Rating Action: Moody’s affirms Microsoft Corporation’s Aaa senior unsecured rating following announced acquisition of Activision Blizzard, Inc., outlook stableGlobal Credit Research – 18 Jan 2022New York, January 18, 2022 — Moody’s Investors Service (“Moody’s”) affirmed Microsoft Corporation’s (“Microsoft”) Aaa senior unsecured rating and the P-1 (Prime-1) rating for commercial paper following Microsoft’s announcement that it agreed to acquire Activision Blizzard, Inc. (“Activision” or “Activision Blizzard”) in an all-cash transaction for approximately $68.7 billion in equity value. Both boards of directors have approved the transaction. Subject to customary closing conditions and completion of regulatory review and Activision Blizzard’s shareholder approval, the deal is expected to close in the first half of calendar 2023.Affirmations:..Issuer: Microsoft Corporation…. Issuer Rating, Affirmed Aaa….Senior Unsecured Commercial Paper, Affirmed P-1….Senior Unsecured Regular Bond/Debenture, Affirmed AaaOutlook Actions:..Issuer: Microsoft Corporation….Outlook, Remains StableRATINGS RATIONALEThe acquisition of Activision “makes good strategic sense and would further Microsoft’s strategy to expand usage and deepen engagement by investing in content, community, and cloud services,” said Moody’s Richard Lane. Lane went on to say that “with $137 billion of cash and equivalents, our projection of $50 billion of free cash flow generation this fiscal year, and very low financial leverage, Microsoft has ample financial flexibility to execute the transaction.” Activision’s $9 billion of revenue is modest in comparison to Microsoft’s $15.9 billion of gaming revenue and $176 billion of total revenue.Microsoft is the world’s largest software company with a leading market share for its core products that make up the majority of revenue. In addition to exceptionally strong liquidity ($137 billion of cash and equivalents), Microsoft maintains a long track record of steady financial performance, strong and growing recurring revenue and cash flow as it continues to build out and expand a cloud-based software subscription model, a very diversified customer base in terms of geography, customer and end market and strong barriers to entry. We project Microsoft will generate consistently strong profitability with over 50% EBITDA margins and free cash flow generation after dividends in excess of $50 billion in fiscal June 2022 and $60 billion in fiscal June 2023. With its substantial financial strength, the company is well positioned to address the challenges related to technology evolution and substitution through acquisitions and internal investments.Corporate governance is an important element to Microsoft’s credit profile. Microsoft’s financial policy as it relates to returns to shareholders is balanced, as the company returns to shareholders approximately 75% to 80% of its cash flow from operations after capital expenditures in the form of dividends and share repurchases. Microsoft’s liquidity is exceptionally strong with cash and short term investments of $137 billion as of September 2021 while financial leverage is very low and declining.Social risks mainly relate to a range of privacy laws and rights that allow people to control their personal information in different jurisdictions globally. To the extent that Microsoft does not comply with data privacy rules, the company could be subject to more regulatory oversight, monetary fines, and reputational damage.Activision Blizzard, Inc. is one of the world’s leading video game producers in the growing but significantly fragmented gaming industry. The company possesses strong revenue diversification across the globe and in multiple genres and gaming platforms. It has a proven track record of developing profitable and sustainable franchises with international gaming community avidity such as Call of Duty, World of Warcraft, Overwatch, and Candy Crush, among others. The company benefited from greater consumption and engagement of its games during the COVID-19 crisis, and we believe that the crisis will broaden the participation base as well.The company’s fundamental position is strengthened by several of its top-selling games moving into mobile free-to-play and taking advantage of eSports opportunities, each of which provide additional revenue diversification benefits. Moody’s recognizes that the company’s past operational performance tended to fluctuate based on the release schedule and the consumer receptivity of its games as compared to competitor games. However, historical seasonality has and will continue to dissipate due to a greater volume of digital in-game content between major game launches, transitioning existing titles to new popular genres such as mobile free-to-play, and new revenue streams which are spread evenly across the year such as expansion of downloadable content revenues, eSports and mobile advertising.The stable outlook reflects Moody’s expectations that Microsoft will continue to maintain and defend its very strong market positions across a range of business and consumer PC, enterprise products and services as well as continue to profitably grow its cloud service offerings.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe long term rating could be downgraded if Microsoft commences aggressive shareholder returns or if the company undertakes additional large, debt funded acquisitions such that Moody’s expects adjusted gross leverage to continue to rise without a substantial increase in cash balances. In addition, downwards ratings pressure could develop if there is an erosion in Microsoft’s’ core business model, and if profitability or cash flow generation weaken sustainably.Microsoft Corporation, with $176 billion of revenue over the twelve months ended September 2021, is the world’s largest software company, supporting a wide range of software license and subscription products and services including the Windows operating system that runs approximately 90% of the world’s personal computers.The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Richard J. Lane Senior Vice President Corporate Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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