Proposal to Buy Activision Blizzard

Basics Ticker: ATVI Current Price: $10.84 Market Cap: $13.81 bn 52-Week range: $8.67 - $13.14 Avg Daily Volume: 11.40 mm Insider Ownership: 62% Institutional Ownership: 38% Dividend: N/A

Investment Thesis We want to invest in ATVI for the following reasons: strong and unique subscription-based SaaS gaming model leading publisher of software in gaming sector diversify our portfolio with exposure to high growth opportunity in gaming sector

Company Profile handheld, PC, and console games Activision Blizzard Activision Blizzard handheld, PC, and console games carry a high one-time cost online subscription-based games carry low cost monthly fee Strategy emphasizes market share growth based upon increasing their subscription base and popularity of retail game series.

Customers & Competition consumers who use and enjoy the product include subclasses of subscription and retail customers Competition other companies that publish video games either in retail or online include: Electronic Arts, Sony Corp, and Take-Two Interactive Inc.

Growth Direction vs. Risks Activision’s videogame sales waning Blizzard preparing for huge releases in the next year Increase market share and subscription revenues by tapping international markets Duplicate recent successes of popular retail titles Volatility of game console wars Revenue depends on small number of franchises Industry/ATVI respond to drops in discretionary income Recent insider trading may cast a negative light on the companies prospects

Available Products Activision: Blizzard: Call of Duty Guitar Hero/Band Hero/DJ Hero Tony Hawk Games based upon licensed properties from LucasArts, Marvel, and DreamWorks Animation Blizzard: World of Warcraft Starcraft Diablo

Recent News Positive Negative Call of Duty Modern Warfare 2 Surpasses $1bn in Retail Sales Worldwide: MW2 continues to set sell-through records since its launch in November, in the first five days alone the game sold $550 mm worldwide, there are only a handful of entertainment properties that breach the $1bn mark Guitar Hero Kicks Off 2010 With Great Downloadable Tracks: To jumpstart revenue from the Guitar Hero series, Activision released downloadable singles on its website. S&P Ups Rating To Strong Buy: Standard & Poor’s equity analyst Jim Yin raised ATVI to Strong Buy from Hold while noting its recent fall with the industry. He quoted strong Call of Duty sales, subscription revenue, and expansion in China as optimistic signs for stock. New ZBoard Keyset Based on StarCraft II: SteelSeries peripheral manufacturer created a customized keyboard in preparation for the upcoming release of Starcraft II. Negative Subscriptions Strong; Console Games Weak: Many of Activision’s aging console game series are seeing a drop in revenue and popularity which is being balanced by increased subscriptions. Trend expected to continue in 2010 with three large upcoming Blizzard releases. Video Game Industry Prospects Poor: Console cycle is aging and demand for high-end systems has been satiated. Consumers continue cutbacks in discretionary spending resulting in 13% drop in overall industry sales during November 2009.

Balance Sheet Trends Cash has been steadily increasing from $354mm in 2006 to $2.9bn in 2008 There has been a similar trend in accounts receivable More than half of the company’s assets are in Goodwill and Intangibles While accounts payable and expenses have been rising accordingly the company has no long term debt

Income & Cash Flow Statements Income Statement Trends Company made net loss of $107mm in 2008 because SG&A and R&D expenses surpassed revenue As a result, retained earnings were negative Cost of revenue grew faster than revenue in 2008   Cash Flow Statement Trends Deferred tax liability account (as a result of differences in tax and GAAP accounting standards) means ATVI will have to pay more in taxes in the future Cash from operating activities is positive and has been steadily increasing from $86mm in 2006 to $379mm in 2008 Company has been making steady capital expenditures Company has received most funding from stock issuances

DCF Valuation

Comparables Analysis

Recommendation: Buy Entry Price Band: $5 - $7 Exit Price Band: $15 - $20 Time Horizon: 1 – 2 years Position Size: $5,000