Activision Blizzard sexual misconduct fallout prompted Microsoft to pursue deal

Microsoft had struck a US$68.7 billion (S$92.4 billion) deal to acquire Activision. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Late last year, as Activision Blizzard employees and chief executive officer Bobby Kotick were reeling from accusations that Mr Kotick knew of sexual harassment at the company for years, a group of Microsoft senior executives suggested that Xbox head Phil Spencer check in with the embattled CEO.

The goal, according to a person familiar with the matter, was to offer support to a key partner and make it clear that Microsoft had concerns about the treatment of women at Activision. Another aim: to ensure that if Mr Kotick and the board were willing to sell the company, Microsoft would be well positioned to make an offer.

After a few phone calls over a two-week period, discussions evolved, leading to last Tuesday’s (Jan 18) announcement that Microsoft had struck a US$68.7 billion (S$92.4 billion) deal to acquire Activision, adding a legendary game publisher responsible for franchises like Call Of Duty and World Of Warcraft.

It is a combination that catapults Microsoft to the top ranks of game makers, gives the company the mobile audience that has eluded it for years, and adds strength as the software giant and rivals race to build out the virtual-reality platform known as the metaverse.

Though the events that paved the way for the eventual agreement kicked off in mid-November, Microsoft senior executives had been dropping hints for months that they were looking for deals.

CEO Satya Nadella had been searching since at least mid-2020 for an acquisition that would deliver the software maker a stable of consumer users. 

Last November, at an interview at the Paley International Council Summit, Mr Spencer reiterated his frequently stated position that he was on the hunt for acquisitions, noting Xbox in particular wanted deals that added casual and social games – something provided by Activision’s mobile titles. “We have a lot of ambition,” Mr Spencer said.

About the same time, the pressure increased on Activision after a Wall Street Journal story detailed allegations of rape at one of the game publisher’s studios and said Mr Kotick had been informed of the alleged incidents, which occurred in 2016 and 2017, as well as an out-of-court settlement, and failed to report them to the board. 

The paper cited interviews, company e-mails, regulatory requests and other internal documents that informed its reporting that the CEO knew about staff misconduct in many parts of the company. It also noted settlements that included cases in which Mr Kotick was accused of mistreatment.

Following the explosive report, Mr Spencer circulated an e-mail inside Microsoft saying he was “evaluating all aspects of our relationship with Activision Blizzard and making ongoing proactive adjustments” in the light of the revelations. 

The two firms have partnered for nearly two decades as Activision sold games for Microsoft’s Xbox console – the first Call Of Duty was released for the original Xbox. 

In an e-mail to staff seen by Bloomberg News, Mr Spencer said he and Microsoft’s gaming leadership team were “disturbed and deeply troubled by the horrific events and actions” at Activision. Other partners said they were evaluating their ties to Activision and some investors and employees called for Mr Kotick to step down. 

Mr Kotick told Bloomberg in an interview last Tuesday the deal had nothing to do with the controversy surrounding Activision or the pressure on him as CEO.

Behind the scenes, Mr Spencer was working on a merger approach. Microsoft’s pitch, as with its other large gaming deals, heavily leveraged Mr Spencer’s decades-long industry experience. The executive joined Microsoft as an intern in 1988 after a stint hawking video games and PC gear in a Computer Mart in Vancouver, Washington state.

Yet even as Activision fought to salvage its reputation with players and investors – the stock fell about 15 per cent in the month after the Journal article – and weighed the potential takeover, Mr Kotick and the board were not sold on Microsoft as the acquirer, two people familiar with the matter said. Activision made calls to try to find other interested parties, said the people, who asked not to be identified. Those included Facebook parent Meta Platforms and at least one other big company. But no other serious interest materialised.

In an interview, Mr Spencer declined to discuss how the deal went down. A Meta spokesman declined to comment, and a representative for Activision did not return requests for comment.

Picking up on Activision’s hesitations, Microsoft backed off, telling the game publisher it was happy to remain partners and work on selling more Activision titles on Xbox. 

The two companies have partnered for nearly two decades as Activision sold games for Microsoft's Xbox console. PHOTO: BLOOMBERG

Ultimately, Activision came back to the table and both companies’ teams worked through the holidays to get the deal done. Microsoft brought in Mr Dan Dees of Goldman Sachs Group and Activision hired Ms Nancy Peretsman at Allen & Co. While Mr Nadella was involved when needed, most of the merger talks took place between Mr Spencer and Mr Kotick.

The companies kept the negotiations well under wraps, though Mr Spencer was grilled on Microsoft’s relationship with Activision during a New York Times podcast posted on Jan 10.

“The work we do specifically with a partner like Activision is something I’m obviously not going to talk publicly about,” Mr Spencer told interviewer Kara Swisher. “We have changed how we do certain things with them and they’re aware of that. So this isn’t about us virtue shaming other companies.”

He also refrained from criticising Mr Kotick. “In terms of individuals who are in leadership at other companies, it’s not our position to judge who the CEOs are,” Mr Spencer said. “CEOs are chosen by shareholders and boards.” 

Mr Nadella’s first acquisition as CEO, the US$2.5 billion purchase of Minecraft in 2014, also came about thanks to Mr Spencer’s relationship with that game’s creator, Mr Markus Persson, known to gamers as Notch. Mr Persson went directly to Mr Spencer when he wanted to sell Minecraft, which was previously privately owned and is considered one of the best-selling games of all time. 

Mr Spencer also personally negotiated Microsoft’s US$7.5 billion acquisition of ZeniMax Media, owner of the storied video game publisher Bethesda Softworks, in 2020 with that company’s co-founder Robert Altman.

While Microsoft discussed the Activision deal, another large video game company made its own mobile play. On Jan 10, Take-Two Interactive Software announced an agreement to buy mobile game maker Zynga for US$11 billion. Bankers working on that deal reached out to Microsoft to see if they were interested in a bid for Zynga before Take-Two sealed the deal, according to the person. Microsoft demurred.

As it turned out, Microsoft had its sights on something bigger.

Join ST's Telegram channel and get the latest breaking news delivered to you.