The announcement from Microsoft Gaming CEO Phil Spencer comes as Activision Blizzard faces a series of crises. In July, the publisher was sued by California’s Department of Fair Employment and Housing (DFEH); the state agency’s suit alleging widespread gender-based discrimination and sexual harassment at the company.
Activision Blizzard also faces a U.S. Securities and Exchange Commission investigation, as well as a class-action lawsuit instigated by shareholders and an unfair labor practices complaint filed by workers and the media labor union Communications Workers of America. The publisher’s CEO, Bobby Kotick, has faced repeated calls by employees to step down.
The deal would be Microsoft’s biggest purchase in its decades-long existence, and one of the largest acquisitions within the tech industry. It would surpass Microsoft’s 2016 acquisition of professional networking site LinkedIn, which the business software company bought for $26.2 billion. After the Activision Blizzard deal closes, Microsoft says it will become the third-largest gaming company by revenue, beat only by Tencent and Sony.
The acquisition comes at a time when the video game industry has made major strides both financially and culturally. In 2020, with people around the world self-isolating and turning to games amid the coronavirus pandemic, the gaming industry recorded double and even triple digit jumps in engagement in terms of sales and time spent online. S&P Global Market Intelligence predicted in November of last year video game content revenues would surge past $200 billion in 2022, after marked year-over-year leaps between 2019 and 2021.
Microsoft CEO Satya Nadella has for years defended the value of the company’s gaming unit, even when some analysts had suggested the cloud-computing giant sell the company in previous years.
Following the news of the acquisition, Nadella announced that Kotick will stay on as CEO of Activision Blizzard. When finalized, that company will report to Spencer. In an email sent to Activision Blizzard employees Tuesday and shared with The Washington Post, Kotick wrote he would stay on as CEO “with the same passion and enthusiasm” he had when he started the job in 1991. He wrote that the deal will close sometime by June 2023, pending regulatory approval, and until then, the company will stay autonomous from Microsoft.
Microsoft’s acquisition of Activision Blizzard is more than four times bigger than the previous record sum paid for a video game publisher set earlier in January when Take-Two Interactive announced plans to purchase mobile game maker Zynga for $12.7 billion. In 2020, Microsoft paid $8.1 billion to acquire ZeniMax Media, the parent company of popular video game developer Bethesda Softworks.
The acquisition could also position Microsoft to better compete in the nascent business of the “metaverse,” or online worlds that have become a recent focus of tech companies. Facebook recently changed its corporate name to Meta, in part to reflect its emphasis on building out the metaverse.
Buoyed by the releases of major new games like “Call of Duty: Warzone” and a mobile version of “Call of Duty,” Activision Blizzard soared over the past two years, peaking at over $100 per share in Feb. 2021. However, the company’s fortunes swung in July with the filing of a lawsuit from California’s DFEH. That lawsuit alleged gender-based discrimination and harassment, primarily at Blizzard Entertainment, one of the company’s major studios and the developer of “World of Warcraft.” Blizzard president J. Allen Brack stepped down as a result of the lawsuit, replaced by a tandem of Mike Ybarra and Jen Oneal. Oneal stepped down from the position after just three months and left Activision Blizzard at the end of the year.
The allegations in the DFEH lawsuit, and what some workers saw as a lacking response from the company, prompted a series of walkouts by employees. In November, more than 1,000 Activision Blizzard employees signed a petition calling for Kotick to resign as CEO, a call that was echoed by shareholders. The December termination of a dozen contractors working in quality assurance for Activision Blizzard-owned Raven Software led several dozen workers to strike, demanding those contractors be reinstated and given full-time positions.
“As a company, Microsoft is committed to our journey for inclusion in every aspect of gaming, among both employees and players,” Spencer wrote in Tuesday’s blog post announcing the deal. “We deeply value individual studio cultures. We also believe that creative success and autonomy go hand-in-hand with treating every person with dignity and respect. We hold all teams, and all leaders, to this commitment. We’re looking forward to extending our culture of proactive inclusion to the great teams across Activision Blizzard.”
Industry analysts believe the controversies around Activision Blizzard may have pushed downward the acquisition price.
“[Microsoft is] paying a lot less than it would have a year ago,” said Joost van Dreunen, a lecturer on the business of games at the New York University Stern School of Business. He added that the deal could help Microsoft challenge PlayStation, the dominant console maker. “Across the ecosystem, there’s a land grab in content as 10 major platform holders are all looking to differentiate themselves, attract customers and lock in long-term audiences.”
Last week, in an interview on the New York Times podcast “Sway,” technology writer Kara Swisher asked Microsoft’s Spencer about the sexual assault allegations in The Wall Street Journal’s December report on Activision Blizzard.
“I always feel for people working on any team, my own teams, other teams. I think people should feel safe and included in any workplace that they’re in,” Spencer said on the podcast. “I’m saddened and sickened when I hear about workplace environments that cause such distress and destruction of individuals and teams.”
Last November, Spencer wrote an email to staff explaining that Microsoft was reevaluating its partnership with Activision. Spencer told Swisher that Microsoft had changed how the company partners with Activision Blizzard but didn’t go into any details. Spencer went on to say that “Xbox’s history is not spotless” and he didn’t want to chastise other gaming companies.
“This isn’t about, for us as Xbox, virtue-shaming other companies,” Spencer said. “If I can learn from them or I can help with the journey that we’ve been on on Xbox by sharing what we’ve done and what we’ve built, I’d much rather do that than get into any kind of finger-wagging at other companies that are out there.”
Separately, Microsoft announced last week that it has hired an outside firm to conduct a review of the company’s sexual harassment and gender discrimination policies after a shareholding proposal pushing for the investigation was approved.
In the Tuesday blog post announcing the acquisition, Spencer also shared that Game Pass, Microsoft’s video game subscription service, had surpassed the mark of 25 million subscribers. In a news release, Microsoft explicitly connected the acquisition to its Game Pass subscription offering, noting that the purchase will set in motion plans to release Activision Blizzard games on the service.
Michael Pachter, a Wedbush Securities analyst who focuses on the video game industry, noted that the deal is significantly larger than what would be warranted given Activision Blizzard’s closing stock price last week at $65 per share. Activision Blizzard was up nearly 30 percent Tuesday after the market opened.
“Microsoft gets $8 to $9 billion of revenue and $3 billion or so of annual free cash flow, plus a ton of great intellectual property and great studios,” Pachter said. “They might decide to stop offering games on PlayStation, which could raise antitrust issues, but other than that, I think the deal goes through.”
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