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Microsoft’s bid to acquire Activision Blizzard blocked by CMA

Updated: Oct 30, 2023

Acquisition Overview

On January 18th, 2022, technology giant Microsoft announced that it had agreed to acquire Activision Blizzard, one of the largest video game producers globally, for $75bn. The deal was anticipated to close in Spring 2023, but the UK’s competition authorities have blocked the acquisition, citing concerns over decreased competition in cloud gaming services. Despite the potential benefits of adding Activision to its portfolio, Microsoft’s strategic focus has shifted towards cloud technology and artificial intelligence, away from gaming. While the news did not shake confidence in Microsoft on Wall Street, Activision’s shares dropped 12% the day after the announcement, though it released a strong earnings report. While Bobby Kotick, Activision’s CEO, has promised to fight the decision, the completion of the deal is in serious jeopardy.

Deal Structure

Microsoft have agreed to acquire Activision for $68.6bn in an all-cash deal. The offer of $95.00 per share represents a considerable premium of 45%, though this did not precipitate an immediate increase in Activision’s share price, given regulatory concerns. A $3bn break-up fee was agreed upon, implying that Microsoft was confident that it would not face significant antitrust issues. The funding for the purchase was intended to come from Microsoft’s considerable cash reserves, amounting to as much as $137.7bn, accumulated during the pandemic.

Microsoft are being advised by Goldman Sachs and Simpson Thacher & Bartlett, while Allen & Company and Skadden, Arps, Slate, Meagher & Flom are advising Activision.

Microsoft Overview

Headquartered in Redmond, Washington, Microsoft is an American technology company renowned for developing and manufacturing software, including the widely used Windows Operating System, Microsoft Office, and consumer electronics. In recent years, Microsoft has expanded its horizons, venturing into gaming, through Xbox, cloud computing, and hardware. As the world’s second most valuable company by market cap, Microsoft is a dominant player in the technology space.

Institutions own 70.68% of Microsoft’s stock, with Vanguard (8.64%) and BlackRock (7.16%) being the two largest individual shareholders. Insiders constitute a notable minority of shareholders at 6.24%, with Steven Ballmer, the former CEO, owning 4.48%.

Founded: 1975

Number of employees: 221,000

LTM Revenue: $207.59bn

LTM EBITDA: $100.08bn

Market Cap: $2.05tn

EV: $2.00tn

Activision Blizzard Overview

Activision Blizzard is a California-based video game developer that formed from a 2008 merger between Activision and Blizzard. The company is responsible for creating some of the world’s most popular video game franchises, including Call of Duty, World of Warcraft, and Overwatch. Activision and Blizzard remain, operationally, fairly separate entities. Activision Publishing is solely responsible for its franchises, primarily Call of Duty, while Blizzard manages its own catalogue. King Digital Entertainment is another business segment that develops mobile games, including the immensely popular Candy Crush Saga. As one of the largest video game developers, Activision is only surpassed by industry giants like Tencent and Nintendo.

The majority of Activision’s equity is held by institutions, comprising 78.50% of total ownership. The two largest individual investors are Vanguard (7.51%) and Berkshire Hathaway (6.72%), though the latter recently reduced its stake.

Founded: 1979

Number of employees: 13,000

LTM Revenue: $8.14bn

LTM EBITDA: $2.09bn

Market Cap: $60.87bn

EV: $51.96bn

Industry Insight

Unlike the majority of businesses, big tech thrived during the COVID-19 pandemic, capitalising on the opportunity presented by remote life. The transition from independent data centres to outsourcing, for example, benefitted Amazon, Microsoft, and Google. A similar story can be told for the gaming industry. UK citizens spent an average of 29% more time playing video games during the pandemic, with mobile seeing a particularly substantial increase. As a result, revenues shot up on the backbone of in app and game purchases. The emergence of the metaverse was an exciting innovation for the gaming industry, with some estimates projecting its 2025 market value to reach $280bn, driving much of 2022’s excitement that played a role in prompting Microsoft to agree to acquire Activision.

