It has been a good year for Bobby Kotick, the Long Island-born, head of video game maker Activision Inc.

In the first half of 2007 sales of his company's games, which include top selling titles Guitar Hero and Call of Duty, outpaced rival Electronic Arts Inc. - the first time in a decade anyone has achieved that feat. And on Sunday, Dec. 2, he went a long way toward making sure Activision stays at the summit, announcing a merger with Irvine, Calif.-based Blizzard Entertainment, a unit of France's Vivendi SA and the publisher of the world's No.1 online game, World of Warcraft.

The new business will have about $3.8 billion in sales this year, on a proforma basis, placing it ahead of Electronic Arts, which expects about $3.1 billion.

Vivendi, will control the venture, taking a 52% stake in exchange for contributing its $8.1 billion video-game unit and $1.7 billion in cash. But it is Kotick that will take the helm, a vote of confidence in a man who has a knack for the right deal and a nose for billion-dollar-plus game franchises.

The latest deal was instigated by Kotick, who last year approached Vivendi counterpart, Bruce Hack, with a pitch that centered on combining Activision's strength in gaming consoles, such as PlayStation, with Vivendi's PC-based online games unit. Hack will be No. 2 in the new venture.

"Activision Blizzard will be the only publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry and reach the broadest possible audiences," Kotick said in a statement released on Sunday.

The deal cements video gaming as one of the key pillars of Vivendi's business - the group's biggest earner is telecoms, which account for 42% of income, followed by music.

Vivendi had come under pressure in recent years, not least from private equity, to sell its gaming unit to concentrate on its telecoms and music businesses. But CEO Jean-Bernard Levy has resisted the entreaties, insisting that media was converging and that his business units were complementary.

It is a vision shared by Kotick, who noted that Vivendi's position as the world's No.1 music group would provide new possibilities for Activision's Guitar Hero franchise, which allows gamers to assume the role of lead guitarist in a rock band.

Video gaming is Vivendi's fastest growing but least profitable business unit. Ebitda at the unit jumped 71% in the third quarter to €41 million ($60 million), accounting for about 4.5% of Vivendi sales over the first nine-months of the year. In November, Vivendi reported third quarter profit excluding one-time gains of €721 million.

Under Kotick's guidance Santa Monica, Calif.-based Activision has made nine acquisitions in the past five years. In 2006 it paid $100 million for RedOctane Inc., which developed Guitar Hero. In 2003 it acquired Infinity Ward, capturing the team of developers that had created Medal of Honor, one of Electronic Arts' bestsellers. The team has since developed the Call of Duty series for Activision, which has taken in more than $1 billion.

Kotick has also been an aggressive bidder for Hollywood licenses, positioning Activision at the forefront of the booming crossover genre, with titles including Spider Man and Shrek.

The ability to turn deals into blockbuster games has proven a happy knack, not the least because the cost of game development has risen sharply in recent years.

According to figures cited in the Los Angeles Times, the average cost of developing a game has doubled in recent years to $25 million a game, as a result of increased programming demands from powerful new game consoles, such as Play Station 3 and Xbox 360.

The rise in the cost of developing games, as well as the need for bigger advertising budgets, has driven consolidation across the gaming sector. Last month Electronic Arts said it would buy the private equity-owned holding company of Pandemic Studios and BioWare Corp. for as much as $775 million in cash and shares.

Under the terms of the Activision/Vivendi deal the French group will receive 295.3 million new shares in Activision Blizzard in return for its gaming unit. It will also pay $1.7 billion, or $27.50 per share, for a further 62.9 million shares. On that basis the new group, which will trade on the Nasdaq stock exchange, will be valued at about $18.9 billion.

The new company will make an offer to buy back as much as $4 billion of shares, also at $27.50, a premium of 24% to Activision's closing price of $22.15 on Friday. Based on that price Activision had a market capitalization of $6.5 billion.

The transaction will boost Activision's earnings from the first year, with the merged entity targeting operating income of $1.1 billion for 2009. The deal is expected to close in the first half of 2008.

Vivendi shares traded Monday morning at €32.32, up €0.93, or almost 3% on their previous close.

Activision tapped Allen & Co. LLC for financial advice on the deal and took counsel from Skadden, Arps, Slate, Meagher & Flom LLP. Vivendi turned to Goldman, Sachs & Co. for financial advice and took counsel from Gibson, Dunn & Crutcher LLP.