Microsoft's Blizzard in the Gaming Snowstorm

Microsoft acquired Activision Blizzard (Nasdaq: ATVI), a leader in game development and interactive entertainment content publisher, for $68.7bn ($95 per share). This acquisition will accelerate the growth in Microsoft’s gaming business across mobile, PC, console and cloud and will provide building blocks for the metaverse. The acquisition includes iconic franchises from the Activision, Blizzard and King studios like “Warcraft,” “Diablo,” “Overwatch,” “Call of Duty” and “Candy Crush,” in addition to global eSports activities through Major League Gaming.

With this acquisition, Microsoft became the world’s third-largest gaming company by revenue, behind only Tencent and Sony. The acquisition of Activision is Microsoft’s largest ever, far in excess of the $26bn Microsoft paid to acquire LinkedIn in 2016 and the $7.5bn it paid to acquire Bethesda in 2021.

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Activision Blizzard – 2008 alliance between Activision and Vivendi

In Jul-08, Vivendi and Activision merged to create Activision Blizzard, the world's most profitable pure-play online and console game publisher. Activision Blizzard was formed by combining Activision, one of the world's leading independent publishers of interactive entertainment, and Vivendi Games, Vivendi's interactive entertainment business, which included Blizzard Entertainment's(R) World of Warcraft(R), the world's #1 subscription-based massively multiplayer online role-playing game, at the time. Activision Blizzard continued to operate as a public company traded on the Nasdaq under the ticker ATVI until 2022. The merger combined leaders in mass-market entertainment and subscription-based online games, and Activision Blizzard had leading market positions across all categories of the rapidly growing interactive entertainment software industry.

At the time, in addition to World of Warcraft, the #1 subscription-based massively multiplayer online role-playing game, the transaction brought together some of the world's leading interactive entertainment franchises including Guitar Hero(R), the #1 family entertainment and #1 music-based franchise; Call of Duty(R), the #1 first-person action franchise; Tony Hawk, the #1 action sports franchise; Spider-Man, the #1 Super Hero franchise; Cabela's(R), the #1 sports hunting franchise; and two of the top-ten kids movie-based franchises, Shrek and Madagascar(TM), for calendar year 2005 through 2007.

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Why would Microsoft buy Activision Blizzard?

The most valuable company in the world, Microsoft has rebounded from a poor performance with the Xbox One generation by focusing emphatically on software instead of hardware. In June 2017, the company launched Game Pass, a subscription service that provides “no-additional-cost access” to thousands of games, both those developed by Microsoft-owned studios and many others from partners.

Microsoft focused on acquisitions in the gaming space to bolster its library of franchises. In Mar-21, it acquired ZeniMax, the parent of Fallout and Skyrim developer Bethesda Softworks and Doom creator ID Software. However, Microsoft has been fairly unsuccessful in gaming acquisitions in the past. The aftermath of the ZeniMax deal went sideways as Microsoft decided to not release popular upcoming Bethesda titles Starfield or Skyrim sequel The Elder Scrolls VI on PlayStation, opting instead to limit distribution to Xbox consoles and Microsoft Windows computers. Redfall, the latest release from ZeniMax subsidiary Arkane Austin, did not publish on PlayStation, either. Before the acquisition, Bethesda games were distributed across all platforms.

Amid employee unrest at Activision Blizzard and a multitude of lawsuits regarding alleged systemic sexual harassment, Microsoft swooped in and made what amounts to the biggest M&A offer in gaming history. Expected synergies for Microsoft from the acquisition of Activision Blizzard include –

• Microsoft and Activision Blizzard will empower players to enjoy the immersive franchises, like “Halo” and “Warcraft,” virtually anywhere they want. Mobile is the largest segment in gaming, with nearly 95% of all players globally enjoying games on mobile. And with games like “Candy Crush,” Activision Blizzard′s mobile business represents a significant presence and opportunity for Microsoft in this fast-growing segment.
• Bolsters Microsoft’s Game Pass portfolio with plans to launch Activision Blizzard games into Game Pass, which has reached over 34m subscribers. With Activision Blizzard’s 400m monthly active players in 190 countries and three billion-dollar franchises, this acquisition will make Game Pass one of the most compelling and diverse lineups of gaming content in the industry. Upon close, Microsoft will have 30 internal game development studios, along with additional publishing and e-sports production capabilities.

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A Long and Tedious Battle with the Regulators

But this deal met with a roadblock that lasted one year, eight months, and 26 days! Microsoft announced its intention to buy Activision on January 18, 2022. The deal saw pushback from all the regulators including the United States' Federal Trade Commission (FTC), the European Union, and the UK's Competitions and Markets Authority (CMA). Microsoft finally emerged successful, however, as the deal was finally closed on October 13, 2023. Well, it was either this or Microsoft would have to pay $3bn to Activision Blizzard in a breakup fee.

