Microsoft Corp. plans to buy Activision Blizzard Inc. for US$68.7 billion, acquiring a legendary game publisher responsible for franchises like Call of Duty and World of Warcraft, but recently roiled by claims of sexual misconduct and discrimination. 

In its largest purchase ever, Microsoft will pay US$95 a share in cash to add Activision’s stable of popular titles, helping the software giant expand its own offerings for the Xbox console and push it into the fast-growing markets for mobile gaming and the metaverse. The deal, which would make Microsoft the world’s No. 3 gaming company, also fits with Chief Executive Officer Satya Nadella’s strategy of focusing on content, community and cloud software.  

Activision CEO Bobby Kotick, 58, will continue to serve in that role only until the deal closes, a person familiar with the deal said. Once the transaction is completed, the Activision Blizzard business will report to Phil Spencer, who, as part of the deal was promoted to CEO of Microsoft Gaming. 

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Bobby Kotick

Activision, which has a long history with Microsoft’s Xbox, will also help the software giant better compete with rival Sony Corp.’s PlayStation. The publisher’s largest franchise, Call of Duty, became successful largely due to Microsoft’s online platform Xbox Live, which allows gamers to connect for multiplayer matches. Most of Activision’s games are designed to run on Xbox consoles.

“Gaming has been key to Microsoft since our earliest days as a company,” Nadella said in a note to employees. “Today, it’s the largest and fastest-growing form of entertainment, and as the digital and physical worlds come together, it will play a critical role in the development of metaverse platforms.” 

Taking on Activision also introduces a whole host of legal and potential regulatory problems to Microsoft. Activision has been shrouded in controversy since last July after a California state agency filed a sexual bias lawsuit against the Santa Monica, California-based company, describing in lurid detail its “frat boy culture,” and accusing leadership of failing to take action to stop it. The U.S. Securities and Exchange Commission later launched its own investigation into how the company handled the reports of misconduct. 

The deal will also likely face tough regulatory scrutiny in the U.S., where big technology companies are being probed by regulators for their reach and influence. China, which has been sparring with the U.S. already over technology issues, will also likely review the merger.

Kotick, who has led Activision for three decades, came under pressure to resign after an explosive report in the Wall Street Journal last fall that tied him personally to reports of mistreatment of women and suggested that he was aware for years of sexual misconduct, including rape, at the company but didn’t report it to the board. Kotick has apologized and pledged to make changes.

In an interview, Kotick said the deal has nothing to do with the controversy surrounding Activision or calls for him to step down and that Spencer reached out to him last year. A person familiar with the discussions, who was not authorized to speak publicly, said Microsoft looked at Activision’s situation, given all the negative attention and pressure on Kotick, and wondered if the beleaguered CEO would be willing to do a deal.

Kotick initially didn’t want to sell, according to another person familiar with the talks, and also put the word out to see if any other company would outbid Microsoft. But at that point, Kotick had little leverage with his board amid the ongoing public scrutiny at his company.

Microsoft’s bid is a 45 per cent premium on Activision’s closing price Friday. However, it’s a bargain compared with the stock’s performance in the first half of last year, before the sexual bias lawsuit plunged the company into crisis. The shares hit a high of more than US$100 apiece in February and then lost nearly half their value by the end of the year. Microsoft shares fell about 2 per cent Tuesday afternoon in New York.

The scandal has taken a toll on a company already struggling to adapt to the end of a pandemic-fueled video game boom. In November, Activision delayed two of its most anticipated games and gave a sales forecast for the fourth quarter that fell short of Wall Street’s expectations.

Spencer said last November that Microsoft was reevaluating its relationship with Activision and making “proactive adjustments” in the wake of the Wall Street Journal report.

“We also recognize that after the close, we will have significant work to do in order to continue to build a culture where everyone can do their best work,” Nadella said on a call with investors on Tuesday.

Founded in 1979, Activision is home to some of the most popular game franchises in the world, including Candy Crush, Guitar Hero, Skylanders, Destiny, Crash Bandicoot and the Tony Hawk skateboarding titles. Its Call of Duty franchise is particularly notable for its lasting appeal, opening week sales and, increasingly, its reach in Asia. The mobile edition of the game launched in China in December 2020, quickly hitting the top of the download charts. It brought in tens of millions of new fans, “with player investment in the first quarter on par with the rest of the world combined,” the company said in May.

The franchise is arguably Activision Blizzard’s most important business. In 2020, the company’s Activision segment -- nearly all of which is Call of Duty -- accounted for 55 per cent of the company’s operating profit.

But some of Activision’s games aren’t capturing the zeitgeist the way they once did. In 2021, Baird analysts published a report that revealed searches for Call of Duty and World of Warcraft were down markedly from the prior year, falling 32 per cent and 44 per cent, respectively. 

“Acquiring Activision will help jump-start Microsoft’s broader gaming endeavors and ultimately its move into the metaverse with gaming the first monetization piece of the metaverse,” Dan Ives, an analyst at Wedbush Securities, wrote in a note to investors. “With Activision’s stock under heavy pressure (CEO related issues/overhang) over the last few months, Microsoft viewed this as the window of opportunity to acquire a unique asset that can propel its consumer strategy forward.” 

Microsoft plans to keep making some of Activision’s games for PlayStation consoles but will also keep some content exclusive to Xbox, said a person familiar with the company’s thinking. 

“I’ll just say to players out there who are playing Activision Blizzard games on Sony’s platform: It’s not our intent to pull communities away from that platform and we remained committed to that,” Spencer said in an interview.

Microsoft has made several acquisitions recently to bolster its roster of games studios. In 2020, it agreed to acquire ZeniMax Media Inc., home to The Elder Scrolls and Doom publisher Bethesda Softworks, for US$7.5 billion. At the time, this was Microsoft’s biggest video game purchase ever. Microsoft also spent US$2.5 billion in 2014 to to purchase Mojang, the maker of Minecraft, a popular virtual-world-building game that is seen as a path to the company’s future metaverse ambitions. Microsoft said the Activision deal will vault it to just behind China’s Tencent Holdings Ltd. and Japan’s Sony. 

Driving Microsoft’s ambition is its Game Pass subscription service, which gives members access to all of its first-party games -- those from the studios it owns -- for no extra charge, and on the day of their commercial release. Recently, it’s added titles from other publishers, such as Electronic Arts Inc., but owning the underlying developers gives Microsoft the freedom to keep the most popular titles from competing platforms, such as the PlayStation.

What Bloomberg Intelligence says: 
“Picking up Activision would further strengthen Game Pass and get Microsoft much closer to Sony. Game Pass has over 25 million subscribers, and Activision’s Blizzard has about 400 million active players around the globe. The deal could take over a year of scrutiny but has a good shot of clearance, according to BI’s antitrust expert.” -- Anurag Rana, BI senior software industry analyst.

Microsoft is also banking on the rise in mobile gaming, the fastest-growing part of the industry and one of the software giant’s weak spots. Earlier this month, Take-Two Interactive Software Inc. agreed to buy mobile game maker Zynga Inc. in a deal valued at US$11 billion to help the publisher of Grand Theft Auto break into the market for smartphone games.

Microsoft said its deal for Activision will allow gamers to enjoy hit titles like Halo and Warcraft “virtually anywhere they want.” Activision’s mobile business represents a “significant presence and opportunity” for Microsoft, the company said.

Goldman Sachs Group Inc. and Simpson Thacher & Bartlett LLP advised Microsoft while Allen & Company LLC and Skadden, Arps, Slate, Meagher & Flom LLP worked with Activision.