For $68.7 billion, technology giant Microsoft plans to purchase one of the biggest names in video game publishing — host to an embattled HR department that, by some accounts, has lost employees' trust.
In its Jan. 18 announcement of the deal, Microsoft acknowledged the strategic utility of purchasing Activision Blizzard, the company behind three billion-dollar video game franchises, and folding it into Microsoft's existing gaming footprint. That assumes all goes well ahead of the expected 2023 closing date.
In the meantime, Activision faces the fallout of a 2021 lawsuit filed by California regulators alleging incidents of sexual discrimination, sexual harassment and gender-based pay discrimination. The allegations prompted further investigation from the U.S. Equal Employment Opportunity Commission and the Securities and Exchange Commission.
Last October, Activision paid $18 million as part of a consent decree with the EEOC, though California's Department of Fair Employment and Housing is challenging the agreement. Groups of Activision employees staged walkouts, and some, including a group of quality assurance employees at subsidiary Raven Software, aim to unionize.
The company's SEC filings detail a list of changes such as adding staff and resources to its ethics, compliance and employee relations teams, and it has dropped mandatory arbitration agreements for sexual harassment and discrimination claims brought by workers. Still, public sentiment — and the company's own messaging — show much work still to be done. Activision's HR operations drew particular scrutiny, with DFEH's lawsuit alleging that the department suffered from a "'big lack of trust'"and dismissed employee complaints while failing to keep them confidential.
Sources who spoke to HR Dive said Microsoft, despite its size and HR savvy, has a challenging task ahead in acquiring the troubled publisher.
"It's not the best look for Microsoft, and they're going to have to do a lot to prove to their employees that they're not going to let this culture continue the way it has," said Jason Walker, co-founder and CHRO at Thrive HR Consulting.
A studio-by-studio problem
One aspect of Microsoft's Activision acquisition that makes it a unique M&A case study is the nature of a studio as an entity within a larger gaming corporation. Studios operate similarly to the way business units do in a typical organization, according to Reynaldo Ramirez, co-founder and management consultant at Thrive HR Consulting.
Ramirez, whose experience includes a stint as an HR director at Electronic Arts, explained that game studios are often independent by nature; they have their own general managers, profit and loss statements, and they develop their own gaming genres. By extension, studios tend to develop their own cultures, Ramirez said. If a studio's culture harbors inappropriate activity, it can cause problems if not addressed proactively by the organization's broader HR team.
"This is a content play for [Microsoft], and even though Activision has got some challenges, some warts, for the greater good, you are overlooking some of those warts," Ramirez said. "Hopefully they're going into this with eyes wide open knowing that they've got work ahead of them from an HR integration perspective."
Asked for comment on its plans to address cultural issues at Activision, Microsoft directed HR Dive to a statement published by Microsoft Gaming CEO Phil Spencer.
"We deeply value individual studio cultures," Spencer said. "We also believe that creative success and autonomy go hand-in-hand with treating every person with dignity and respect. We hold all teams, and all leaders, to this commitment. We're looking forward to extending our culture of proactive inclusion to the great teams across Activision Blizzard."
'Bad apples' and 'bad barrels'
The first item on Microsoft's task list may very well be deciding who stays and who goes, according to Christine Hendrickson, vice president of strategic initiatives at pay equity analysis firm Syndio.
Hendrickson distinguished between "bad apples," or the individuals who fail to live up to an organization's cultural values, from "bad barrels," or the broader strategies and policies that systemically contribute to cultural dysfunction.
"If there are individuals who are not living up to Microsoft's values, those individuals need to be identified," Hendrickson said. But for issues such as pay equity, companies may have to examine broader structures that impact specific workforce groups in a discriminatory way. "If you have a policy driving bad behavior [...] such as a performance rating policy that was having an impact on women and people of color in the organization, leading to lower ratings, you would want to assess that."
Ramirez spoke about a previous M&A experience in which his former employer, Cognizant, acquired a company that had seen harassment charges leveled against one of its founders. During the acquisition process, the target company was reluctant to provide information about the claims. "We ended up having to say that unless you provide us that information, we're not going ahead with the deal," he said.
From there, Ramirez and others brought the issue to their executive sponsor. Though the sponsor considered the executive facing the allegations to be a key part of the deal, the team was able to convince the sponsor that retaining the executive would not be worth the potential public relations damage, Ramirez said.
Proposed changes at the executive level are already at the heart of the Activision saga. Microsoft has said it will retain current Activision Blizzard CEO Bobby Kotick, a controversial figure among employees within the company and investor groups. Portions of those stakeholders have called on Kotick to step down following a Wall Street Journal report into his knowledge of sexual misconduct incidents at Activision prior to last year's litigation.
