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Microsoft sets itself up as a one-stop tech shop with historic purchase of video game giant

Deal to buy Activision Blizzard — the maker of Candy Crush and Call of Duty — for $68.7 billion would be Microsoft’s largest acquisition

(The Washington Post illustration; Xbox; Activision Blizzard)
9 min

Microsoft on Tuesday announced it is buying embattled video game publisher Activision Blizzard for $68.7 billion, a historic deal that consolidates under the tech giant’s roof an increasingly wide range of businesses delivering everyday technologies.

Microsoft announced in a blog post Tuesday it would acquire the video game publisher behind hit franchises Call of Duty, World of Warcraft, Overwatch and Candy Crush. Activision Blizzard has come under fire in recent months from public allegations of gender discrimination and sexual harassment, as well as worker strikes — all of which increase the risks for Microsoft’s biggest acquisition ever.

Buying Activision would add power to Microsoft’s already heavy-hitting game business, which includes gaming unit Xbox and popular kid’s game Minecraft, and position Microsoft well to compete in the emerging “metaverse” business prioritized by tech companies. Microsoft has built itself into a tech conglomerate in recent years through big deals such as career networking site LinkedIn and coding site GitHub, as well as its homegrown cloud-computing powerhouse Azure — part of a growing trend among tech giants toward operating sprawling empires.

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The Activision tech deal is the largest one in recent memory, several times the size of Amazon’s and Facebook’s largest acquisitions of Whole Foods Market and WhatsApp, respectively. But this deal sets up a major test for U.S. regulators, who are increasingly skeptical of consolidation in the tech industry.

The companies don’t expect the deal to close until 2023. Microsoft has largely escaped the trustbusting scrutiny that its fellow tech giants have endured recently, in part by carefully applying lessons it learned in its huge antitrust battle with regulators two decades ago.

The Activision acquisition dwarfs others that have faced opposition from the Federal Trade Commission and Justice Department, including the $40 billion semiconductor deal the FTC sued to block in December.

Antitrust enforcers from the Justice Department and FTC hosted a news conference Tuesday on strengthening enforcement of mergers, asking the public to weigh in on how they can ensure competition guidelines can address digital markets.

“All of the signs, all of the indications point toward more demanding scrutiny,” said William Kovacic, a professor at George Washington University Law School and former FTC chair.

Staffers from the Justice Department and FTC declined to comment on the deal during Tuesday’s news conference.

The purchase price is a significant premium on Activision Blizzard’s stock price before the deal was announced, even as the smaller company grapples with multiple lawsuits and claims of a toxic work environment. Activision Blizzard has established itself as a leader with several popular game franchises, but Microsoft would be taking on a troubled asset.

In July, the publisher was sued by California’s Department of Fair Employment and Housing (DFEH) in a suit that alleges widespread gender-based discrimination and sexual harassment at the company.

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Activision Blizzard also faces a U.S. Securities and Exchange Commission investigation, as well as a class-action lawsuit instigated by shareholders, and an unfair labor practices complaint filed by workers and the media labor union Communications Workers of America. The publisher’s CEO, Bobby Kotick, has faced repeated calls by employees to step down.

Microsoft announced that Kotick will stay on as CEO of Activision Blizzard, but he is expected to step down when the deal closes, according to media reports.

When the deal is finalized, that company will report to Microsoft Gaming CEO Phil Spencer.

The deal price would surpass Microsoft’s 2016 acquisition of professional networking site LinkedIn, which the business software company bought for $26.2 billion. Microsoft made a name for itself as a PC and business software maker, and is now one of the largest providers of cloud-computing services in the world with its Azure division. But the company has its arms in a sprawling list of businesses, including gaming, health care and artificial intelligence.

Microsoft CEO Satya Nadella has for years acted to preserve the company’s gaming unit, even when some analysts had suggested the Xbox business wasn’t worth keeping.

In an email sent to Activision Blizzard employees Tuesday and shared with The Washington Post, Kotick wrote he would stay on as CEO “with the same passion and enthusiasm” he had when he started the job in 1991. He wrote that the deal will close sometime by June 2023, pending regulatory approval, and until then, the company will stay autonomous from Microsoft.

