Unveiling the Truth: Microsoft's Serious Bid to Acquire Nintendo

What Did Phil Spencer Say?

In regards to the potential acquisition of Nintendo by Microsoft, there has been speculation and discussions surrounding this notion. Recently, a leaked document from Xbox revealed that key decision-makers within the company have explored the concept of such a buyout. Microsoft's board of directors, led by CEO Satya Nadella, has been provided with a comprehensive outline detailing the specifics of an acquisition. However, it is important to temper any excitement or expectations, as experts assert that this remains more of a far-fetched idea rather than a realistic possibility. It should be noted that Microsoft's examination of a Nintendo takeover is simply a part of their standard due diligence process, and the likelihood of it coming to fruition is highly improbable. Nevertheless, as with anything in the ever-evolving landscape of the industry, one can never completely rule out what may unfold in the future.

Spencer observed that Nintendo is "sitting on a substantial amount of money" thanks to the remarkable success of the Nintendo Switch. At the time of Spencer's email, Nintendo had over $12 billion in cash readily available, a figure that has continued to increase since then. However, Spencer mentioned that Mason Morfit, a former Microsoft board of directors member affiliated with the investment firm ValueAct, has been acquiring shares in Nintendo. Spencer stated that this development could potentially "bring forth promising prospects for us." The exact nature of these opportunities remains unclear for now.

Phil Spencer at Gamescom 2023

Spencer stated that for Microsoft to make a deal, there would need to be a significant factor like involvement from Morfit. He also expressed his disliking towards the idea of a hostile takeover. According to Spencer, a near-term mutually agreeable merger between Nintendo and Microsoft is unlikely, and he believes that a hostile action would not be a wise decision. As a result, they are opting to pursue a long-term strategy.

Despite the aforementioned points, Spencer concluded his email by expressing that acquiring Nintendo would be a significant achievement for his career. Additionally, he opined that a Microsoft-Nintendo merger would prove advantageous for both entities.

"It is simply taking Nintendo quite a while to realize that their future lies beyond their own hardware. Quite a while..." Spencer stated, followed by a smiling emoticon to emphasize his point.

Of Course Microsoft Wants To Buy Nintendo

Microsoft, as a publicly traded company, is committed to achieving constant and exponential growth while delivering superior value to its shareholders. It is evident that financial prosperity plays a pivotal role in this pursuit, underlining its significance.

In order to continue its upward trajectory and ensure positive trends, Microsoft must explore new avenues for generating revenue. It is logical to assume that acquiring a behemoth enterprise like Nintendo would instill confidence in stakeholders and investors, potentially leading to increased profitability for Microsoft. The question then arises: Is it a feasible scenario for Microsoft to acquire Nintendo?

According to Mat Piscatella from Circana (formerly NPD), Spencer's email discussing the possibility of acquiring Nintendo is nothing unusual or remarkable. As part of their job, compiling reports on potential acquisition targets is a routine task and does not necessarily imply anything significant.

Piscatella mentioned that M&A evaluations and discussions are a typical and regular aspect of the business. Assessing the costs and potential opportunities of potential M&A deals is considered part of the leadership's due diligence. Therefore, the fact that such conversations were taking place in the leaked emails is the least surprising aspect of the leaked information.

Piscatella stated that Spencer and his team engaging in discussions about a potential sale and creating a comprehensive report for Microsoft's board of directors is an integral aspect of his role. Should the acquisition of Nintendo ever become a realistic opportunity, Microsoft must be prepared to take action.

"Although the majority of the time no action would be taken, nor would it be anticipated, undertaking such tasks is necessary for those occasional instances when the proposition aligns with the company's interests and enhances its position. It is simply sound business practice," expressed Piscatella.

Michael Pachter of Wedbush Securities shares a similar viewpoint, stating that during his time in the '90s as the head of business development for an oil company, his team meticulously prepared M&A analysis documents for each competitor. These documents, totaling around 50, were always kept on standby. Pachter believes that Microsoft's practice of thoroughly analyzing the competition, including the possibility of major unexpected acquisitions like Nintendo, is simply a sound business strategy.

"Their Future Exists Off Of Their Own Hardware"

According to Pachter, Microsoft likely has prepared files for various publishers, console makers, big independent studios, and a select few other companies such as Turtle Beach or Corsair. Notably, the head of the Xbox division considered Nintendo as a highly valuable acquisition, and it comes as no surprise that he discussed this possibility with his colleagues. The response to the leaked information may be negative due to people's strong affection for Nintendo (including myself). Nonetheless, Pachter believes that this is just a typical occurrence in the business world.

One particularly interesting aspect of Spencer's email is his remark at the end where he suggests that Nintendo is taking a significant amount of time to realize that they could expand their business by venturing beyond their own hardware. Essentially, Spencer believes that Nintendo is potentially missing out on an opportunity to grow their brand and reach a wider audience by making their content available on various platforms.

