Microsoft (MSFT) announced on Tuesday morning that it’s buying Activision Blizzard (ATVI) for $68.7 billion, the tech giant’s largest acquisition ever. The deal further extends Microsoft’s position in the gaming industry and also gives the company a huge boost as it seeks a piece of the so-called metaverse, a virtual world where social media, virtual reality, and online games will exist as part of a connected system.

A Closer Look at the Deal

Microsoft is buying Activision for $95 per share in an all-cash transaction that values the video game maker and interactive entertainment content publisher at $68.7 billion. The per-share bid represents a 45% premium to the $65.39 closing price of Activision stock on Friday, Jan. 14.

In a blog post, Microsoft said that Activision Blizzard CEO Bobby Kotick will keep his job, and he and his colleagues “will maintain their focus on driving efforts to further strengthen the company’s culture and accelerate business growth.” After the deal closes, Kotick will report to Microsoft Gaming CEO Phil Spencer.

The transaction, which is subject to customary closing conditions, regulatory review, and Activision Blizzard’s shareholder approval, is expected to close in the fiscal year 2023.

Activision’s Businesses

Activision was founded in 2008 from the merger of Activision Inc. and Vivendi Games. It is one of the most recognizable names in gaming. The company develops and distributes its video games on console platforms such as Xbox and PlayStation, as well as mobile devices and personal computers (PCs). Activision is the creator of “Call of Duty,” one of the most popular game franchises in the world.

Other popular games developed by the company include “Candy Crush” and “World of Warcraft.” The company also sells digital advertising and operates eSports leagues. Its revenue comes from full-game and in-game sales as well as from licensing software to third-party that distribute its products.

Why the Acquisition Makes Sense

The deal is a strategic one for both companies: It comes amidst a string of sexual harassment allegations at Activision while also boosting Microsoft’s presence in the gaming space. Here are two ways Microsoft expects to benefit from the acquisition.

Gaming Revenues

By buying Activision, Microsoft gives itself a major platform to increase its gaming revenues. Microsoft will own Activision, Blizzard, and all of its subsidiary studios including Digital Legends, Beenox, High Moon Studios, Radical Entertainment, Demonware, Infinity Ward, Sledgehammer Games, King, Toys for Bob, Major League Gaming, Treyarch, and Raven Software.

It also takes over popular game franchises including “Call of Duty,” “Overwatch,” “Candy Crush,” and “World of Warcraft” in addition to major game studios like Treyarch and Blizzard Entertainment. Microsoft plans to add franchises into its GamePass streaming service, which has over 25 million subscribers, across both Xbox and PC.

The deal comes just days after Take-Two Interactive (TTWO), the maker of the popular Grand Theft Auto game series, scooped up rival Zynga (ZNGA), the maker of “Words with Friends” and “FarmVille,” for $12.7 billion.

Following the closing of the transaction, Microsoft will become the third-biggest gaming company by revenue in the world, behind Japan’s Sony (SONY) and China’s Tencent (TCEHY).

Gaming is one of the biggest and fastest-growing consumer businesses in the world. According to data released by The NPD Group and the Entertainment Software Association, the U.S. gaming industry hit record revenue in 2020, generating $43.4 billion — an 18% jump from the previous year. Analysts expect the industry to become a $300 billion worldwide business by 2025.

Metaverse Ambitions

Additionally, the acquisition cements Microsoft’s big lead over other tech companies as the gaming industry finds itself at the center of the latest scramble for dominance in the metaverse.

In a note to clients shortly after the deal was announced, Wedbush analysts said 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, in our opinion.”

Microsoft chair and chief executive Satya Nadella hailed the purchase, adding that “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.”

Will Microsoft Ignore Activision’s Misconduct Scandal?

While this mega-deal is indeed a smart move from Microsoft, there is one major problem that taints the transaction. Activision has been facing a growing number of scandals and an increasingly angry player base. In July 2020, the company was hit with a devastating lawsuit over its culture of sexual harassment and discrimination against female employees.

Following a report from the Wall Street Journal that Kotick was involved and knew for years about the sexual misconduct allegations at the company, Activision’s stock price dropped and some of its top executives and staff left the company, resulting in the delay of its “Overwatch 2” and “Diablo IV” games.

In October 2021, the company announced that it would pay $18 million to settle the lawsuit. A day before news of the Microsoft/Activision deal broke, the WSJ reported Activision had pushed out and fired more than three dozen employees for misconduct.

And even though Microsoft has said Kotick will continue to serve as Activision CEO throughout the acquisition process, the Journal claims that he will leave once the deal closes.

Bottom Line

Despite the challenges facing Activision, the company is still an industry juggernaut and its world-class talent and extraordinary franchises could greatly boost Microsoft ambitions.

If the transaction is approved, it will be another high-profile gaming deal for Microsoft, which also bought “Bethesda” maker Zenimax in a $7.5 billion deal early last year. In 2014, Microsoft acquired Mojang, the owner of “Minecraft” for $2.5 billion.