In the deal announcement, Microsoft said Kotick and his team "will maintain their focus on driving efforts to further strengthen the company's culture and accelerate business growth."Activision, meanwhile, defended Kotick from The Wall Street Journal's reporting in a statement: "The Board remains confident that Bobby Kotick appropriately addressed workplace issues brought to his attention."
Activision has since confirmed to media outlets, including The Wall Street Journal, that it has let go of at least 37 of its more than 9,900 employees and disciplined an additional 44 since July 2021.
While it may seem simple to identify problem individuals at an acquisition target, office politics complicate matters. "There's always a particular group of people pushing for someone," said Walker, who noted personnel may try to argue that a problem employee "just had a moment"or was "set up"and that the employee should be excused because of their contributions.
"A lot of this takes longer because people are infighting amongst themselves," Walker said. "That's always the piece that is a challenge and that takes some time to figure out."
How quickly an acquiring company moves through that process can also vary depending on the size and scope of the deal, Ramirez said. If the transaction involves somewhere in the neighborhood of 150 people and both firms are privately held, the process could be done within a 30- to 45-day timeframe. But a deal like this, between large publicly traded entities Microsoft and Activision, could require government approval, so vetting individuals and integrating policies could take longer.
"The good news from Microsoft's perspective is that they can build an integration plan and any exits as part of the plan," Ramirez said, though he also noted that "the quicker you can [take action] to eliminate a problem, the better it is for the organization and employees."
When the HR department is already in flux
As the two companies attempt to synchronize their HR operations, there is yet another wrinkle. In the months prior to the acquisition announcement, Activision shuffled its HR executive team, replacing chief people officer Claudine Naughton with longtime Disney executive Julie Hodges.
Any plans or initiatives being put into place by Activision likely will have to be approved by HR management at Microsoft, Ramirez said, and the latter may opt to take a different approach or otherwise prefer that Microsoft HR leaders have a say in new developments. But he added that the company's existing knowledge of the gaming space should help it in sorting out talent issues.
"It's going to be very complicated, but I think that because this is such a highly visible and costly transaction for Microsoft, they're going to want some of their leaders inside the organization to understand how it works and how to address those issues," Ramirez said.
"If you think the deal is bad and not a good thing for the company, go on record. Make sure that you say it. Make sure that the people who need to hear it, hear it."
Co-founder and CHRO, Thrive HR Consulting
The leadership shuffle underscores the importance of due diligence in the M&A process, Hendrickson said. Organizations, she continued, need to ensure acquisition targets have built assessments for diversity, equity and inclusion, what she referred to as the "S part of ESG."That information, Hendrickson said, is just as important as an organization's financial data.
"Due diligence is so critical because, in this case, a lot of these challenges were already public, but in many cases they are not, and you've got to ask the tough questions," she continued. "If they're not providing you information, there's a reason, so dig again. You've got to have the courage to dig."
Walker concurred, noting when HR teams find themselves in similar M&A situations — in which the company being acquired has a litany of HR issues — they need to speak up, well before a deal closes.
"Don't be a 'yes' person," Walker said. "Your job is not to rubber stamp everything that comes across your desk. If you think the deal is bad and not a good thing for the company, go on record. Make sure that you say it. Make sure that the people who need to hear, it hear it."
As the transition goes forward, Ramirez said Microsoft likely will need to take hold of a situation characterized by employee dissatisfaction and stabilize it, though Activision will bear part of that responsibility as well.
Employee advocates are already calling on regulators to explore the issues raised by Activision employees ahead of close. In a statement by email to HR Dive, Christopher M. Shelton, president of the Communications Workers of America union, did just that.
Before any approval of this proposed deal, the Department of Justice, Federal Trade Commission, and states Attorneys General must all carefully consider the impacts on consumers and American workers, especially Activision Blizzard employees who have been trying to improve working conditions and raising up troubling issues regarding company culture of sexist and discriminatory cultural practices, pay inequity, workplace harassment and abuse. Activision Blizzard's response to its employees' concerns has been repeated surveillance, intimidation tactics, and the hiring of notorious union busters. Activision Blizzard worker concerns must be addressed in any plan - acquisition or not – on the future direction of the company.
Between the announcement and the deal's close, Microsoft's communication strategy also might focus specifically on the benefits the acquisition will have for Activision's workforce, Ramirez said, as well as any major short-term changes to pay, bonuses and benefits plans.
"At the end of the day, employees know if there's something that's being done incorrectly, and that will determine whether they stay or go," Ramirez said. "One of the key reasons that Microsoft is doing this is to acquire talent, and the last thing you want to do is make decisions that would cause talent to leave the organization."