with Microsoft and its financial advisor in connection with Microsoft’s due diligence review and discussions regarding the merger. Set forth below is a summary of the material unaudited prospective financial information provided by the management of Activision Blizzard in connection with the merger. We refer in this proxy statement to such unaudited prospective financial information, collectively, as the “prospective financial information.”
The prospective financial information was not prepared with a view to public disclosure and is included in this proxy statement only because such information was made available as described above. The prospective financial information was not prepared with a view to compliance with generally accepted accounting principles as applied in the United States, which we refer to as GAAP, the published guidelines of the SEC regarding projections and forward-looking statements or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. The prospective financial information included in this document has been prepared by, and is the responsibility of, Activision Blizzard’s management. PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report incorporated by reference in this document relates to Activision Blizzard’s previously issued financial statements. It does not extend to the prospective financial information and should not be read to do so.
Although a summary of the prospective financial information is presented with numerical specificity, the prospective financial information reflects numerous forecasts, variables, assumptions and estimates as to
future events made by management of Activision Blizzard, many of which are difficult to predict and subject to significant economic and competitive uncertainties beyond Activision Blizzard’s control, that management of Activision Blizzard believed in good faith were reasonable and supportable at the time the prospective financial information was prepared, taking into account the relevant information available to, and reflecting the best currently available estimates and judgments of, the management of Activision Blizzard at the time. However, this information is not fact and should not be relied upon as necessarily indicative of actual future results nor construed as financial guidance, given the inherent risks and uncertainties associated with such forecasts. The prospective financial information is subjective in many respects and, thus, subject to interpretation. Important factors that may affect actual results and cause the prospective financial information not to be achieved include general economic, regulatory, market, financial, competitive, seasonal, cyclical and other conditions, trends and developments, industry performance, accuracy of certain accounting assumptions, changes in actual or projected cash flows, competitive pressures, the ability to attract and retain highly skilled employees, the ability to execute day-to-day operations and other strategic initiatives and other factors described or referenced under the section entitled “Forward-Looking Statements” beginning on page . Because the prospective financial information covers multiple years, such information by its nature becomes less predictive with each successive year. In addition, the prospective financial information does not take into account any circumstances or events occurring after the date that it was prepared and does not give effect to the merger. As a result, there can be no assurance that the prospective financial information will or would be realized, and actual results may be materially better or worse than those contained in the prospective financial information.
None of Activision Blizzard or its directors, officers, affiliates, advisors or other representatives makes any representation to readers of this proxy statement, and has not made any such representation to Microsoft, concerning the ultimate performance of Activision Blizzard or the combined company compared to the prospective financial information. The inclusion of the prospective financial information in this proxy statement does not constitute an admission or representation by Activision Blizzard or any of its directors, officers, affiliates, advisors or other representatives that the information is material nor has such information been included to influence your decision on how to vote on any proposal. The prospective financial information should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding Activision Blizzard contained in our public filings with the SEC. Financial measures provided to a board of directors or a financial advisor are excluded from the definition of non-GAAP financial measures and, therefore, are not subject to SEC rules regarding disclosures of non-GAAP financial measures, which would otherwise require, among other information, a reconciliation of a non-GAAP financial measure to a GAAP financial measure. Reconciliations of non-GAAP financial measures were not relied upon by the Activision Blizzard Board of Directors or Allen & Company in connection with the merger. Accordingly, a reconciliation of the financial measures included in the financial projections is not provided.
EXCEPT TO THE EXTENT REQUIRED BY APPLICABLE FEDERAL SECURITIES LAWS, ACTIVISION BLIZZARD DOES NOT INTEND, AND EXPRESSLY DISCLAIMS ANY RESPONSIBILITY, TO UPDATE OR OTHERWISE REVISE THE PROSPECTIVE FINANCIAL INFORMATION TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH FORECASTS ARE NOT REALIZED AND EVEN IN THE EVENT THAT ANY OF THE ASSUMPTIONS UNDERLYING THE PROSPECTIVE FINANCIAL INFORMATION ARE SHOWN TO BE INAPPROPRIATE.
Long-Range Plan
As part of Activision Blizzard’s ordinary course annual financial planning process, and not in contemplation of the merger, the Long-Range Plan for Activision Blizzard’s fiscal years 2021 through 2024 was presented by Activision Blizzard’s management to the Activision Blizzard Board of Directors on October 28, 2021. The Long-Range Plan was not prepared or extrapolated for Activision Blizzard’s fiscal years 2025 through 2026. In connection with the Long-Range Plan process (and as is typical in Activision Blizzard’s annual financial planning process), the management teams of various Activision Blizzard franchises and business units provided preliminary inputs regarding estimated financial results of such franchises and business units based on the “stretch” goals and objectives of such franchises’ and
business units’ management teams which were aggregated by Activision Blizzard’s management into a compilation of “bottom-up” franchise and business unit inputs. Activision Blizzard’s management then applied certain risk assessments and judgments to the franchise and business unit inputs in arriving at the Long-Range Plan. The Long-Range Plan, as risk-adjusted by Activision Blizzard’s management, was approved by the Activision Blizzard Board of Directors on November 2, 2021 as the plan to be used for internal business planning purposes for Activision Blizzard’s performance for the fiscal years 2021 through 2024, as described in the section entitled “Proposal 1: Adoption of the Merger Agreement — The Merger — Background of the Merger” beginning on page . The Long-Range Plan, which included as an appendix the pre-risk-adjusted franchise and business unit inputs, was provided to Microsoft on December 6, 2021 and subsequently shared by Microsoft with Goldman Sachs.
