Tech

Microsoft will buy Activision Blizzard, a bet on the next generation of the internet.

Microsoft is the dominant force in business software, and a giant player in cloud computing. On Tuesday, the company made clear that its ambitions were even bigger, saying it planned to buy the powerhouse video game player Activision Blizzard for nearly $70 billion, in a deal meant to position the company for the next generation of the internet.

The acquisition, Microsoft’s largest ever, would catapult the company into a leading spot in both the video game industry and could strengthen its hand in the nascent world of virtual and augmented reality.

It is also a challenge to regulators in Washington, as Democrats and Republicans alike have pushed to limit the power of technology giants. Microsoft, which makes Xbox consoles and owns studios that produce hits like Minecraft, has expanded its gaming business to surpass $10 billion in annual revenue. In anticipation of a longer review, Microsoft said it did not expect the Activision deal to close until the next fiscal year, which ends in June 2023.

Activision makes major hits like Call of Duty and Candy Crush, and the takeover would make Microsoft the world’s third-largest gaming company by revenue, behind Tencent and Sony, the company said. The industry has been consolidating rapidly, as it increasingly moves deeper into mobile and cloud gaming.

The deal could also give Microsoft a significant boost against Facebook, which is considered the leader in the so-called metaverse, the name given to the virtual world. The metaverse is more of a buzzword than a thriving business, but companies are putting huge sums of money and talent behind the idea. Facebook renamed its parent company to Meta late last year to underscore its commitment. Adding Activision is a bet that consumers want to play major games anywhere — on phones, consoles, computers and eventually in virtual reality.

“Our vision of the metaverse is based on intersecting global communities rooted in strong franchises,” said Phil Spencer, vice president of gaming at Microsoft. “A big part of that is the fact that mobile is the biggest category of gaming, and it’s an area where we have not had a major presence before.”

Microsoft has been hunting for ways to spend its immense cash reserve, more than $130 billion, to expand its consumer business, having looked at acquiring the booming social network TikTok and popular chat app Discord.

In Activision, which faces accusations that senior executives ignored sexual harassment and discrimination, Microsoft found a target under stress. The allegations have weighed on Activision, with its shares falling 27 percent since California sued the company in July over the matter.

The game maker’s shares are up nearly 40 percent in premarket trading. Microsoft’s shares fell by 1 percent after the announcement.

The transaction may be seen as a victory for Bobby Kotick, Activision’s longtime chief executive, whom some critics had sought to oust over the controversy. Mr. Kotick negotiated a big premium for investors — Microsoft is paying $95 a share, roughly 45 percent above his company’s stock price before the announcement — and he will continue running the company at least until the deal closes. The companies did not indicate if he will remain after but said the studio would report to Mr. Spencer.

The deal is the largest in the history of the gaming industry, breaking the record set just days earlier when Take-Two Interactive, the creator of games like Grand Theft Auto, purchased the mobile game publisher Zynga for more than $11 billion.

The gaming industry, which has been flush with cash since the pandemic increased the industry’s profits, has been consolidating rapidly. Last year, Electronic Arts and Take-Two engaged in a bidding war over Codemasters, a racing game company — eventually selling to EA for $1.2 billion — and Microsoft made another splashy purchase in 2020 when it purchased Zenimax Media and its slate of gaming studios for $7.5 billion.

In buying Activision, Microsoft gets access to some of the most popular and recognizable titles, most notably Call of Duty, World of Warcraft, Overwatch, Diablo and Candy Crush. Activision’s recent profits have been split fairly evenly across its three subsidiaries, with the Candy Crush-maker King pulling in the most money, $303 million in operating income, in its most recent quarterly earnings report. Activision made $244 million in operating income and Blizzard pulled in $188 million.

But Activision’s gaming efforts are also facing headwinds, with its most recent Call of Duty released panned by gamers and delays among titles like Diablo and Overwatch, which have seen key directors leave in recent months in the wake of the company’s series of scandals.

One main driver of deals is the arms race for exclusive content: Locking up a well-known franchise like Call of Duty or Skyrim, for instance, could force fans of those games to switch from Sony’s PlayStation console to Microsoft’s rival Xbox system, if Microsoft chooses to make a game exclusive.

The takeover is likely to be among the biggest announced this year, continuing a boom in the mergers business. Last year, $5.8 trillion worth of deals was struck — breaking the previous record by $1 trillion — as companies embraced acquisitions as a way to grow their businesses.

Deal makers said they expected that fervor to continue, as business leaders took advantage of low interest rates to buy assets with cheap financing.

Activision itself was the product of serial deal-making by Mr. Kotick over decades, rolling up smaller game studios. It took shape in its current form when Activision — then known primarily for producing titles for traditional gaming consoles — agreed to combine with the gaming unit of France’s Vivendi to expand into multiplayer online games like World of Warcraft.

Activision later bought King, the European gaming company behind Candy Crush, to expand into mobile games.

Related Articles

Back to top button