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Why Is Activision Being Sued and Will the Acquisition by MSFT Help?

Mohit Oberoi, CFA - Author
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Jul. 27 2021, Published 10:15 a.m. ET

Large companies get sued all the time—but every now and then, one of the lawsuits sticks. This is the case with Activision Blizzard Inc. (NASDAQ:ATVI)—a video game holding company that's now being acquired by tech giant Microsoft. Why is ATVI getting sued, and who's doing the suing?

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Microsoft is paying nearly $69 billion to acquire ATVI, which makes it the biggest deal not only for MSFT but for the entire U.S. tech industry. After the deal is completed, Microsoft will become the third-largest gaming company globally, behind Tencent and Sony.

What happened to Activision Blizzard?

The lawsuit comes from the California Department of Fair Employment and Housing. In it, the Department accuses Activision Blizzard of discrimination against gender as well as harassment and retaliation.

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Some of the details of the lawsuit are stomach-churning for sensitive readers. It reads, "Unlike its customer-base of increasingly diverse players, Defendants' workforce is only about 20 percent women. Its top leadership is also exclusively male and white."

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This is just the tip of the iceberg. The lawsuit states that "women are subjected to 'cube crawls' in which male employees drink copious amounts of alcohol as they 'crawl' their way through various cubicles in the office and often engage in inappropriate behavior toward female employees."

Following complaints about harassment, discrimination, and retaliation, female workers were "deprived of work on projects, unwillingly transferred to different units, and selected for layoffs," among other punishments.

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The Department's investigation started two years before deploying the lawsuit.

ATVI reached a settlement with the Equal Employment Opportunity Commission.

In September 2021, ATVI reached a settlement with the Equal Employment Opportunity Commission over the misconduct allegations. However, the settlement still needs to be approved by a judge. That said, the allegations have taken a toll on ATVI's stock price.

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ATVI CEO Bobby Kotick might resign.

ATVI CEO Bobby Kotick has also been under the scanner amid reports that he allegedly hid some of the employee misconduct, including an alleged rape and the resultant settlement from the company's board.

Since the lawsuit's release, almost 1,900 current and former Activision employees have signed a petition to force Kotick to resign as the company's CEO.

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While there have been calls for Kotick to resign, he has managed to stay on. In its release announcing the acquisition of Activision Blizzard, Microsoft said that he would continue to serve as the CEO. However, there's speculation that he might resign after the deal closes. Subject to regulatory clearances, Microsoft expects to close the deal in its fiscal 2023, which would end on June 30, 2023.

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Microsoft is expected to do the cleanup at ATVI.

Incidentally, just a day before Microsoft announced the acquisition, ATVI said that since July 2021, 37 employees have left the company while another 44 have been disciplined amid the misconduct allegations.

Microsoft is also reviewing its policies.

Several analysts think that Microsoft will help ATVI tide over the misconduct and sexual assault allegations. However, Microsoft's employee policies have also been under a scanner.

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Under pressure from some investor groups, Microsoft is reviewing its gender discrimination and sexual harassment policies. The board has also authorized the company to hire the law firm of Arent Fox for conducting the review.

Will Kotick resign from Activision?

The clean-up exercise at Activision Blizzard already seems to be in play looking at the multiple exits at the company. Hopefully, the association with Microsoft will help ATVI address the allegations effectively.

However, many activists and several Activision Blizzard employees think that the scandal won't reach closure until Kotick exits the company. Will he leave Activision like it's widely being speculated? We'll know in a few months.

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