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Acquisition of Activision Blizzard by Microsoft

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Acquisition of Activision Blizzard by Microsoft
InitiatorMicrosoft
TargetActivision Blizzard
TypeFull acquisition
CostUS$68.7 billion
InitiatedJanuary 18, 2022
CompletedMid-2023

On January 18, 2022, Microsoft announced its intent to acquire Activision Blizzard for $68.7 billion in cash.[1] Under the terms of the agreement, which would be expected to close by mid-2023 pending regulatory and shareholder approval, Microsoft would own Activision, Blizzard Entertainment, and King under the Xbox Game Studios brand. This gives Microsoft ownership of franchises such as Call of Duty, Crash Bandicoot, Spyro, Warcraft, StarCraft, Diablo, Overwatch, and Candy Crush. If approved by international regulators, it would be the largest video game acquisition in history.[2] The acquisition is expected to finish in the mid-2023.[3]

Background

Activision Blizzard is one of the largest video game publishers in the world, with annual revenues of about $8.8 billion in 2021.[4] The company is composed of five business units:[5] Activision Publishing, Blizzard Entertainment, King,[6] Major League Gaming,[7] and Activision Blizzard Studios.[8][9] Among its assets are ownership of Call of Duty, Crash Bandicoot, Spyro from Activision's studios; Warcraft, Diablo, StarCraft, and Overwatch from Blizzard Entertainment; and Candy Crush Saga from King.[10][11]

Microsoft is a dominant player in computing software, and also makes the Xbox line of game consoles and operates Xbox Game Studios, a collection of developers to create first party titles.

History

Announcement

On January 18, 2022, Microsoft announced its intent to acquire Activision Blizzard for $68.7 billion in an all-cash deal, or approximately $95 per share. Activision Blizzard's stock price jumped nearly 40% that day in pre-market trading. The deal would make Microsoft the third-largest gaming company in the world and the largest headquartered in the Americas, behind Chinese company Tencent and the Japanese conglomerate Sony. Goldman Sachs will serve as the financial advisor to Microsoft, and Allen & Company will be Activision's financial advisors. Simpson Thacher will serve as legal advisor for Microsoft while Skadden will serve as legal advisor for Activision.[12] The deal has been approved by both companies' board of directors and is expected to close in 2023 following international government regulatory review of the action.[13][14] Upon completion of the deal, Activision Blizzard would be a sibling entity to Xbox Game Studios under a new Microsoft Gaming division with Phil Spencer as its lead. The deal would also allow Microsoft to offer Activision Blizzard games on its Xbox Game Pass service.[14] Spencer also spoke to reviving some of the games in Activision Blizzard's past that he himself enjoyed, mentioning series such as King's Quest, Guitar Hero and Hexen: Beyond Heretic.[15]

Kotick stated that he, Spencer, and Microsoft's CEO Satya Nadella have had discussions in 2021 on their concern of the power of Tencent, NetEase, Apple, Inc. and Google, and that Activision Blizzard lacked the computation expertise in machine learning and data analytics that would be necessary to compete with these companies. According to Kotick, this led to the idea of Microsoft, which does have those capabilities, acquiring Activision Blizzard at an attractive price point.[16] In a statement released on Activision Blizzard's investor website, the company said its industry is the "most dynamic and exciting category of entertainment across all platforms" and that gaming will be the forefront of the development of the emerging metaverse. Some journalists saw this acquisition, and Microsoft's March 2021 acquisition of Bethesda Softworks, as a bid to compete against Meta Platforms, formerly known as Facebook.[17][13][14]

The announcement had come in the wake of events related to California Department of Fair Employment and Housing v. Activision Blizzard, A lawsuit raised in July 2021 accusing the company of sexual harassment, employment discrimination and retaliation on the part of Activision Blizzard.[18][19] Allegations had expanded by November 2021 to include actions that Activision Blizzard's CEO Bobby Kotick had done.[20][21] The timing of the acquisition was reported by The Wall Street Journal and Bloomberg News to be in response to the ongoing DFEH lawsuit. Reports from both newspapers stated that Activision Blizzard had been considering a buyout from other companies, including Facebook parent company Meta Platforms, due to the weaker than expected financial performance of their latest game releases and production delays.[22][23][24] Based on SEC filings related to the merger, Microsoft approached Activision Blizzard again in the days immediately following the November 2021 Wall Street Journal report regarding a buyout.[25] While Kotick had been hesitant about selling the company, the board had gone ahead with the deal as they continued to fear the ongoing impact of the lawsuit while Kotick had remains on the board[22][24] The buyout would provide a graceful exit for Kotick in the future, ranging in $252.2-292.9 million over most scenarios.[22][24][26]

According to official announcements, under the deal Kotick will remain the CEO of Activision Blizzard,[27][28][29][30] and is expected to keep the position while the deal goes through regulatory processes, as Activision Blizzard remains independent from Microsoft until the deal closes.[31] According to The Wall Street Journal, Kotick "will depart once the deal closes" under Microsoft's management, while Kotick said in an interview that he has an interest in remaining in the company.[20][32][33][16] Microsoft has yet to speak directly about the Activision Blizzard lawsuit following news of the acquisition, however the company announced a week prior that it would be reviewing its own sexual harassment and gender discrimination policies.[34]

Activision Blizzard's shareholders approved of the acquisition near-unanimously in April 2022.[35]

Regulatory approvals

Due to the size of the acquisition, the deal is being reviewed by several government commerce bodies for antitrust concerns.