This claim may seem audacious, especially coming from Spencer, who has faced criticism for his overconfidence. However, the fact remains that Nintendo generates billions in revenue annually and consistently outperforms Microsoft's Xbox consoles in both the US and global markets. Currently, Nintendo stands in a position of strength with substantial cash reserves and plans for a new console launch in 2024. Additionally, Nintendo boasts an impressive catalog of immensely popular and commercially successful games such as Mario, Zelda, and Donkey Kong. On the other hand, Microsoft has openly acknowledged their struggles in developing first-party games. While Microsoft may express interest in acquiring Nintendo, it is important to acknowledge that such a notion may not be realistic or feasible for the company. Spencer himself admits this in his email, indicating that Microsoft will pursue alternative paths to achieve success in the long run.

Over the years, people have proposed that Nintendo should follow Sega's example and exit the hardware industry, focusing solely on developing games for other consoles. However, given Nintendo's current success in both gaming and hardware sales, there is little incentive for them to make such a drastic move. Nintendo has consistently argued for the necessity of a symbiotic relationship between their games and hardware, and for Spencer to believe that Nintendo would drastically alter their approach at this stage is bold. With the Switch having sold over 130 million units, a feat no Xbox console has come close to achieving, Nintendo's departure from the hardware market would indeed be a surprising shift.

Market Growth

Microsoft, naturally, doesn't require Nintendo's assistance to achieve the desired increase in revenue. As part of its growth strategy, Microsoft intends to acquire Activision Blizzard for a staggering $68.7 billion, marking its largest-ever buyout in history for the video game industry. If the anticipated deal is finalized, Microsoft would gain ownership of esteemed franchises such as Call of Duty, Warcraft, Diablo, as well as other renowned studios, cutting-edge technology, and infrastructure. The potential benefits of this acquisition appear to be immense.

Market Growth

In the same communication, Spencer highlighted that Nintendo's board of directors has not actively pursued further market growth or a rise in stock appreciation. However, this stance began to shift in 2020 due to the intervention of a crucial investor who steadily acquired shares.

ValueAct, an investment firm, began purchasing Nintendo shares in 2019 but significantly increased its stake in 2020. They bought 2.6 million shares worth $1.1 billion, resulting in a 2% stake in Nintendo. The news of their increased investment caused a rise in Nintendo's share price. Nintendo confirmed that they are in discussions with ValueAct but did not disclose the details.

According to reports, ValueAct does not intend to have a seat on Nintendo's board of directors. Instead, they want to collaborate with Nintendo's management team behind the scenes. ValueAct and its partners, including Morfit, have shown support for Nintendo's President's decisions in the past. The report suggests that Morfit, with his experience on the Microsoft board, can provide valuable guidance to enhance Nintendo's financial ambitions. An email from Spencer indicates that Morfit will advocate for increased performance from Nintendo stock, potentially creating opportunities.

Nintendo possesses some of the most highly acclaimed and top-selling video game franchises, such as Mario Kart.

Spencer's email primarily focuses on the contrast between Nintendo and other companies in terms of their approach to growth. This distinction could be attributed to the difference between Microsoft's Western perspective, which prioritizes aggressive growth, and Nintendo's own operational guidelines and expectations for expansion. It is commonly believed that companies like Microsoft, with their heavy reliance on shareholders, are compelled to prioritize profits every quarter. Layoffs, often seen as a response to shareholder pressure, are one way to achieve this. However, Nintendo has historically resisted implementing layoffs. In 2013, former Nintendo president Satoru Iwata acknowledged that the company experiences ups and downs in its business each year. While it would be ideal to generate quarterly profits and provide gains for investors to maintain a high share price, this isn't always feasible. Iwata argued that cutting staff for short-term profitability is detrimental because it negatively affects employee morale and leads to adverse consequences. This mindset diverges from the prevailing thinking associated with Western giants like Microsoft, which is planning to lay off over 10,000 employees in 2023 as a cost-saving measure.

Don't Bet On It, But Anything Could Happen

Spencer's comments on Nintendo's alleged disinterest in following a Microsoft-style approach to "market growth and stock appreciation" caused some to view it as another instance of the Western belief that prioritizing profits at any cost is the norm.

In the years following Spencer's mention of a potential acquisition of Nintendo in an email, the company renowned for its iconic mascot, Mario, has witnessed remarkable financial success. This can be attributed to the release of highly acclaimed games like The Legend of Zelda: Tears of the Kingdom, consistent sales of the Switch console, and the massive triumph of The Super Mario Bros. Movie. If the reports hold true, Nintendo plans to introduce a new gaming console in 2024. While success is never certain (as evident from the struggles of the Wii U), it is rarely wise to bet against Nintendo. Consequently, it appears unlikely that Nintendo would actively pursue a buyer or readily entertain a sale at this time. However, the influence that investors such as Morfit and ValueAct may exert over time remains uncertain.

In the ever-changing business world of media and entertainment, possibilities are limitless. A prime example is Disney's acquisition of Lucasfilm, bringing together Mickey Mouse and Luke Skywalker under the same parent company. Surprisingly, even The Simpsons, a show known for poking fun at Disney, is now part of their family. While it's unlikely that we'll see a collaboration between Master Chief and Mario in the near future, it's also not something to be entirely dismissed. Unless governments intervene due to antitrust concerns, the consolidation of media and entertainment will continue to be an attractive choice for investors in various industries, including video games.