Despite being one of the most valuable companies in the world, with a valuation of more than $2 trillion, Microsoft to date has largely sidestepped the recent flurry of antitrust scrutiny aimed at Facebook, Google, Apple and Amazon. (Amazon founder Jeff Bezos owns The Post.)

Microsoft pointed out in its blog post announcing the deal that buying Activision Blizzard would make it the third largest gaming company by revenue, still beat by Tencent and Sony.

That may not be enough to keep regulators at bay. The deal would be one of the largest in the history of the tech industry, edging out Dell’s acquisition of EMC in 2016.

Herb Hovenkamp, an antitrust professor at the University of Pennsylvania Law School, said the Microsoft deal is likely to invite antitrust challenges, given its size.

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“The agencies might be applying closer scrutiny given that they have been attacked for being somewhat under deterrent with respect to mergers over the last decade,” Hovenkamp said in an interview.

Regulators at both the DOJ and FTC have said antitrust enforcement needs to be modernized to address consolidation in tech. This deal could prove to be a bellwether.

“It’s going to be interesting to see if this gets looked at in a nontraditional way, if some new theories get tested here,” D. Bruce Hoffman, a partner at Cleary Gottlieb and former FTC official, said.

The acquisition comes at a time when the video game industry has made major strides both financially and culturally. In 2020, with people around the world self-isolating and turning to games amid the coronavirus pandemic, the gaming industry recorded double and even triple digit jumps in engagement in terms of sales and time spent online. S&P Global Market Intelligence predicted in November of last year that video game content revenue would surge past $200 billion in 2022 following marked year-over-year leaps between 2019 and 2021.

Microsoft’s acquisition of Activision Blizzard is more than four times bigger than the previous record sum paid for a video game publisher set earlier in January when Take-Two Interactive announced plans to purchase mobile game maker Zynga for an estimated $12.7 billion.

In 2020, Microsoft paid $8.1 billion to acquire ZeniMax Media, the parent company of popular video game developer Bethesda Softworks.

The acquisition could also position Microsoft to better compete in the nascent business of the “metaverse,” or online worlds that have become a recent focus of tech companies. Facebook recently changed its corporate name to Meta, in part to reflect its emphasis on building out the metaverse.

Buoyed by the releases of major new games like “Call of Duty: Warzone” and a mobile version of Call of Duty, Activision Blizzard’s stock soared over the past two years, peaking at over $100 per share in February 2021. But the company’s fortunes swung in July with the filing of the lawsuit from California’s DFEH. That lawsuit alleged gender-based discrimination and harassment, primarily at Blizzard Entertainment, one of the company’s major studios and the developer of World of Warcraft.

Blizzard President J. Allen Brack stepped down as a result of the lawsuit, replaced by a tandem of Mike Ybarra and Jen Oneal. Oneal stepped down from the position after just three months and left Activision Blizzard at the end of 2021.

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The allegations in the DFEH lawsuit, and what some workers saw as a lacking response from the company, prompted a series of walkouts by employees. In November, more than 1,000 Activision Blizzard employees signed a petition calling for Kotick to resign as CEO, a call that was echoed by shareholders.

Nadella briefly addressed the concerns during a call with investors Tuesday.

“We believe it’s critical for the Activision Blizzard to drive forward on its renewed cultural commitments,” he said. “We are supportive of the goal and the work Activision Blizzard is doing, and we also recognize that after close, we will have significant work to do in order to continue to build a culture where everyone can do their best work.”

Industry analysts believe the controversies around Activision Blizzard may have pushed down the acquisition price.

“[Microsoft is] paying a lot less than it would have a year ago,” said Joost van Dreunen, a lecturer on the business of games at the New York University Stern School of Business.

Gender discrimination and sexual harassment allegations have roiled the entire tech industry in recent years, including Microsoft. Microsoft announced last week that it has hired an outside firm to conduct a review of the company’s sexual harassment and gender discrimination policies after a shareholder proposal pushing for the investigation was approved.

In the Tuesday blog post announcing the acquisition, Spencer also shared that Game Pass, Microsoft’s video game subscription service, had surpassed the mark of 25 million subscribers. In a news release, Microsoft explicitly connected the acquisition to its Game Pass subscription offering, noting that the purchase will set in motion plans to release Activision Blizzard games on the service.

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Teddy Amenabar contributed to this report.