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The Real Story Behind the Kotick-Nadella Deal

How a peace offering from Phil Spencer, Microsoft’s gaming chief, led Activision’s Bobby Kotick to a $69 billion deal.

In business, success can sometimes come down to making the best of a bad situation. Knowing when to hold ‘em, when to fold ‘em, et cetera, and knowing how to fold said cards in the most advantageous way for your company, your shareholders, and yourself. In mid-November, Bobby Kotick, the chief executive of the gaming giant Activision Blizzard, had endured a year of production delays, workplace controversies, a federal investigation and state lawsuit, extremely bad press, and an intensifying unionization effort—all of which had pushed $ATVI stock down 45 percent from an all-time high in February. Some in the Sun Valley potluck set were fearful for his future. 

Suitors were circling, meanwhile, looking to buy the video game empire at a massive discount. But even then, Kotick showed no indication that he planned to cash in, according to sources familiar with his thinking. He still had the support of his board, these people said, and he had just been authorized to issue a $4 billion stock buyback that he hoped would fuel the company's growth.

Then a curious series of events unfurled. After the Wall Street Journal published an inflammatory article alleging, among other things, that Kotick had tried to cover up sexual harassment claims at his company, Microsoft gaming chief Phil Spencer sent a note to his employees stating that he and his executive team were “disturbed and deeply troubled by the horrific events and actions” at Activision, and that Microsoft's Xbox unit was “evaluating all aspects” of its relationship with the company. Spencer's note came on the heels of a similar missive from Sony PlayStation chief Jim Ryan, but Spencer's note must have hit particularly hard given that he and Kotick were friends and had worked together for years. Moreover, Microsoft had spent several years looking at Activision as a potential acquisition target, sources familiar with the matter said. (Spokespeople for Activision and Microsoft could not be reached for comment.)

While the note was circulating in the press, however, a different conversation was happening between Spencer and Kotick. The two men got on the phone to make peace, a source familiar with the discussions said. Not long after, both Spencer and Microsoft chief Satya Nadella reached out to Kotick and Activision chairman Brian Kelly to discuss another matter: Was it time to start thinking seriously about negotiating a deal that would bring Activision to Microsoft? 

There was a strategic logic. Nadella, after all, had been rapidly acquiring game studios since becoming chief executive in 2014, but Microsoft still lagged behind the competition, particularly in mobile, and needed more titles. An Activision deal would immediately turn Microsoft into the world's third-largest gaming company by revenue and make it a seemingly unstoppable force. Meanwhile, no one was better suited than Microsoft to help Activision with its own shortcomings in A.I. and machine learning, data analytics, and so on.

Thus began two months of negotiations that would ultimately result in the deal that was announced this week. Microsoft will pay $80 billion for Activision—the deal is valued at $69 billion because Activision has $11 billion in cash—which translates to $95 a share, or a 45 percent premium to Activision's stock price before the sale was announced. Meanwhile, Kotick will stay on through the integration and be given a relatively graceful exit, concluding his thirty-year run at Activision with a narrative about its value to Microsoft, rather than further scrutiny over the issues that have roiled the company for the last year. “He was going to get killed. Now he buys himself some time with less bad press,” one Hollywood executive who knows Kotick told me, reflecting the conventional wisdom of the Sun Valley circle. “Then he can start investing, go on boards... He has great relationships.”

The majority of ink that has been spilled on Microsoft's acquisition has rightly focused on what it means for Microsoft: with this deal, Nadella's tech giant immediately becomes one of the most dominant forces in gaming—a space that has become not just the preferred source of entertainment for younger generations, but their primary online social sphere, and, theoretically, the vanguard for society's transition to the virtual- and augmented-reality-based metaverse. On a more prosaic level, it allows Microsoft to consolidate the fast-growing mobile gaming industry, which is throwing off metric tons of cash, and to bolster Xbox’s content catalog with lucrative I.P. assets. Perhaps most important, it positions Nadella to double down on Microsoft’s Game Pass monthly subscription product—a cloud-oriented, Netflix-for-games style service that complements Microsoft's strategic pivot to a recurring-revenue model. 

But it's important to note that Microsoft's ability to make such a massively significant play for the future of the internet was only made possible by the very real and present-day problems that have beset Kotick's gaming empire, and its stock price. It’s also worth noting that, for all the controversy surrounding Activision in the press in recent months, those problems weren’t pervasive enough to make Microsoft’s lawyers balk at the idea of bringing the company into the fold. Finally, in terms of the Bobby Kotick story, it's worth noting that when push came to shove, he masterfully played a rough hand. No wonder the board had his back.

FOUR STORIES WE'RE TALKING ABOUT