King as a company was sitting on a boatload of cash which you have to remember was part of this deal price, but that cash just comes back to the purchaser. If anyone is curious, here's how deal valuation works:
King as of it's 2Q reporting had $1,220,235,000 in Assets and $352,619,000 in Liabilities.
Therefore, it had net $867,616,000 in assets. ($785,883,000 of that is straight CASH.)
So subtract the assets from the $5.9B purchase price and you get $5,032,284,000.
To find the multiple Activision paid, divide that reduced purchase price by the trailing twelve month profits of King which are $565,710,000.
Your end result is Activision only paid an earnings multiple of 8.9x. That's an 11.24% current return on investment if growth is flat. That's actually incredibly cheap for a gaming company of King's size. Activision is buying the company for 25% cheaper than the public did when King IPOed just last March 2014.
Given Activision's current cost of capital of 12.6%, they're betting they can grow King's profits by at least 12% in the near future, or they're planning on juicing the return up by partially funding it with debt. Given Activision's current capital structure (50/50 Debt/Equity mix), my bet is they juice it up with debt. Expect to see them hit up the U.S. bond market in 1Q 2016 for $2.2B in long term debt so they can close the deal by 2Q 2016. The debt leverage juices the return on equity past their cost of capital and this has the added tax benefit of giving them interest deductions in the U.S. for debt used to purchase foreign income that won't ever be repatriated.
The numbers look fine and this deal is great on paper, whether the business realities line up is to be seen. Personally, I think Activision will do fine on this deal even if King's profits decline in the near term.
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