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January 31, 2022

Fear of Missing Out is set to be the latest video-game sensation. Microsoft's (MSFT.O) $69 billion agreement to buy Activision (ATVI.O) threatens to upend the industry. Sony (6758.T) and Nintendo (7974.T), the respective makers of the PlayStation and Switch consoles, will be under pressure to consider bolder M&A strategies.

The race to build immersive virtual worlds has sparked a fresh rush to acquire intellectual property. Video-games are a fierce battleground. Just days before Microsoft's record plan to take over the "Call of Duty" and "Candy Crush" owner, Take-Two Interactive Software (TTWO.O) unveiled a $13 billion acquisition of Zynga . Video-game deal volume nearly tripled last year to $85 billion, according to Drake Star Partners.

All eyes are turning to Japan, one of the industry’s power hubs. Nintendo, the $63 billion creator of Super Mario, is sitting on more than $9 billion of cash but prefers to build rather than buy. The company took over one developer last year for an undisclosed sum, its first major acquisition since 2007. Larger rival Sony has been busier, with roughly half a dozen purchases in 2021; all of them, however, were small and niche gaming studios.

With both Sony and Nintendo due to report financial results this week, investors will be scouring for Easter eggs, or hidden clues about how bosses Kenichiro Yoshida and Shuntaro Furukawa intend to respond to the consolidation. Unease about how Sony can keep up with an aggressive acquirer like Microsoft has helped erase over $20 billion in market value since the Activision deal was announced. The PlayStation 5 might be more popular than Microsoft's Xbox, but the U.S. company’s subscription service, which allows gamers to play on any device, has racked up more than 25 million customers.

Nintendo looks equally unprepared. Switch sales have peaked and operating profit is expected to slide 12% in the fiscal year ending March 31, according to the average analyst estimate compiled by Refinitiv. Furukawa also has dragged his feet in mobile and other growth areas. The shares now trade at just 16 times forecast earnings for the next year, compared to 21 times at the start of 2020, further suggesting it may be time to shift into attack mode.

Other news
- Japan's Sony is forecast to report revenue of 2.9 trillion yen ($25 billion) in the three months to December, an increase of 6.6% from a year earlier, according to an average analyst estimate compiled by Refinitiv.

- Sony is scheduled to report quarterly earnings on Feb. 2 and Nintendo plans to do the same on Feb. 3.