Background of the Merger
The Activision Blizzard Board of Directors and senior management team regularly review Activision Blizzard’s performance, future growth prospects and overall strategic direction and consider potential opportunities to strengthen Activision Blizzard’s business and enhance stockholder value. These reviews have included consideration of whether the continued execution of Activision Blizzard’s strategy or possible strategic opportunities, including acquisitions, dispositions, commercial partnerships or combinations with third parties, offered the best avenue to maximize stockholder value. In addition, the Activision Blizzard Board of Directors and senior management from time to time have been approached by third parties expressing an interest in exploring a potential strategic combination with or acquisition of Activision Blizzard, but, since the reduction of Vivendi’s ownership stake in Activision Blizzard in 2013, no such discussions have advanced beyond preliminary discussions gauging each party’s respective interest in pursuing a transaction or resulted in any specific proposal on price, structure or other material terms.
For over 20 years, Activision Blizzard and Microsoft have maintained an ongoing commercial relationship. While the companies have certain commercial arrangements relating to the licensing of various products and services, their principal business relationship relates to the publishing of products and services for the Xbox gaming platform. This relationship began over 20 years ago, and Bobby Kotick, the chief executive officer of Activision Blizzard, and Phil Spencer, the chief executive officer of Microsoft Gaming, maintain a regular dialogue about the commercial relationship and the gaming industry generally. From time to time, Satya Nadella, the chief executive officer of Microsoft, and Mr. Kotick have also spoken about similar matters.
On November 19, 2021, in the course of a conversation on a different topic between Mr. Spencer and Mr. Kotick, Mr. Spencer raised that Microsoft was interested in discussing strategic opportunities between Activision Blizzard and Microsoft and asked whether it would be possible to have a call with Mr. Nadella the following day. Mr. Kotick agreed to participate in such discussion. Following this call, Mr. Kotick promptly reported the conversation to Robert Morgado, the lead independent director on the Activision Blizzard Board of Directors, and Brian Kelly, the chairman of the Activision Blizzard Board of Directors. Messrs. Kotick and Kelly subsequently spoke with Allen & Company LLC, which we refer to as “Allen & Company,” which had provided strategic financial advice to Activision Blizzard on other occasions, regarding the call with Mr. Spencer.
In a call on November 20, 2021, between Messrs. Kotick and Nadella, Mr. Nadella indicated that Microsoft was interested in exploring a strategic combination with Activision Blizzard. Following this call, Mr. Kotick promptly discussed the call with Messrs. Morgado and Kelly and, thereafter, with a representative of Skadden, Arps, Slate, Meagher & Flom LLP, outside legal counsel to Activision Blizzard, which we refer to as “Skadden.”
On November 22, 2021, a call was held with Messrs. Spencer, Kotick and Kelly, during which call Mr. Spencer noted that, while Microsoft already had a significant amount of information about Activision Blizzard and its business as a result of the commercial relationship between the companies, Microsoft would need additional information regarding Activision Blizzard’s long-range financial plan and prospects in order to advance its analysis. Subsequently, Messrs. Kotick and Kelly indicated to Mr. Spencer that Activision Blizzard was not willing to provide such information without an indication of the proposal that Microsoft would be prepared to make that could then be shared with the Activision Blizzard Board of Directors to gauge the Board’s level of interest in engaging in additional discussions. Following this call, Robert Corti, chair of the Audit Committee of the Activision Blizzard Board of Directors, was also informed of Microsoft’s expressed interest in potentially pursuing a transaction.
On November 26, 2021, Mr. Spencer again spoke with Messrs. Kotick and Kelly, indicating that, based on the information available to Microsoft, Microsoft was preliminarily considering making an all-cash acquisition proposal for Activision Blizzard at $80.00 per share. Thereafter, Messrs. Kotick, Kelly, Corti and Morgado discussed potential ranges at which the full Activision Blizzard Board of Directors may be willing to consider an acquisition proposal taking into consideration, among other factors, Activision Blizzard’s historical trading prices, selected research analysts’ estimates for Activision Blizzard and relative trading multiples of Activision Blizzard and its peers.
On November 28, 2021, based on discussions with Messrs. Kelly, Corti and Morgado, Mr. Kotick communicated to Mr. Spencer that the Activision Blizzard Board of Directors might be willing to entertain a proposal, and potentially to engage in discussions relating to a potential strategic combination, if Microsoft was prepared to propose a transaction in a range of $90.00-$105.00 per Activision Blizzard share, rather than the $80.00 per share valuation that Mr. Spencer had indicated.
