Proposal to Buy

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

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

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 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 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

Activision: ◦ 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

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.

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.

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

Revenue vs. Cost Growth2006 2007 2008

Revenue 1468 1337.88 3026% Growth -8.86% 126.18%

Cost of Revenue 940.36 382.02 1839% Growth -59.38% 381.39%

SG&A 379.76 330.3 735% Growth -13.02% 122.52%

R&D 132.65 384.81 592% Growth 190.09% 53.84%

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

VALUATION - DISCOUNTED CASH FLOW METHOD

Historical Projected Terminal2006 2007 2008 2009 2010 2011 2012 2013

0 1 2 3 4 5Free Cash Flow Calculation

EBITDA 160 242 152 939 1,033 1,136 1,249 1,374 Less: Taxes on EBITDA 69 104 65 404 444 (398) (437) (481) Less: Capex (96) (68) (46) (31) (34) (38) (42) (46) Add: Working Capital Impact - 65 (243) 17 19 20 22 -

Unlevered Free Cash Flow 343$ (72)$ 1,328$ 1,461$ 721$ 793$ 847$

Discounted Cash Flow 1,328$ 1,350$ 616$ 626$ 619$ 650$

DCF Enterprise Value Calculation

Terminal Value CalculationTerminal Growth Rate 5.00%Terminal Enterprise Value 20,431.07 Discounted Terminal Value 14,917.75

Enterprise Value 18,128.93 Enterprise Value Net Debt 18,128.93 Share Price $13.87

Market Multiples Growth Rates MarginsPrice Percent of Value Price / Earnings EV / EBITDA EV / Revenue Revenue EPS EBITDA CY 09E

FT Sector / Company 07/31/09 LTM High ($ mm) CY 09E CY 10E CY 09E CY 10E CY 09E CY 10E CY 09E CY 10E LT Growth CY 09E CY 10E P / E / G

Bucket NameATVI $ 10.89 82.88% $ 14,236 14.5 x 12.5 x 7.3 x 6.4 x 2.3 x 2.1 x 10.28% 7.23% 16 % 31.31% 32.87% 0.9 xERTS 17.03 71.68% 5,500 35.9 22.2 10.0 7.4 0.9 0.9 0.94% -1.02% 16 9.37% 12.80% 2.3TTWO 10.08 80.19% 839 (17.5) 8.0 (43.5) 7.1 1.0 0.7 -5.14% 40.34% 13 -2.20% 9.63% (1.4)SNE 33.99 99.65% 34,110 48.0 N/A N/A N/A 0.5 N/A 8.14% N/A 11 N/A N/A 4.6

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