However, regulators have taken a harsh stance on big tech mergers. Meta’s 2021 acquisition of Giphy was blocked by the CMA in what was essentially a test case for the UK body while Adobe’s bid for Figma is currently being probed. Nevertheless, M&A activity was markedly higher among technology companies in 2022, even in a year with a high volume of deals across the board. Low borrowing costs and, more importantly, the availability of excess cash to the largest bodies in the space precipitated a series of deals, including Broadcom’s acquisition of VMware for $61bn. That said, equity values were not as depressed in tech which, as mentioned, largely escaped the damage caused by the pandemic. Smaller, unprofitable, technology companies were popular acquisition targets, especially those that essentially functioned as consultants and thus suffered significant declines in revenue during the strain of the pandemic.

Looking ahead for 2023, big tech is betting that future success will be based in the cloud. This belief is well evidenced: Amazon, for instance, recently reported that its cloud computing sales had increased by 16% over the course of a year. Indeed, pandemic gains do not seem to be slowing down for big tech. Meta, Alphabet, and Microsoft all exceeded Wall Street expectations for earnings in the first quarter of 2023 and much of the market’s growth more broadly is being driven by technology’s success. Although high interest rates at the end of 2022 prompted streamlining, with Google notably undertaking huge layoffs, tech is nonetheless in a strong position.

Strategic Rationale

Microsoft’s gaming division became an increasingly important contributor to the business during the pandemic, yet much of this profit came from hardware sales, primarily of Xbox consoles. The company has been unable to create a truly enormous franchise and as a result the most popular games on its consoles come from third party publishers, including Activision Blizzard. Franchises such as Call of Duty and Overwatch, on the other hand, are among the most well known in the world. The acquisition, then, would allow Microsoft to bring a considerable portion of development in-house, granting it unfettered access to valuable IPs. Moreover, the addition of King Digital Gaming, and therefore Candy Crush, will provide considerable revenue and leave the door open for future forays into mobile gaming.

When the deal was announced, cloud gaming, a market then estimated to reach upwards of $12bn by 2026, seemed to be Microsoft’s entry point into the Metaverse.. Nadella, Microsoft’s CEO, went as far as to say that technology initially developed for gaming will be transferred across to other uses, underpinning much of the company’s future software. This was not an unorthodox view when the deal was announced and was seen as a useful vehicle to further Microsoft’s strategic goals, focused on cloud, content, and creators.

Activision was a particularly appealing acquisition target given its depressed valuation. Following a record-breaking 2021, Activision’s share price suffered a 37% slump following a deluge of sexual misconduct and harassment allegations, implicating a number of senior employees. Kotick, Activision’s current CEO, has expressed his intention to stay on immediately post-merger, though it is thought that he would leave soon after the completion of the deal. Microsoft, wary of potential PR implications, has been keen to emphasise that Activision has dealt with these cultural issues that are now, allegedly, ‘a thing of the past’.

Long-Term Prospects

Microsoft’s acquisition of Activision has not yet been killed by regulatory issues. Both sides have made it clear that they intend to fight for the deal to be permitted. Undoubtedly, Microsoft will appeal to the Competition Appeal Tribunal (CAT) before the May 24th deadline. The CMA did make a series of errors in blocking the deal, including a serious misstep in their financial modelling of the new entity. Consequently, it is entirely possible that the CMA’s slightly bizarre approach to blocking this deal may leave the door open for it to be permitted. Yet, regulatory blocks are not the sole issue this deal faces. Following in a recent trend in competition law, a number of gamers filed an antitrust lawsuit against Microsoft in December 2022. Outside pressure may undermine Microsoft’s case against regulators.

However, in spite of the hefty break-up fee, if either the FTC or EU regulators block the deal, it would not come as a surprise if Microsoft were to cut their losses. As has been made clear, the company, and indeed the market more broadly, now sees gaming as a less viable means of taking advantage of the cloud space than it did 15 months ago. Further, the deal was not intended as a cost-cutting measure as Activision was planned to be kept separate as operational synergies were not deemed to justify any disruption. Although they will certainly fight this deal, it is doubtful that Microsoft will throw the full weight of its resources behind a case to which it is not overly attached.

For Activision meanwhile, this is not necessarily a disaster. Share price did drop by 12% following the CMA’s announcement, yet the issues faced by the company were more PR related than financial. Though, of course, it will be difficult to replicate the successes of 2020-21, Activision will remain a key player in the gaming industry, and it is hard to imagine that the popularity of Call of Duty or Candy Crush, for instance, will rapidly decline any time soon. This merger, then, would undoubtedly benefit both companies, but its failure would not be an unmitigated disaster for either.

Written by Thomas West (St John’s College)

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