Microsoft (MSFT) Acquiring Gaming Company Activision Blizzard (ATVI)

Microsoft Corporation (MSFT) is acquiring gaming company Activision Blizzard, Inc. (ATVI). The all-cash transaction is Microsoft's biggest acquisition and is worth $68.7 billion. It values Activision Blizzard at $95 per share.

News of the deal, which came as a surprise to investors, sent Activision's shares up by as much as 36% in pre-market trading. As of this writing, they are changing hands at $84.14, up 28.68% from their opening price.

The acquisition makes Microsoft the third largest gaming company by revenue, behind Tencent Holdings Ltd. (TCEHY) and Sony Group Corporation (SONY). "Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms," said Satya Nadella, chairman and CEO of Microsoft.

But Microsoft investors do not seem to share his enthusiasm. The tech giant's shares fell by 1.3% in pre-market trading and are currently trading at $308.31, down around 1% from the opening price.

A Year of Problems

Activision's acquisition is a welcome development for investors in the company. In the past year, they have witnessed the value of their holdings tank by as much as 45% as the company struggled with declining demand after pandemic restrictions were lifted and delivery issues for its games.

During its latest earnings call, Activision postponed deliveries for two of its best-selling titles and provided a weak fourth quarter revenue forecast. The company was also reported to be "losing its magic" after analysts at research firm Baird published a November report that stated searches for its best-selling titles were down by double-digit figures. 

Starting last June, Activision's stock price was further hammered by workplace culture issues. The California Department of Fair Employment and Housing filed a lawsuit against the company alleging a "frat boy culture" at its offices that promoted discrimination and sexual harassment. CEO Bobby Kotick, who was reported to be aware of the issues for years, was said to be considering resigning from his post after three decades at the top.

A Key Moment for Microsoft

Today's acquisition is a key moment for Microsoft's ambitions in the gaming industry and metaverse. With best-selling titles like Diablo, World of Warcraft, and Call of Duty in its stable, Activision is among the leaders in console and mobile gaming. 

According to Dan Ives, analyst at Wedbush Securities, the acquisition will "help jump start Microsoft's broader gaming endeavors and ultimately its move into the metaverse with gaming the first monetization piece of the metaverse." Evercore ISI analyst Kirk Materne called gaming a key "next gen" growth driver for Microsoft in the coming years. According to Materne, " … adding ATVI catapults Microsoft's gaming strategy to the front of the pack in terms of both having the requisite cloud infrastructure to support new gaming paradigms."

Phil Spencer, Microsoft's head of gaming, told investors that the company is planning to extend the Game Pass subscription, available to players on its Xbox Console, to Activision’s 390 million monthly active players. He said that the acquisition makes Microsoft's approach to the consumer metaverse "even stronger." Spencer explained, "That's because our vision of the metaverse is based on intersecting global communities rooted in strong franchises. A big part of that is the fact that mobile is the biggest category of gaming, and it's an area where we’ve not had a major presence before." 

But Microsoft, which has had to contend with workplace culture reckonings of its own recently, also has tough work ahead to integrate its acquisition into its fold. Last November, the company said that it was "reevaluating its relationship" with Activision in light of the allegations of sexual misconduct at the company.

This was just before the Microsoft's own reckoning with the same topic after news came out that former CEO Bill Gates had propositioned employees. It led to an overwhelming majority of shareholders in the tech giant voting for a review of its sexual harassment policies.

"We also recognize that after the close, we will have significant work to do in order to continue to build a culture where everyone can do their best work," Microsoft chief Nadella told investors.