Activision Misconduct Fallout prompted Microsoft to pursue the deal

(Bloomberg) — Late last year, as Activision Blizzard Inc. and Chief Executive Officer Bobby Kotick were rocked by allegations that Kotick had known about sexual harassment at the company for years, a group of Microsoft Corp. suggests that Xbox CEO Phil Spencer, a longtime video games industry statesman, speak to the embattled CEO.

According to a person familiar with the matter, the goal was to offer support to a key partner and make it clear that Microsoft had concerns about Activision’s treatment of women. Another goal: to ensure Microsoft would be well-positioned to make an offer if Kotick and the board were willing to sell the company. After a few phone calls over a two-week period, discussions evolved into Microsoft’s interest in acquiring the company.

That led to Tuesday’s announcement that Microsoft had struck a $68.7 billion deal to acquire Activision, adding a legendary games publisher responsible for franchises like Call of Duty and World of Warcraft. It’s a combination that’s propelling Microsoft into the top ranks of game publishers, giving the company the mobile audience it’s eluded it in years, and increasing its strength while the software giant and its competitors work to build the virtual reality platform known as the Metaverse. fight platform.

Although the events paving the way for the eventual deal began in mid-November, Microsoft executives had given hints for months that they were eyeing deals. CEO Satya Nadella had been looking for an acquisition that would bring the software maker a steady base of consumers since at least the summer of 2020. In November 2021, during an interview at the Paley International Council Summit, Spencer reiterated his frequently-stated position that he was on the lookout for acquisitions, noting that Xbox in particular wanted offerings that added casual and social gaming – something that Activisions mobile titles is provided. “We have big ambitions,” Spencer said at the summit.

Read more about Microsoft’s proposed acquisition of Activision

Around the same time in November, pressure mounted on Activision after a story in the Wall Street Journal detailed allegations of rape at one of the game publisher’s studios and said Kotick had been briefed on the alleged incidents, which happened in 2016 and an extrajudicial one Agreement reached and not reported to the board. The paper cited interviews, company emails, regulatory inquiries and other internal documents that informed its reporting that the CEO was aware of employee misconduct in many parts of the company. It also found settlements that included cases in which Kotick was accused of mistreatment.

Following the explosive report, Spencer circulated an email within Microsoft, saying that in light of the revelations, he was “evaluating all aspects of our relationship with Activision Blizzard and making ongoing proactive adjustments.” The two companies have worked together for almost two decades, when Activision sold games for Microsoft’s Xbox console – the first Call of Duty was released for the original Xbox. In an email to Bloomberg News staff, Spencer said he and Microsoft’s gaming leadership team are “disturbed and deeply disturbed by the horrific events and actions” at Activision.

Behind the scenes, Spencer was working on a fusion approach. Microsoft’s pitch, like its other big gaming deals, drew heavily on Spencer’s decades of industry experience. The executive joined Microsoft as an intern in 1988 after selling video games and personal computer equipment at a computer store in Vancouver, Washington.

But even as Activision struggled to salvage its reputation with gamers and investors — its stock fell about 15% in the month after the Wall Street Journal article — and weighed the potential acquisition, Kotick and the board weren’t sold to Microsoft as a buyer . Two people familiar with the matter said so. Activision called to try to find other prospects, the people said, asking not to be identified and speaking via private calls. These included Facebook parent company Meta Platforms Inc. and at least one other large company. But no further serious interest arose. A meta spokesman declined to comment.

Microsoft took Activision’s hesitation and pulled out, telling the game publisher it was happy to remain a partner and work to sell more Activision titles on Xbox. Eventually, Activision came back to the table, and teams from both companies worked over the holidays to finalize the deal. Microsoft brought in Dan Dees from Goldman Sachs Group Inc. and Activision hired Nancy Peretsman from Allen & Co. While Nadella was involved when needed, the bulk of the merger talks were between Spencer and Kotick, the person said.

Nadella’s first acquisition as CEO, the $2.5 billion purchase of Minecraft in 2014, also came about thanks to Spencer’s relationship with that game’s creator, Markus Persson, known to gamers as Notch. Persson went straight to Spencer when he wanted to sell Minecraft, previously privately owned and considered one of the best-selling games of all time. Spencer also personally negotiated Microsoft’s $7.5 billion acquisition of ZeniMax Media Inc. in 2020 with that company’s co-founder, Robert A. Altman.

While Microsoft was debating the Activision deal, another major video game company was developing its own mobile game. Last week, Take-Two Interactive Software Inc. announced an agreement to buy mobile game maker Zynga Inc. for $11 billion. Bankers working on the deal reached out to Microsoft to see if they were interested in an offer for Zynga before Take-Two sealed the deal, the person said. Microsoft disagreed.

As it turns out, Microsoft had their sights set on something bigger.