Earlier this week information technology was confirmed that Microsoft is acquiring Minecraft maker Mojang for $2.5 billion. I've got mixed feelings most the transaction.

The strategic benefits are questionable and financially, Minecraft is worth maybe $1.eight billion — a valuation which assumes a sequel is as commercially successful every bit the original, and which assumes the intellectual holding rights founder Markus Persson took out of Mojang are role of the transaction.

A $1.viii billion valuation leaves $700 million that new acquirement streams similar additional merchandising, a successful movie, etc. are unlikely to cover.

The best possible caption might be that Microsoft is using its foreign cash reserves to pay for the conquering — money that would be hard for Microsoft to utilise domestically for taxation reasons.

The printing is speculating that Microsoft is acquiring Minecraft and so information technology can "tap into a cultural phenomenon" and entice players to Microsoft's platforms.

Editor'south Note:
Jeffrey Yuwono is CEO and co-founder of Feecha, a hyperlocal news app for neighbourhoods. A Stanford MBA and Duke undergrad, Jeff writes insightful observations well-nigh technology one time a day on his blog The Cornerplay and at present on this weekly column on TechSpot.

I don't buy either caption.

Xbox is already a cultural phenomenon, every bit is Halo and Skype. Microsoft doesn't demand another property to create make sensation. Moreover, Minecraft is like Aroused Birds and Candy Trounce Saga — all the same popular, all the same recognizable, merely past the point of explosive growth. Microsoft would be buying an asset on the downward slope of the hype cycle.

The only fashion such a loftier buy price makes sense is a sequel. The graphics in the commencement Minecraft are quite basic, so equally long every bit Microsoft tin retain the charm and gameplay of the first, I tin can meet existing users upgrading for a ameliorate visual experience.

Microsoft claims xc% of all paid customers accept played Minecraft in the past year — that'south an impressive statistic.

Simply even with a successful sequel, the math only gets us partly there. $1.8 billion to be exact.

OK, not exact. Nosotros're missing too much information for a valuation to exist anything but a high level estimate; but let'due south use public data and what I remember from my days in cyberbanking and consulting to run into what nosotros can come up with.

Nosotros make the following assumptions:

Mojang will sell thirteen million units in 2022. This figure is based on PC sales over the concluding 24 hours as representative for the twelvemonth (upside: vacation sales; downside: accelerated saturation) and a similar mix of PC to total sales in 2022. This represents a 23% decline versus the 17 million units sold in 2022.

We forecast sales will decline some other 23% in 2022 to 10 million units.

Minecraft 2 launches in 2022 and does every bit well as the original: 54 million copies to date plus 23 one thousand thousand over the next two years for a total 77 1000000 units.

At present that we have sales, we need price. According to the Wall Street Periodical, 41% of Minecraft's revenue is from PC at $27; 32% from consoles at $20; and 27% from mobile at $seven. The resulting weighted price is $19. We presume this stays constant (upside: upward-selling and cantankerous-selling; downside: higher mobile share).

Share Price Weighted
PC 41% 27 11
Console 32% 20 6
Mobile 27% vii 2
Total 100% 19

We as well assume a x% discount rate, 50% revenue to equity cash catamenia and growth equal to inflation in the last value. 50% sounds similar a lot, but reasonable given Minecraft's mammoth 79% profit margin.

Every investment bank puts in at least 5% synergy in their M&A models, and then we follow suit here. Revenue tin can benefit from Microsoft'south more expansive distribution channels and redundant costs tin can be eliminated.

Given these, we calculate a net present value of $1.8 billion. $1 billion over the projected period and $800 meg for the terminal value.

That seems about right to me.

To double check, we turn to marketplace multiples.

Technically, Mojang only produced $128 meg of profit, but it likewise paid $129 million to Persson'southward visitor to license the intellectual property rights he carved out of Mojang. This is a technique to ensure the founder gets paid before shareholders do, but it'south also not usually a real operational cost.

If Microsoft gets these rights in the acquisition — and thus no further payouts — Mojang'southward true turn a profit is closer to $257 one thousand thousand. Probably a good supposition given Mojang's founders are all leaving.

A convenient comparable to Mojang is King, the public company behind Candy Trounce Saga. Male monarch has a marketplace value of $four.1 billion and earnings of $568 million for a P/East of 7.three. Multiply that with Mojang's earnings to go a $ane.ix billion valuation.

Some other comparable is Supercell, the company backside Clash of Clans. Softbank recently acquired Supercell for $3.0 billion. Given earnings of $464 million, applying Supercell's P/Due east of 6.5 to Mojang's earnings results in a $i.7 billion valuation.

Acquirement
($ chiliad) 		Turn a profit
($ m) 		Margin Market Value
($ m) 		P/E Mojang Value
($ m)
King 1,884 568 30% four,140 7.3 one,873
Supercell 892 464 52% 3,000 6.5 1,662
Mojang 325 257 79% ii,500 9.7 2,500

Projecting disinterestedness cash flows gets us a valuation of $1.eight billion. Using P/Due east multiples from Supercell and King gets us $1.7 to $1.9 billion. Not bad, the two methods match!

Without seeing a remainder sail, information technology's hard to experience besides confident merely $1.8 billion seems directionally correct.

And so how does Microsoft expect to make upwards the $700 million difference? Do they believe they can sell that many more copies under the Microsoft banner? According to our financial model, Mojang will demand to sell 160 million copies of Minecraft 2 at a weighted price of $19 from 2022 to 2022 to justify a $2.5 billion valuation. That's more than double what the original will sell in its lifetime. Unlikely.

Perhaps Microsoft intends to leverage Minecraft's immature user base of operations to cross-sell Microsoft products? Become them early kind of matter? Even and then, it's a stretch.

Microsoft simply paid likewise much.