Activision Blizzard’s Workplace Problems Spurred $75 Billion Microsoft Deal

That provided the catalyst for Microsoft’s gaming head,

Phil Spencer,

to approach Mr. Kotick about a takeover soon after, according to people familiar with the matter.

Deal-hungry Microsoft had long been interested in Activision and had discussed a potential acquisition in the past, some of those people said, but Mr. Kotick was cool to the idea until Microsoft offered him a graceful exit.

Some of Activision’s directors who had stood by Mr. Kotick during the crisis were individually beginning to get anxious, according to people familiar with the board. Some directors didn’t believe shareholders and employees would be comfortable without a major change but weren’t willing to try to oust Mr. Kotick. He is expected to depart the company after the deal closes, the people said.

Staking so much on a company facing investigations, internal and external unrest and unknown liabilities is highly unusual and a big risk for Microsoft. Activision’s troubles gave the tech giant an opening to make a deal and also a long list of problems to navigate.

Mr. Kotick pushed to make the deal happen, the people familiar with the board said. He and Mr. Spencer already knew each other given that many of Activision’s games, which include the wildly popular Call of Duty and World of Warcraft, appear on Microsoft’s Xbox console. Microsoft CEO

Satya Nadella

later got involved in the talks too, a person familiar with the matter said.

Over the next two months, Messrs. Spencer and Kotick negotiated. The $75.5 billion transaction, announced Tuesday, is the biggest ever for Microsoft and will create the world’s third-largest gaming company by revenue.

The deal gives Microsoft broader reach in a gaming sector that has only grown during the pandemic, and adds original content—and nearly 400 million monthly users of Activision’s products—that could boost Microsoft’s subscription game service. Microsoft said it also provides opportunities to expand in the virtual world known as the metaverse, the latest focus of many major technology players.

It is the biggest deal since 2019 and the largest cash acquisition of a U.S. company ever, according to Dealogic.

Activision’s board said in a written statement provided by the company’s spokeswoman that the board didn’t consider Mr. Kotick’s status in unanimously approving the Microsoft transaction. The spokeswoman, Helaine Klasky, disputed the Journal’s timeline of the deal and said the details of Mr. Kotick’s status after the deal’s close haven’t been decided. A Microsoft spokesman declined to comment.

In an interview Tuesday, Mr. Kotick didn’t specifically address his status after the deal closes. He described “really great opportunities” at Microsoft, with Activision Blizzard “able to tap into the pipeline of talent that Microsoft has been able to build,” as well as its machine learning and data analytics capabilities.

Activision has disputed the California regulator’s claims alleging sexual harassment. It has said the Journal’s reporting created a misleading picture of the company, and Mr. Kotick has said he is transparent with his board, which issued a statement supporting him.

The company has announced changes in recent months that Mr. Kotick has said are aimed at making Activision a welcoming and inclusive workplace, including a zero-tolerance harassment policy and an end to mandatory arbitration for harassment and discrimination claims.

Mr. Spencer had told Microsoft employees in November that the software giant was evaluating its relationship with Activision in the wake of the Journal’s reporting on Mr. Kotick’s handling of the sexual-misconduct allegations. Sony Group Corp.’s PlayStation unit also asked Activision how it planned to address sexual misconduct issues.

Asked about Activision’s workplace issues in an interview Tuesday, Mr. Spencer said: “We see the progress that they’re making that was pretty fundamental to us deciding to go forward here.”

Microsoft, which has faced pressure from shareholders over its handling of workplace issues, pledged last week to be more transparent in its handling of sexual-harassment allegations and would review its policies.

As part of the due-diligence process, Microsoft and its advisers reviewed the allegations Activision is facing and met with management to understand them as well as the processes put in place to ensure future issues are handled differently, a person familiar with the matter said.

Tuesday’s agreement hands Microsoft a major prize after several aborted acquisition attempts. It has managed to ink others, such as a $16 billion deal for artificial-intelligence company

Nuance Communications Inc.

The Redmond, Wa., company, one of the biggest in the world with a market value of $2.3 trillion, held unsuccessful talks to buy social-media company TikTok’s U.S. operations, photo-sharing platform

Pinterest Inc.

and chat startup Discord Inc. in recent years. Microsoft’s biggest acquisition to date was its roughly $26 billion purchase of LinkedIn Corp., announced in 2016. In that deal, Microsoft moved after its target’s shares were depressed—in that case because the networking platform’s growth had slowed.

The tech giant saw another opening in late November, when Activision was facing an uprising from employees, investors and business partners. Activision’s share price had fallen nearly 30% since California regulators sued, alleging sexual harassment and gender pay disparity at the company. The Securities and Exchange Commission was investigating.

Even though the deal carries a 45% premium, it values Activision at around its level before the California lawsuit.

The Journal reported Nov. 16 that Mr. Kotick had known for years about misconduct allegations, including rape, and hadn’t told the board, sending the stock down nearly 20% over several sessions. About 1,900 of the company’s 10,000 employees signed a petition calling for Mr. Kotick to resign and some staged a walkout. Business partners, including Sony, said they were reevaluating their relationship with the company.

Activision’s board publicly expressed confidence in his leadership and ability to address Activision’s workplace-culture issues, but in recent weeks some directors came to the realization that the public backlash may continue and Mr. Kotick might be forced to resign, according to people familiar with the company.

The Journal reported Monday that Mr. Kotick held back a summary of personnel issues planned for public release that showed the company had disciplined or pushed out more than 80 employees since July, and had collected about 700 reports of employee concern over misconduct and other issues—in some cases about these same incidents. An Activision spokeswoman disputed the 700 number and said it included benign issues, and said “the assertion regarding Mr. Kotick is untrue.”

Mr. Kotick owns 0.53% of the company, according to FactSet. A stake that size would be worth nearly $400 million at the deal price, of $95 a share.

His departure following the sale would mark a big shift for Activision and the videogame industry. He became Activision’s chief executive in 1991 after acquiring it out of bankruptcy with partners for $400,000. Over the past three decades, he has built it into the second largest videogame publisher by market capitalization by focusing on deal-making and pumping out sequels and spin-offs to the most popular franchises. His 2020 pay package was valued at $154 million, making him one of the highest-paid chief executives of a U.S. publicly traded company.

Mr. Kotick has been eager to change the public narrative about the company, and in recent weeks has suggested Activision Blizzard make some kind of acquisition, including of gaming-trade publications like Kotaku and PC Gamer, according to people familiar with him. The Activision spokeswoman, Ms. Klasky, disputed that Mr. Kotick wanted to make the acquisitions. A spokesman for G/O Media, the parent company of Kotaku, declined to comment. PC Gamer didn’t respond to a request for comment.

—Aaron Tilley contributed to this article.

Write to Kirsten Grind at kirsten.grind@wsj.com, Cara Lombardo at cara.lombardo@wsj.com and Ben Fritz at ben.fritz@wsj.com