The following table reflects selected metrics (in millions) included in the Long-Range Plan as approved by the Activision Blizzard Board of Directors on November 2, 2021:
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Fiscal Year Ending December 31,
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Long-Range Plan
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2021E
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2022E
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2023E
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2024E
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Revenue(1)
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| | | $ | 8,856 | | | | | $ | 9,174 | | | | | $ | 11,725 | | | | | $ | 12,405 | | |
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Operating Income(2)
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| | | $ | 3,718 | | | | | $ | 3,886 | | | | | $ | 4,849 | | | | | $ | 5,597 | | |
(1)
Revenue excludes the impact of deferrals from Activision Blizzard’s accounting treatment under GAAP on certain of Activision Blizzard’s online-enabled products. Revenue (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: $8,856; 2022E: $9,546; 2023E: $12,654; 2024E: $13,394.
(2)
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: $3,718; 2022E: $4,082; 2023E: $5,596; 2024E: $6,391.
Management Forecasts
At meetings of the Activision Blizzard Board of Directors held on December 14, 2021, and December 15, 2021, Activision Blizzard’s senior management presented to the Activision Blizzard Board of Directors updated financial forecasts for Activision Blizzard’s long-term financial performance (which we refer to in this proxy statement as the “December 2021 management forecasts”), which had been extended for fiscal years 2025 and 2026 based on potential Activision Blizzard longer-term initiatives and downwardly adjusted from the Long-Range Plan for fiscal years 2021 through 2024 by Activision Blizzard’s management to account for, among other things, the passage of time since the Long-Range Plan was presented to the Activision Blizzard Board of Directors on October 28, 2021 and approved by Activision Blizzard’s Board of Directors on November 2, 2021, further insight into Activision Blizzard’s performance in the fourth quarter of 2021 — particularly the underperformance of the recently launched version of Call of Duty and the potential effects of that underperformance in 2022, and execution risk in the Long-Range Plan. The updated management forecasts were intended to provide the Activision Blizzard Board of Directors with an updated and risk-adjusted view of Activision Blizzard’s potential prospective financial performance in light of the foregoing as it considered the proposed transaction with Microsoft. The updated management forecasts were not intended to, and do not, constitute a revised Long-Range Plan, and do not reflect any adjustments that Activision Blizzard might make in its strategy in response to Activision Blizzard’s performance in the fourth quarter of 2021. The December 2021 management forecasts were subsequently further updated in mid-January 2022, prior to the approval of the merger agreement by the Activision Blizzard Board of Directors, to reflect forecasted financial results of Activision Blizzard for the fourth quarter of 2021 and other immaterial adjustments (which we refer to in this proxy statement as the “January 2022 forecasts”). On January 14, 2022, the Activision Blizzard Board of Directors directed Allen & Company to use and rely upon the January 2022 forecasts in connection with its opinion and related financial analyses summarized under “Proposal 1: Adoption of the Merger Agreement — The Merger — Opinion of Activision Blizzard’s Financial Advisor” beginning on page (in which such January 2022 forecasts are referenced as the “Activision
Blizzard forecasts”). The updated preliminary financial results for the fourth quarter 2021 and full year 2021 performance were provided to Microsoft and its financial advisor on January 11, 2022. The revenue and EBIT (Pre-SBC) metrics reflected below and included in the January 2022 forecasts for fiscal years 2022 through 2024 were provided to Microsoft on January 14, 2022.
The following table reflects selected metrics (in millions) included in the January 2022 forecasts:
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Management Forecasts
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Fiscal Year Ending December 31,
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2021E
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2022E
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2023E
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2024E
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2025E
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2026E
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Revenue(1)
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| | | $ | 8,354 | | | | | $ | 8,625 | | | | | $ | 10,605 | | | | | $ | 11,125 | | | | | $ | 12,237 | | | | | $ | 12,604 | | |
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EBIT (Pre-SBC)(2)
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| | | $ | 3,507 | | | | | $ | 3,450 | | | | | $ | 4,300 | | | | | $ | 4,870 | | | | | $ | 5,166 | | | | | $ | 5,446 | | |
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Adj. EBITDA(3)
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| | | $ | 3,615 | | | | | $ | 3,552 | | | | | $ | 4,403 | | | | | $ | 4,973 | | | | | $ | 5,266 | | | | | $ | 5,546 | | |
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(-) 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) | | | | | $ | (25) | | | | | $ | (25) | | |
|
Unlevered Free Cash Flow(4)
|
| | | $ | 2,235 | | | | | $ | 1,768 | | | | | $ | 3,387 | | | | | $ | 3,396 | | | | | $ | 3,773 | | | | | $ | 3,886 | | |
(1)
Revenue excludes the impact of deferrals from Activision Blizzard’s accounting treatment under GAAP on certain of Activision Blizzard’s online-enabled products. December 2021 management forecasts provided for the following approximate estimated revenues (in billions): 2021E: $8.5; 2022E: $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. December 2021 management forecasts provided for the following approximate estimated EBIT (Pre-SBC) (in billions): 2021E: $3.6; 2022E: $3.6; 2023E: $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. December 2021 management forecasts provided for the following approximate estimated Adjusted EBITDA (in billions): 2021E: $3.7; 2022E: $3.7; 2023E: $4.4; 2024E: $5.0; 2025E: $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 and deducting changes in working capital, capital expenditures, capitalized software development and restructuring costs. December 2021 management forecasts provided for the following approximate estimated Unlevered Free Cash Flow (in billions): 2021E: $2.5; 2022E: $1.8; 2023E: $3.4; 2024E: $3.4; 2025E: $3.8; 2026E: $3.9.
