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How Activision Will Fund the King Digital Deal

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King Digital’s acquisition will enhance Activision revenues and earnings by 30%

Previously in the series, we discussed Activision’s (ATVI) fiscal 3Q15 results as well as its recently announced acquisition of King Digital. Activision’s CEO Bobby Kotick said that though the mobile game market is worth $36 billion, it is highly fragmented. By integrating King Digital into its portfolio, Activision aims to become the second largest gaming company.

Activision stated that the King Digital acquisition expected to complete by 2016 would complement and enhance the company’s revenue and earnings by approximately 30%.

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Activision plans to use offshore cash to fund King Digital acquisition

Activision stated that it plans to use $3.6 billion in cash that is held offshore to fund this acquisition. In fiscal 3Q15, Activision’s cash and investment reserves stood at $4.5 billion. $870 million was held domestically, and the remaining was held offshore.

By using the majority of its offshore cash to fund the acquisition, Activision Blizzard has devised a tax-efficient way to use its offshore cash as well as secure a position in the rapidly growing mobile gaming space. US-based companies generally prefer not to repatriate foreign profits because of the hefty taxes. US companies that bring home foreign earnings are liable to pay the US corporate tax rate of 35%. They get tax credits for payments to foreign governments.

High cash reserves for companies in the technology sector

Tech companies are usually associated with high cash reserves. If we take into account the cash balance of leading tech companies like Apple, Microsoft (MSFT), Google (GOOG), and Cisco (CSCO), the collective total is $345 billion. This figure represents approximately 23% of the cash reserves in the US in 2013. The majority of the cash piles that these companies hold is offshore, which when brought back to the US might be subjected to high tax.

To learn more about investing in the tech industry, please read Why Tech Stocks Have Run Up for the Last Six Years.

You can consider investing in the SPDR S&P 500 (SPY) to gain exposure to the technology sector. The ETF invests about 18% of its holdings in the technology sector.

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