Saudi Arabia became the first country to approve the acquisition in August 2022.[36] The Administrative Council for Economic Defense of Brazil approved the acquisition in October 2022 without any regulatory restrictions for Microsoft.[37]

In the United States, the acquisition was reviewed by the Federal Trade Commission (FTC) rather than traditionally by the U.S. Department of Justice, as the agency had raised more concerns over mergers and acquisitions in the Big Tech sector in the last decade.[38] U.S. Senators Elizabeth Warren, Bernie Sanders, Sheldon Whitehouse, and Cory Booker expressed their concerns about the merger to the FTC as part of the FTC's investigation, saying that both companies have "failed to protect the rights and dignity of their workers" and that the merger should be opposed if "the transaction is likely to enhance monopsony power and worsen the negotiating position between workers and the parties."[39] In addition, the U.S. Securities and Exchange Commission (SEC) reviewed potential claims that investors close to Kotick used insider trading prior to the acquisition announcement;[40] Activision Blizzard said they would fully cooperate with the SEC's review.[41]

The UK's Competition and Markets Authority, a consumer watchdog group, stated its intent to perform a higher-level review of the acquisition in August 2022. The phase 1 ruling, issued on September 1, 2022, said that the merger "may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom". Phase 2 of the investigation is to last until March 1, 2023.[42] It would begin said higher-level review the next month, expected to close in March 2023.[43]

In September 2022, the European Commission (EC) began its first phase review of Microsoft's acquisition with an expected completion date by November 8, 2022. The EC could approve the merger with or without specific terms, or require an additional second phase review, to last four months.[44][45] The EC sent out a questionnaire to several game industry firms to ask them about the potential impact of the acquisition on their livelihood, including if Microsoft does opt to lock rivals out of Activision games in the future.[46]

The deal is also seeing review in New Zealand, among other places.[43]

Criticism

Several Activision Blizzard employees have expressed cautious optimism with respect to the deal, with the ABK Workers Alliance, a group of employees pushing for unionization in the wake of the DFEH lawsuit, saying the acquisition did "not change the goals" of the Alliance.[47][48][49] A report by Business Insider suggested several Microsoft employees have raised their concern on the deal with respect to the sexual harassment scandals and Activision Blizzard workplace culture, hoping for "concrete steps to make sure we aren't introducing a dangerous and unwelcome culture." On January 19, 2022, World Bank president David Malpass criticized the acquisition, contrasting the acquisition price with the smaller amount of bond financing available to developing countries during the COVID-19 pandemic.[50]

Concerns on Microsoft's potential ownership of the Call of Duty franchise, which has sold over 400 million units by April 2021 and considered one of the most valuable properties within the video game industry,[51] have been raised by Sony Interactive Entertainment and regulators. Shortly after the acquisition announcements, Sony had stated that they expect Microsoft to honor all of Activision Blizzard's publishing agreements for multiplatform games, assuring that Call of Duty would remain available on the PlayStation platform and not made a console-exclusive title. Spencer and Microsoft president Brad Smith reassured that Microsoft will continue these existing agreements and expressed their desire to keep Call of Duty and other popular Activision Blizzard games on PlayStation beyond the terms of these agreements, as well as explore the opportunity to bring these games to the Nintendo consoles.[52][53][54][55] Around September 2022, Xbox head Phil Spencer said Microsoft had written a letter to Sony in January, affirming their commitment to maintain Call of Duty on the PlayStation "several years" beyond the current contractual agreements set before the acquisition, which are said to last until 2024 according to Bloomberg.[56][57] Spencer said their offer to Sony "goes well beyond typical gaming industry agreements".[58] Sony's president Jim Ryan responded to Spencer by stating that in their commitment, Microsoft only stated their intent to keep Call of Duty for three more years beyond the current contract terms, and that "their proposal was inadequate on many levels and failed to take account of the impact on our gamers. We want to guarantee PlayStation gamers continue to have the highest quality Call of Duty experience, and Microsoft’s proposal undermines this principle."[58]

The New York City Employees' Retirement System, which are shareholders of Activision Blizzard, sued the company in April 2022, arguing that the company had made the acquisition deal quickly with Microsoft as to try to cover up the misdoings of Kotick that had been uncovered as part of the ongoing DCEH lawsuit and escape any liability.[59]

References

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