Microsoft has been on a tear since the release of PUBG, with Rocket League and Minecraft continuing to do well. But Activision is struggling, and Microsoft may be betting too much by acquiring them.
Microsoft has made a risky gamble on the troubled Activision, but it is likely manageable. Microsoft will be able to make up for any losses in other areas of its business.
In its proposed acquisition of Activision Blizzard Inc., Microsoft Corp. will take on a corporation with a shady working culture, but the dangers posed by such issues are far from insurmountable, according to deal specialists.
Microsoft’s statement this week that it plans to buy Activision for $75 billion in cash follows a string of negative news for the gaming business over the last six months, including claims of sexual misconduct and following regulatory measures.
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Despite the workplace difficulties, the gamble Microsoft has taken isn’t risky, according to individuals who specialize in mergers and acquisitions.
The overall business culture in the United States has grown more sensitive to the damaging impacts of sexual misbehavior and gender discrimination, resulting in more thorough due-diligence assessments prior to transactions.
“There’s definitely more diligence being done, particularly diligence being done around ‘bad behavior,’” said Sabina Menschel, president of the global investigative firm Nardello & Co. “Not only sexual harassment or misconduct, but bullying or other types of behavior—companies have a lot less tolerance for that.”
Due-diligence assessments that used to focus on things like whether a firm has open litigation have become significantly more comprehensive as the public has become more aware of a company’s image and culture, a tendency heightened by the #MeToo movement.
Sabina Menschel, president of the global investigative firm Nardello & Co.
Photo: Nardello & Co.
Investigative businesses are now frequently searching social media and reviews on sites like Glassdoor, as well as meeting with headhunters and former workers, to gain a feel of an acquisition target’s culture.
Activision has been the subject of more public scrutiny than many other companies, including a Wall Street Journal report that Chief Executive Bobby Kotick failed to inform the board of directors about certain employee allegations, but acquirers typically scrutinize even the least scrutinized companies.
“Diligence on issues of culture, governance and sexual harassment is becoming routine now,” said Katherine Murray, a partner specializing in transaction and compliance matters at the London-based risk advisory firm Wallbrook. “Over the last 12 to 24 months, almost all of the pre-transaction M&A work that we’ve done has had these sorts of issues expressly in scope.”
“I’d expect that process to be done to death here, and I’d expect it to give Microsoft a reasonable read…on whether a prospective drive toward cultural change has been successful,” Ms. Murray noted.
Katherine Murray is a partner at Wallbrook who specializes in transaction and compliance issues.
Wallbrook (photo)
Activision has refuted a regulator’s allegations of sexual harassment, claiming that the Journal’s prior coverage of the business was inaccurate. Mr. Kotick has said that he has been open and honest with his board of directors, which has published a statement in his support.
According to a business official, Activision is striving to implement new initiatives and procedures to ensure that workers are “heard and empowered.”
A request for comment from Microsoft was not returned.
During an interview at the WSJ’s Women In: The Tech Industry event, Ms. Wu, who was a subject of the GamerGate controversy, said Activision Blizzard’s CEO created a culture of non-accountability.
Microsoft’s purchase price could already reflect its view on the likely future costs it faces with respect to issues at Activision, said Sean Crnkovich, a managing director in the transactional risk practice at professional services firm Marsh & McLennan Cos.
Mr. Crnkovich said, “When you have an unknown exposure that everyone is aware of and potentially have a fair quantum connected with it, that’s virtually always going to be a business point.” “The customer just considers it in terms of what they’re prepared to spend.” They would pay more for the purchase if the legacy obligation wasn’t a shadow.”
Mr. Crnkovich said that escrow accounts or other techniques may be utilized to lay money away for potential future monetary responsibilities.
However, given Microsoft’s huge finances (as of Sept. 30, 2021, before the merger news, the firm had $130.6 billion in cash and short-term assets), the money that may be directly paid out in future legal settlements and penalties is unlikely to be a major worry.
Sean Crnkovich, a managing director in the transactional risk practice at Marsh & McLennan Cos.
Jason Roth is shown here.
Almost every company will approach a transaction with specific aims in mind for the early days after the merger, and frequent competition regulator monitoring should give Microsoft plenty time to fine-tune its plans.
Building a corporate culture at Activision that may help maintain and recruit what is probably the gaming business’s most important asset, its employees, might be a difficult assignment for the corporation. Some employees have participated in repeated work stoppages over their worries.
Microsoft will have a difficulty in establishing its trust as a force for good among Activision workers, but it has prior experience dealing with sexual harassment and gender discrimination concerns. Mr. Kotick is expected to leave when the acquisition closes, according to the Wall Street Journal. If a departure happens, it may serve as a form of turning point.
At the same time, Microsoft will be wary about damaging the aspects of Activision’s culture that have led to its success, putting the acquisition on a tightrope.
“The integration challenge,” Wallbrook’s Ms. Murray said, “becomes a little bit more challenging for Microsoft.” “Integration is an art form.”
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