• Concerns raised by US Senators: Four senators including Bernie Sanders referenced the wave of sexual harassment and other allegations issued against Activision, saying the deal could "further disenfranchise these workers and prevent their voices from being heard"
• Wall Street reaction despite shareholder approval: On April 28, 2022, 98% of Activision Blizzard shareholders voted to approve the company's acquisition by Microsoft, at $95 a share, but shareholders grew concerned as the share price started dipping slowly to the low $80 range and as low as $75.60 on April 29. This can be interpreted as a lack of shareholder confidence in the deal's ability to ultimately pass.
• UK's Competitions and Markets Authority (CMA) launches investigation: Responsible for ensuring fair competition between businesses in the UK, the CMA investigated whether the deal could harm competition and lead to worse outcomes for consumers.
• The Call of Duty debate: While both Microsoft and Sony wanted to get Call of Duty on their respective consoles (Xbox and PlayStation respectively), with the acquisition CMA also investigated the impact of this transaction between Activision and Sony. However, Microsoft clarified that Xbox Game Pass would receive new Call of Duty games day one, but this wouldn't impact their launch on PlayStation along with Xbox allegedly offering to bring Call of Duty to PlayStation for three years beyond the current contract. Replying to the competition threats to Sony, Xbox essentially called PlayStation “too big to fail” and has significantly more exclusive games. Microsoft signed a ten-year deal with Sony and Nintendo to bring Call of Duty to their platforms.
• The Federal Trade Commission enters the fray: The commission alleged that the deal would "gain control of top video game franchises" and therefore "harm competition in high-performance gaming consoles and subscription services by denying or degrading rivals’ access to its popular content." The FTC pointed to Microsoft's history of acquisitions and making those games exclusives, as it did with Bethesda and games including Starfield and Redfall.
• European Union issues antitrust warning: EU had previously raised concerns over the exclusivity of Call of Duty
• European Commission approves the deal: The European Commission’s verdict directly countered that of the CMA. Though it reached similar conclusions — that the deal would not harm the console market but could harm cloud gaming — the EC was satisfied with Microsoft's proposed remedies for these concerns. A 10-year licensing commitment for consumers in the European Economic Area guarantees that Activision games will not be locked to Game Pass Ultimate or the Xbox Cloud Gaming platform.
• Crossing the Final Regulatory Hurdle: In Aug-23 Microsoft made a concession that would see Ubisoft, instead of Microsoft, buy Activision’s cloud gaming rights. This new deal will put the cloud streaming rights (outside the European Economic Area) for all of Activision’s PC and console content produced over the next 15 years in the hands of a strong and independent competitor with ambitious plans to offer new ways of accessing that content.

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The Acquisition Aftermath

Bobby Kotick continued to serve as CEO of Activision Blizzard till Dec-23. Kotick received a whopping $400m from the sale of his shares in Activision, while chairman Brian Kelly received $100m. In Jan-24, 2,000 workers in Microsoft's gaming division were laid off from its 22,000 staff. This was just three months after the acquisition.

600 workers at Activision Publishing, are unionizing, forming the largest video game workers’ union in the US. Microsoft recognized the union after the vote count was finalized. As part of its lengthy effort to convince regulators to approve the deal, Microsoft signed a first-of-its-kind pact in the industry to remain neutral if workers wanted to unionize with the Communications Workers of America Union (CWA). The workers also saw the successful effort in Jan-23 to unionize at ZeniMax Media, a video game company also owned by Microsoft, which had expanded its neutrality pact to cover any of the other video game studios it owned. 300 workers at ZeniMax, whose Bethesda Game Studios makes hits such as The Elder Scrolls, voted to unionize through the new, expedited process.

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This concludes the first case study in the series “Gaming Consolidations – Forming the Perfect Tetrix.” Microsoft’s acquisition of Activision Blizzard is the biggest gaming acquisition to accelerate the growth in gaming across mobile, PC, console and cloud and provide building blocks for the metaverse. What followed was a long and tedious battle with the regulators, a roadblock that lasted one year, eight months, and 26 days!

While Microsoft fired 2,000 workers, Sony laid off 900 workers from its PlayStation division. In the next case study, we will look at the acquisition of Bungie, the gaming company that created sci-fi hits Halo and Destiny Corus Group, and Repeat.gg, a leading eSports tournament organiser, by Sony. Until then, thank you for your time. Please post your feedback and comments. Also, if you want to further read on the M&A strategies of the big tech companies FAANG, please refer to my two-part article series link here and brief video here.

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Please find below all the information sources that have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –

1.????? Mergermarkets

2.????? https://news.microsoft.com/2022/01/18/microsoft-to-acquire-activision-blizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/

3.????? https://www.hindustantimes.com/technology/bobby-kotick-is-set-to-leave-activision-blizzard-with-400-million-exit-payout-101697434472424.html

4.????? https://in.ign.com/call-of-duty-modern-warfare-3/196007/news/the-microsoft-activision-blizzard-deal-a-complete-timeline-of-events

5.????? https://www.jacobwolf.report/p/microsoft-wins-big-activision-blizzard-acquisition-case

6.????? https://investor.activision.com/news-releases/news-release-details/vivendi-and-activision-complete-transaction-create-activision

7.????? https://www.nytimes.com/2024/03/08/technology/microsoft-activision-gaming-union.html

8.????? https://www.bbc.com/news/newsbeat-68093970