Microsoft Corp. is going all in on gaming. On Tuesday, the technology behemoth announced an agreement to buy Activision Blizzard Inc. for US$69 billion in cash. If the deal goes through, it would become the biggest acquisition in the company’s history. But is this mega-deal a smart move?

At first blush, the merger makes sense. Gaming is one of the largest and fastest-growing consumer businesses and a rare area that could move the needle for a multitrillion-dollar company like Microsoft. According to research firm Newzoo, the global gaming market is projected to grow to US$219 billion by 2024 from US$180 billion last year. So Microsoft’s aim is to strengthen its position in the category by buying the largest publicly traded U.S. video game publisher. 

With Activision, Microsoft will add many well-known franchises — including Warcraft, Diablo, Overwatch, Call of Duty and Candy Crush, along with nearly 10,000 experienced gaming employees. Activision’s large back catalog of games will make Microsoft’s Game Pass subscription service more attractive. And Microsoft clearly is betting that owning some of the most popular video game titles will give the company a foothold in the so-called metaverse, the virtual world where some commercial and social activity could take place in the years ahead.

But there are several big problems with the proposed deal. First, some of the video game company’s best talent may have already departed. Under longtime Chief Executive Officer Bobby Kotick, Activision has been undergoing a serious workplace culture crisis. The company has faced multiple government investigations for failing to protect female workers from sexual harassment and discrimination. On Monday, the Wall Street Journal reported the company had fired or pushed out more than three dozen employees for misconduct. The scandals have prompted exasperated senior executives and developers to leave voluntarily over the past year, while other employees have staged protests. Bloomberg News reported that Kotick is expected to depart once the deal closes. It wouldn’t be a surprise if he left even sooner.

Second, Microsoft might be overpaying. Financially, Call of Duty is Activision Blizzard’s most important franchise, and it could be in trouble. In 2020, Call of Duty accounted for roughly half of the company’s overall operating profit. Last week, Activision was forced to apologize for pervasive technical issues across several recent Call of Duty games. Gamers have been complaining for weeks on Reddit about glitches, crashes and bugs.

Meanwhile, there are signs the latest Call of Duty game is flopping in the marketplace. According to data from a European industry group, Call of Duty: Vanguard sales were down about 36 per cent during the holiday season in the U.K. compared with last year’s version. Historically, U.K. numbers have been consistent with other large markets, so it points to a big overall decline in sales. And World of Warcraft, perhaps Activision’s second-most important property, is showing declining gamer interest, too. Baird analyst Colin Sebastian recently published a report that revealed Google searches for the online role-playing game had plunged 60 per cent from last year. 

On a call with analysts Tuesday morning, Microsoft management said the acquisition wasn’t about short-term results but the long-term potential of Activision’s franchises. But even looking out a few years, the company may be underestimating the level of damage Activision’s brands have suffered from both the workplace scandals and the complaints about game quality.

Then there’s the regulatory question. Last week, Bloomberg News reported that the U.S. Federal Trade Commission was probing Meta Platforms Inc.’s virtual reality unit Oculus over anti-competitive practices, including the acquisitions of VR apps. But if Meta is getting scrutinized over small acquisitions, it begs the question of why Microsoft should be allowed to buy multiple large companies.

While it avoids the spotlight, the technology giant has been prolific in M&A. Last year, it completed its US$7.5 billion takeover of video game publisher ZeniMax Media and also announced a nearly US$20 billion purchase of voice-recognition and AI specialist Nuance Communications Inc. And this came after it reportedly looked at other consumer targets from gaming-chat community Discord Inc. to Pinterest Inc. and TikTok. Regulators undoubtedly will take a close look at the Activision deal, something the parties clearly anticipate, given the proposed fiscal 2023 closing date.

Microsoft’s US$95-a-share bid values Activision at roughly 25 times analysts’ earnings estimates for the next four quarters, roughly in the similar ranges as other publishers. But that price tag only makes sense if Activision can get its house in order.