Following that discussion, on November 29, 2021, Mr. Spencer communicated to Messrs. Kotick and Kelly that Microsoft was willing to negotiate a potential transaction within the $90.00-$105.00 per share range, albeit noting that Microsoft would be more comfortable at the lower end of the range. Mr. Spencer also noted a desire to move quickly in advance of a previously scheduled near-term meeting of Microsoft’s board of directors at which Mr. Spencer wished to discuss the potential transaction between Microsoft and Activision Blizzard. Following this discussion, Messrs. Kotick and Kelly reported the call to Mr. Morgado and Mr. Corti as well as to Hendrik Hartong III and Peter Nolan, the remaining members of the Audit Committee of the Activision Blizzard Board of Directors.
On December 1, 2021, Mr. Kotick spoke with Mr. Spencer regarding introductions between the parties’ respective legal teams and potential financial advisors, as well as timing of Activision Blizzard’s delivery of the Long-Range Plan (as defined below) following execution of a mutual non-disclosure agreement and scheduling of a meeting between Activision Blizzard and Microsoft executives to discuss the Long-Range Plan.
On December 3, 2021, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, Sard Verbinnen & Co., Activision Blizzard’s strategic communications firm, Wilmer Cutler Pickering Hale and Dorr LLP, which we refer to as “WilmerHale,” and Skadden, in attendance for portions of the meeting. At the meeting, following the departure of the representatives of Sard Verbinnen & Co., Mr. Morgado provided an update to the Activision Blizzard Board of Directors on the discussions with representatives of Microsoft regarding a potential acquisition of Activision Blizzard by Microsoft. Following the departure of the representatives of Allen & Company, the Activision Blizzard Board of Directors discussed the potential formal engagement of financial advisors to assist Activision Blizzard in connection with a potential transaction with Microsoft and other potential alternatives available to Activision Blizzard. After discussing the relevant experience and qualifications of various potential financial advisors, the Activision Blizzard Board of Directors decided to work with Allen & Company. The Activision Blizzard Board of Directors selected Allen & Company on the basis of, among other factors, Allen & Company’s qualifications and reputation, extensive experience in advising software companies in connection with potential strategic transactions (including in which Microsoft was a counterparty), its knowledge and understanding of Activision Blizzard’s business and industry from its previous work with Activision Blizzard, and the absence of any known material conflicts with respect to Microsoft.
At the same meeting, a representative of Skadden discussed the directors’ fiduciary duties in the context of considering a potential acquisition of Activision Blizzard and various considerations that should be included in the Activision Blizzard Board of Directors’ decision-making process. The Activision Blizzard Board of Directors, senior management and representatives of Skadden then discussed the potential process the Activision Blizzard Board of Directors might pursue in exploring a potential strategic transaction with Microsoft or other companies potentially interested in and capable of undertaking a strategic transaction with Activision Blizzard, and potential regulatory considerations in connection with any such strategic transaction.
Later on December 3, 2021, following the conclusion of the meeting of the Activision Blizzard Board of Directors earlier in the day, Messrs. Kotick and Kelly received an unsolicited email from the chief executive officer of another gaming company, which we refer to as “Company A,” addressed to the Activision Blizzard Board of Directors, expressing interest in exploring a potential strategic transaction with Activision Blizzard, but without any details regarding the terms of such transaction. Subsequently, Mr. Kotick received an additional communication from the chief executive officer of Company A, expressing a desire to meet in person the following week.
On December 6, 2021, Activision Blizzard and Microsoft entered into a mutual non-disclosure agreement in order to facilitate Activision Blizzard sharing with Microsoft certain confidential information,
including at a meeting to be held the following day. Activision Blizzard is not a party or subject to any non-disclosure or other agreement with a party other than Microsoft, including with Companies A, C, D or E or Individual B (each as defined below), with respect to a potential acquisition of Activision Blizzard nor is any other party subject to any standstill or “don’t-ask, don’t-waive” provision that would inhibit such party from making a proposal.
Also on December 6, 2021, at the request of Activision Blizzard senior management, in advance of the meeting scheduled for the following day, Activision Blizzard’s long-range plan (which we refer to as the “Long-Range Plan”), together with “stretch” goals and objectives of the management teams of Activision Blizzard’s franchises and business units included as an appendix (as described below), was shared with representatives of Microsoft, and subsequently shared by Microsoft with representatives of Goldman Sachs & Co. LLC, Microsoft’s financial advisor, which we refer to as “Goldman Sachs.” The Long-Range Plan was approved by the Activision Blizzard Board of Directors on November 2, 2021 as the plan to be used for internal business planning purposes for Activision Blizzard’s performance for its fiscal years 2021 through 2024.
Also on December 6, 2021, Mr. Kelly received an unsolicited email from an individual, who we refer to as “Individual B,” indicating a desire to explore the potential acquisition of the Company’s Blizzard business unit or potentially a full (or partial) take-private transaction with unidentified potential co-investors.
