Lesson 6 of 11
What a purchase does
Microsoft paid $75,408 million for Activision Blizzard. $50,969 million became goodwill, $21,969 million became intangibles, and the stub period showed a loss.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A purchase price is allocated across every identifiable asset and liability at fair value, and whatever is left becomes goodwill.
- The step-up creates amortisation the acquired business never carried, which suppresses reported earnings for years afterwards.
- Microsoft's largest acquisition contributed $5,729 million of revenue and a $1,362 million operating loss in its first partial year.
When one company buys another, the buyer does not add the seller's balance sheet to its own. It rebuilds it.
Every identifiable asset and liability is remeasured at fair value on the day of the deal, the price is spread across them, and the remainder becomes goodwill. The consequences run for years.
Microsoft's allocation of the Activision Blizzard purchase price
- Cash and cash equivalents acquired$12,976m
- Goodwill+$50,969m
- Intangible assets+$21,969m
- Other assets+$2,501m
- Long-term debt−$2,799m
- Long-term income taxes−$1,914m
- Deferred income taxes−$4,677m
- Other liabilities−$3,617m
- Total purchase price= $75,408m
What the note reports
Microsoft's fiscal 2024 10-K, filed on 30 July 2024, states that it completed the acquisition of Activision Blizzard on 13 October 2023 for a total purchase price of $75.4 billion (Microsoft Corporation FY2024 10-K, accession 0000950170-24-087843), consisting primarily of cash, and sets out the allocation above. The allocation was described as preliminary, with goodwill and income taxes the areas still to be finalised.
The largest line is goodwill of $50,969 million (Microsoft Corporation FY2024 10-K, accession 0000950170-24-087843), which the filing attributes primarily to expected synergies and says is substantially non-deductible for tax.
The intangibles, and their lives
Those lives are the amortisation schedule. The technology-based assets alone carry roughly $2.4 billion a year of amortisation for four years, and none of it existed as a cost in Activision Blizzard's own accounts before the deal.
The earnings the step-up suppresses
The same note reports what the acquired business contributed after the deal closed: revenue of $5,729 million (Microsoft Corporation FY2024 10-K, accession 0000950170-24-087843) and an operating loss of $1,362 million (Microsoft Corporation FY2024 10-K, accession 0000950170-24-087843) for the year ended 30 June 2024.
A profitable business became a reported loss inside the buyer, and the note gives two reasons a reader can check. Amortisation of the intangibles created by the allocation, and the change of Activision Blizzard content from third-party to first-party, which moves revenue that Microsoft previously recognised from selling somebody else's games.
That is the general pattern. Purchase accounting reduces reported earnings after a deal, by an amount that depends on how the price was allocated, and cash is unaffected.
What to check in any allocation
Three questions, each answerable from the note.
How much went to goodwill rather than to identifiable assets. A very high share means the valuation could not attach the price to anything specific.
What lives were assigned to the intangibles. Long lives spread the charge and flatter near-term earnings; short ones do the reverse.
And whether a deferred tax liability was recognised, as the $4,677 million here was. A step-up in book value with no step-up in tax basis creates one, and it is the subject of the next-but-one lesson.
Check yourself
What is goodwill in a purchase price allocation?
- The premium paid over the market price of the shares
- The portion of the price left after every identifiable asset and liability is measured at fair value
- The expected synergies, measured directly
Show the answer
Answer: B.
It is arithmetic: price less the fair value of what could be identified. Synergies are an explanation of the residue rather than a measurement of it.Why did Activision Blizzard show an operating loss inside Microsoft in its first partial year?
- The business stopped being profitable
- Amortisation of intangibles created by the allocation, plus content moving from third-party to first-party
- An impairment was taken
Show the answer
Answer: B.
The step-up creates costs the acquired business never carried. The filing names both effects, and neither says anything about the underlying operations.A step-up in the book value of acquired intangibles with no matching step-up in tax basis creates what?
- A deferred tax asset
- A deferred tax liability, because book amortisation will not be deductible
- No tax effect at all
Show the answer
Answer: B.
Microsoft recognised $4,677 million of deferred income taxes in this allocation for exactly that reason. It reduces the amount left to allocate to goodwill.Sources
- Microsoft Corporation, FY2024 Form 10-K, filed 30 July 2024, accession 0000950170-24-087843, Note 8, for the completion date and total purchase price of the Activision Blizzard acquisition, the preliminary allocation, the detail and weighted average lives of the intangible assets acquired, and the revenue and operating loss contributed since the acquisition date.
- ASC 805, Business Combinations, on measuring identifiable assets acquired and liabilities assumed at fair value and recognising the residual as goodwill.
What this leaves out
- Every figure here is history, read from the filing named. Nothing is a statement about Microsoft or Activision Blizzard today and nothing is a view on any security.
- The allocation was described in the filing as preliminary and subject to revision, with goodwill and income taxes the areas still being finalised.
- The roughly $2.4 billion a year of technology amortisation is computed here by dividing the disclosed amount by the disclosed life. Microsoft does not print that figure and the actual pattern of amortisation may not be even.
- This lesson describes how a purchase is recorded. Whether the price was worth paying is a separate question that no accounting note answers.