Activision paid nearly $100 million for RedOctane [update 1]

12 Comments by Ross Miller Aug 9th 2006 6:55PM
Filed under: Sony PlayStation 2, Rhythm

RedOctane has come a long way from being an online video game rental service. The Guitar Hero publisher was recently purchased by Activision, but now it has been revealed via an SEC filing just how much RedOctane was worth to them:

$30.9 million in cash
$30 million worth Activision common stock (approximately 2.4 million shares)
$39 million in Activision common stock "within two years of the closing date" (June 6, 2006)

Culminating in a $99.9 million deal. Would it have been so hard, Activision, to fork over another $100,000 for a more well-rounded figure? Certain RedOctane shareholders may also earn $51 million depending on the success of Guitar Hero II, as explained in this thoroughly vague and confusion statement:

"In addition, in the event the net income of the business over a certain period of time exceeds certain target levels by certain amounts, certain former shareholders of RedOctane will be entitled to an additional amount of up to $51.0 million payable in shares of Activision common stock."

Does that mean anything? We're pretty certain it doesn't.

[update 1: made a Freudian slip, called RedOctane the developer of Guitar Hero, which is highly inaccurate (they're the publisher). Sorry about that.]

Source

(Page 1) Reader Comments

RealWeaponSwitching: Aug 9th 2006; 7:09PM

I hope Activision brings Guitar Hero III to the 360.

Jeremy Wright: Aug 9th 2006; 7:10PM

It's actually pretty standard. Basically the buyers feel the deal could be worth more, and the owners are trying to get more, but it's a potential. So they got language written in that spells out certain metrics and milestones and if the companies meet those there's a second (or third, or fourth, payment).

Most Microsoft and Google deals, for example, are structured this way.

Jack Rosineau: Aug 9th 2006; 7:14PM

"Would it have been so hard, Activision, to fork over another $100,000 for a more well-rounded figure?"

Yes, because stock does not have a fixed value, so nobody could have forseen a $99.9m value for RedOctane based on Activision stock's value in 2 years' time.

vidGuy: Aug 9th 2006; 7:34PM

"Does that mean anything? We're pretty certain it doesn't."

Yes; it means a lot.

It gives former shareholders more incentive to build Activision's good will. Not only will they receive more shares, those shares will be worth more as the company grows.

A stock incentive is a common portion of most acquisition deals, even outside the video game realm. See Howard Stern's move to Sirius. He was paid an additional $225 million in stock for helping Sirius meet set subscriber quotas.

$31 million in cash is nice, but the stock is what's really valuable. Especially since the acquisition is going to make Activision's stock skyrocket near the release of RedOctane games.

Chris Foster: Aug 9th 2006; 7:34PM

One correction: RedOctane was the PUBLISHER of Guitar Hero.

Harmonix was the developer, though they weren't purchased by Activision.

v: Aug 9th 2006; 8:29PM

vidGuy gets it part right, part wrong.

What that section means is that incentives are in place to incentivize and retain key personnel. Key RO people are going to want to stick around for that extra $51 million payout.

These sorts of incentives are common in tech mergers where the entire value of your company walks out the door every evening.

vidGuy: Aug 9th 2006; 8:46PM

What part's wrong, may I ask? If "key personnel" stick around, they (hopefully) do good things. Those good things now have the name Activision attached, so Activision's good will (their intangible value as an entity) goes up. This makes the company more profitable. Thus Activision wins by becoming more profitable and former RedOctane members win by making more dough.

As I've heard thrown around places that nearly crumble and instead get reborn twice as strong, "those that stay will be champions", or something like that. :)

ChrisRX: Aug 9th 2006; 8:54PM

Wouldn't it have made more sense to buy harmonix? They're the game developers and have developed music games in the past too like karaoke revolution and frequency/amplitude.

epobirs: Aug 9th 2006; 9:15PM

I agree with ChrisRX. This is simply insane. Red Octane simply published a single hit game by an outside developer. A game that only had a market because a certain Japanese company dropped te ball on marketing their existing series of guitar games to the US console market.

http://www.gamespot.com/ps/action/guitarfreaks/

From a revenue perspective, what could possibly justify this valuation? A fifth of that amount would have been high and still made the principals very well off.

HamNCheese: Aug 9th 2006; 10:46PM

epobirs: Yes, Harmonix developed it, but it's mostly likely that Red Octane owns the IP. Publishers usually do, and publishers usually have their name all over the product (as opposed to the developers, which usually only get a splash screen and a small box mention).

So the thing is while Harmonix did the kick-ass work, Red Octane gets most of the credit and public recognition. Even look at this article, which mentions RO as the developer (wrong); almost every article I've seen about Guitar Hero mentions RO as the developer.

So if Harmonix ever turned down making GH number whatever, you can bet RO/Activision would keep going and milk the name and reputation for at least a sequel or two. Cause their names, sadly, are what most people remember.

KilgoreTrout XL: Aug 10th 2006; 10:16AM

Ok, fine, Harmonix developed it, whatever.

Just announce it for the 360 so I can pwn my friends list at the solo for "sex farm." Sthaaaanks.

Sex farm woman, don't you see my silo rising high?

HamNCheese: Aug 10th 2006; 9:44PM

It'll be on the 360, Spring 2007.
My source says possibly others, but nothing sure on that yet.

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