Microsoft (MSFT) rocked the gaming industry on Tuesday with the news that it’s purchasing Activision Blizzard (ATVI) for $68.7 billion, or $95 a share, a 45% premium over its Friday closing price of $65.39. The move instantly turns Microsoft into the world’s third largest gaming company by revenue, behind just Tencent and Sony, and gives it a massive foothold in the largest and fastest growing gaming market: mobile gaming.

Microsoft CEO Satya Nadella says it will also power the company’s plans for taking on the metaverse. “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,” Nadella said in a statement.

But the transaction, the largest in Microsoft’s history, isn’t without its risks. By purchasing Activision Blizzard, Microsoft becomes tied to a company facing allegations of widespread sexual harassment that has reportedly resulted in the ouster of three dozen employees since July. And how Microsoft handles that could have a direct impact on the success of the deal.

The hits keep coming for Activision Blizzard

While Microsoft is clearly focused on how it will benefit from gaining Activision Blizzard’s franchises including “Call of Duty,” “Overwatch,” and “Candy Crush,” the game maker's ongoing harassment and discrimination scandal also looms large.

On Monday The Wall Street Journal reported that Activision Blizzard has pushed out dozens of employees after investigating complaints of harassment. According to The Journal, Activision Blizzard CEO Bobby Kotick purposely held back a company-issued report of the actions against the employees out of fears that it would make the problem at the gaming giant look worse.

Kotick isn’t going anywhere for the time being, though. Under the terms of Microsoft’s agreement, he will stay on as Activision Blizzard’s CEO, reporting to Microsoft’s games CEO Phil Spencer.

During a press briefing, Nadella tiptoed around addressing the scandal directly.

“As CEO of Microsoft, the culture of our organization is my number 1 priority,” he said. “This means we must continuously improve the lived experience of our employees and create an environment that allows us to constantly drive every day improvement in our culture. This is hard work. It requires consistency, commitment, and leadership that not only talks the talk but walks the walk.”

The Activision Blizzard scandal game to light when the California Department of Fair Employment and Housing filed suit in July claiming Activision Blizzard allowed a culture of sexual harassment to fester unchecked for years.

The suit portrays a company as one that fostered a “fratboy culture” with men groping female colleagues and women being denied promotions and raises. One woman died by suicide due to a relationship with a male supervisor, the complaint alleged.

According to the suit, one employee noted that “women on the Battle.net team were subjected to disparaging comments, the environment was akin to working in a frat house, and that women who were not ‘huge gamers’ or ‘core gamers’ and not into the party scene were excluded and treated as outsiders.”

The Securities and Exchange Commission is also looking into the gaming giant over allegations that executives didn’t inform investors of continued workplace harassment. Activision Blizzard also agreed to pay $18 million to the Equal Employment Opportunity Commission to settle that commission’s own investigation into the company.

Yahoo Finance has reached out to Microsoft to determine if the company will assume Activision Blizzard’s liabilities as part of the deal. We did not receive an immediate response.

Microsoft is betting on gaming

Microsoft is already a huge gaming company. But with Activision Blizzard, it becomes the third largest gaming giant in the world. For perspective, Microsoft’s gaming revenue in 2021 topped out at $15 billion, a 33% increase over its 2020 revenue.

Activision Blizzard, meanwhile, saw revenue of $8.1 billion in 2020, the latest full-year accounting the company has available. The game publisher’s portfolio will not only give Microsoft even more titles for its Game Pass service, but will make Microsoft a player in mobile gaming as well — something that has eluded the company.

According to Newzoo, the mobile gaming market was expected to grow by 4.4% to $90.7 billion in 2021, while the console and PC gaming spending were expected to decline slightly. By 2024, the industry will see that increase to $116.4 billion.

Revenue from Activision Blizzard’s King mobile division came in at $2.2 billion in 2020, making it the company’s second largest segment behind Activision, which produces the incredibly popular “Call of Duty” franchise.

Nadella is also positioning the acquisition as a means for Microsoft to prepare itself for the fight for a piece of the metaverse, the 3-D virtual reality that many see as the next evolution of the internet.

Fellow tech giants including Facebook parent Meta and gaming behemoths like Epic Games are already staking their own claims to the metaverse, and Microsoft is clearly hoping that Activision Blizzard’s intellectual property will provide it with enough ammunition to fight back on its own.

But if Microsoft is unable to handle Activision Blizzard’s harassment scandals, the move could end up turning into a $69 billion black eye for the company. Specifically, Microsoft could alienate its own employees by choosing to keep Kotick as CEO of Activision Blizzard.

That could lead to a series of walkouts or defections, which could hit overall worker morale and damage Microsoft’s ability to release products on time.

The first step to preventing that? Firing Kotick. Without his ouster, it’s hard to see how Microsoft can move forward with a clean slate.

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