On December 7, 2021, a meeting was held between representatives of Activision Blizzard, including Messrs. Kelly and Kotick and Armin Zerza, chief financial officer of Activision Blizzard, together with representatives of Allen & Company and Skadden, and representatives of Microsoft, including Mr. Spencer as well as individuals in the corporate development, finance and legal functions within Microsoft, representatives of Goldman Sachs and representatives of Simpson Thacher & Bartlett LLP, outside legal counsel to Microsoft, which we refer to as “Simpson.” During the meeting, the representatives of Activision Blizzard discussed with the representatives of Microsoft the Long-Range Plan and long-term opportunities for Activision Blizzard’s business. The attendees also discussed various other aspects of Activision Blizzard’s business.
On December 8, 2021, Mr. Spencer informed Mr. Kotick that a potential transaction with Activision Blizzard was considered at a meeting of Microsoft’s Board of Directors on December 8, 2021, and that, as authorized by Microsoft’s Board of Directors, Activision Blizzard should expect to receive a proposal from Microsoft for a potential acquisition of Activision Blizzard shortly.
On December 10, 2021, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. At the meeting, Mr. Kelly provided an update to the Activision Blizzard Board of Directors on the meeting between representatives of Activision Blizzard and Microsoft, the conversation between Messrs. Kotick and Spencer, and the communications with the chief executive officer of Company A and Individual B. The Activision Blizzard Board of Directors then discussed timing and structuring, regulatory, and process considerations should the Activision Blizzard Board of Directors decide to engage in further discussions with Microsoft following receipt of a proposal from Microsoft. The Activision Blizzard Board of Directors also discussed other technology and/or gaming companies that might have interest in pursuing a transaction with Activision Blizzard, including Company A, as well as Activision Blizzard continuing on a standalone basis. With respect to such other parties, the Activision Blizzard Board of Directors considered their potential strategic interest, ability to deliver greater value for Activision Blizzard stockholders than an all-cash proposal from Microsoft, and potential regulatory hurdles in a transaction with such parties. With respect to Company A, the Activision Blizzard Board of Directors discussed, among other things, that a transaction with Company A would necessarily include a very significant stock component, which would not be directly comparable to an all-cash transaction, would not likely yield significant cost synergies and would need to be premised on the belief that the long-term value of the combined company would achieve greater value than Activision Blizzard’s stand-alone plan. The Activision Blizzard Board of Directors also discussed the relative size and trading multiples of Activision Blizzard and Company A and the implications for how a combined company might trade. Allen & Company and Skadden also provided their respective views to the Activision Blizzard Board of Directors on such considerations. While noting that it was unlikely that a transaction with Company A could be as attractive or competitive as an all-cash proposal from Microsoft, the Activision Blizzard Board of Directors determined that, particularly in light of the anticipated proposal from Microsoft, it would make
sense for Mr. Kotick to meet with the chief executive officer of Company A and learn the parameters of Company A’s interest in a potential transaction. Accordingly, the Activision Blizzard Board of Directors directed Mr. Kotick to meet with the chief executive officer of Company A and to report back on the results of such meeting.
In addition, Mr. Kelly reported to the Activision Blizzard Board of Directors on the email he received from Individual B. The Activision Blizzard Board of Directors discussed the ability of Individual B to credibly pursue a transaction of the size and complexity that such a transaction would entail, as well as the disruption that might ensue were it to become known that Activision Blizzard was exploring strategic alternatives, which might occur if Activision Blizzard engaged in discussions with Individual B in light of prior dealings between Activision Blizzard and Individual B. After discussions, the Activision Blizzard Board of Directors concluded that Mr. Kelly should not engage with Individual B unless instructed to do so at a later date.
Later on December 10, 2021, Mr. Spencer requested an additional discussion with Mr. Kotick. Mr. Kotick consulted with Messrs. Kelly and Morgado and with a representative of Skadden about the potential transaction prior to the telephone call with Mr. Spencer.
Later that afternoon, on a telephone call among Mr. Kotick, Mr. Kelly and Mr. Spencer, Mr. Spencer informed Mr. Kotick and Mr. Kelly that Microsoft would be sending a written non-binding indication of interest to acquire Activision Blizzard later that evening at a purchase price of $90.00 per share in cash. Messrs. Kotick and Kelly expressed their disappointment in the proposed price but stated that they would report the proposal to the Activision Blizzard Board of Directors.
Later that evening on Friday, December 10, 2021, a representative of Simpson, on behalf of Microsoft, sent to a representative of Skadden a non-binding indication of interest to acquire Activision Blizzard for $90.00 per share in cash, together with a draft exclusivity agreement providing for exclusive discussions with Microsoft through January 15, 2022. The letter requested a response to the proposal by Monday, December 13, 2021.
