Game-playing fits Vivendi fine

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Vivendi chairman and CEO Jean-Bernard Levy prefers video games to Hollywood.

That's the rationale he offered Monday during a conference call with analysts on the heels of announcing a $9.8 billion merger of Vivendi Games with console publisher Activision (HR 12/3).

Investors cheered the announcement, and Activision shares flew 12.7% higher on Monday to $24.97, a 52-week high.

Levy cited the merger as a return to the U.S.-based entertainment business for Vivendi, which allowed Universal Studios and cable networks USA Network and Sci Fi Channel to be absorbed by NBC in 2004.

"There's a lot of volatility in the movie industry, and there's a very high level of investment required for just a single movie — up to $250 million with production and promotion," he said. "On the TV side, USA and Sci Fi were being run very successfully, but we thought we could not optimize their revenue because they were stand-alone entities far away from larger media groups. So I think we made the right decision."

Once the merger of Activision and Vivendi Games — whose subsidiary Blizzard launched the widely successful online game "Worlds of Warcraft" — is completed by mid-2008, the new company will have a market cap of $18.9 billion, larger than current industry leader Electronic Arts.

"There is no question that Activision Blizzard would have the right scale, and I also think we are happy with the management of the risk with each single project, which is much easier than for a movie," Levy said.

Activision has seen its business grow substantially in recent years thanks to a combination of such game-specific intellectual property as "Guitar Hero," "Tony Hawk" and "Call of Duty" and an aggressive licensing strategy that this year generated console hits based on the summer blockbuster films "Spider-Man 3," "Shrek the Third" and "Transformers."

Activision chairman and CEO Bobby Kotick said a combination of original and licensed games will continue, noting that Activision has upcoming titles based on "James Bond" and ongoing licensing deals with DreamWorks and Marvel.

The deal "strengthens Activision's product offering and expands its geographic reach while allowing Vivendi to further monetize its success with 'World of Warcraft,' " Wedbush Morgan Securities analyst Michael Pachter said.

Meanwhile, shares of competitor Take-Two Interactive Software jumped 8.7% to $16.28 on Monday as CEO Ben Feder, speaking at the UBS Global Media & Communications Conference, said mergers in the video game industry are inevitable.

"Video game development is not getting any cheaper. It's a capital-intensive business, and I don't see that going away. That will drive some of the smaller competitors out," he said.

Some observers have said for months that Take-Two is a natural acquisition target.
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