On December 12, 2021, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. At the meeting, Mr. Morgado outlined the terms of the non-binding indication of interest received from Microsoft and described Messrs. Kotick’s and Kelly’s recent conversations with Mr. Spencer. The Activision Blizzard Board of Directors discussed that in addition to the $90.00 per share cash purchase price, the indication of interest (i) requested a response by December 13, 2021, (ii) proposed a period of exclusive negotiation through January 15, 2022 pursuant to the terms of an accompanying exclusivity agreement, (iii) stated that the transaction would be all-cash and not subject to any financing condition and (iv) noted that Activision Blizzard, post-acquisition, would be led by the Gaming leadership of Microsoft. Representatives of Allen & Company and Skadden also reported that, in conversations with their respective counterparty advisors to Microsoft, each had conveyed a desire on the part of Microsoft to move expeditiously.
At the meeting, the Activision Blizzard Board of Directors discussed that, in determining how to respond to Microsoft’s non-binding indication of interest, it would be helpful for the Activision Blizzard Board of Directors to have a sense of other parties that might be interested in pursuing a transaction with Activision Blizzard. Allen & Company suggested a number of potential third parties for consideration, including which of those third parties, in Allen & Company’s view, would likely be most able to acquire Activision Blizzard in a transaction that could potentially deliver greater value to stockholders of Activision Blizzard than the non-binding indication of interest received from Microsoft. The Activision Blizzard Board of Directors discussed the potential strategic rationale for a transaction with such third parties, including the potential ability of each such third party to successfully complete an acquisition of Activision Blizzard, the ability of each such third party to submit an offer to acquire Activision Blizzard for consideration consisting solely of cash, equity or a combination of cash and equity, the relative advantages and disadvantages of the form of consideration in a transaction and tactical considerations with respect to conducting an outreach to such third parties. Allen & Company indicated that, in its view, Companies C, D and E (each as defined below) were most likely to be able to acquire Activision Blizzard in a transaction that could potentially deliver greater value to Activision Blizzard’s stockholders than Microsoft’s proposal.
At the meeting, Mr. Kotick also provided an update on his communications with the chief executive officer of Company A, noting that an upcoming meeting had been scheduled for December 14, 2021, and that he would report back after such meeting.
Also at the meeting, a representative of Skadden provided an overview of the directors’ fiduciary duties in connection with their evaluation of a potential sale of Activision Blizzard in general and Microsoft’s non-binding indication of interest specifically. In addition, a representative of Skadden discussed with the Activision Blizzard Board of Directors other considerations relating to deal timing and certainty.
The Activision Blizzard Board of Directors also discussed various considerations involved in soliciting third-party indications of interest in a potential transaction with Activision Blizzard. The Activision Blizzard Board of Directors discussed the potential benefits of assessing third parties’ interest, including the potential to obtain a higher value for stockholders from a third party and the potential that increased competition could result in an increased purchase price and better overall terms for Activision Blizzard from Microsoft in the event that one or more other parties expressed interest. The Activision Blizzard Board of Directors also discussed the significant downside and disruption that could occur from market rumors regarding exploratory outreaches, including a potential adverse reaction from Microsoft that could negatively impact its willingness to proceed with a transaction with Activision Blizzard. In addition, the Activision Blizzard Board of Directors discussed the most effective approach in the event of such outreach, including who specifically was best positioned to conduct such outreach and attract serious interest. After discussions, the Activision Blizzard Board of Directors authorized and directed Mr. Kotick, along with other members of Activision Blizzard’s management and/or advisors as needed, to contact Companies C, D and E (each as defined below) initially, and, in the event of insufficient interest on the part of those three parties, to contact one other potential strategic counterparty, to gauge interest in a potential acquisition of Activision Blizzard. At this meeting and in other meetings throughout the Activision Blizzard Board of Directors’ consideration of the potential transaction with Microsoft, the Activision Blizzard Board of Directors met in executive session with only non-employee directors, outside counsel and the Secretary of the meeting in attendance to allow the non-employee directors to confer about the matters discussed at the meeting.
That same day, as authorized by the Activision Blizzard Board of Directors at the earlier meeting, Mr. Kotick contacted the chief executive officer of a potential strategic acquiror, which we refer to as “Company C.” The chief executive officer of Company C stated that Company C was potentially interested in acquiring Activision Blizzard. Mr. Kotick subsequently spoke with another senior executive of Company C. The following day, at Company C’s request and in accordance with the Activision Blizzard Board of Directors’ directives, representatives of Allen & Company sent to Company C a draft mutual non-disclosure agreement that had been prepared by Skadden and contained substantially similar terms to those in the non-disclosure agreement entered into between Activision Blizzard and Microsoft. As described below, Company C determined not to proceed with a potential transaction involving Activision Blizzard. Accordingly, the mutual non-disclosure agreement was never negotiated or executed between Activision Blizzard and Company C or their respective advisors.
Also on December 12, 2021, after the Activision Blizzard Board of Directors meeting authorizing the outreach, Mr. Kotick contacted the chairperson of the board of a potential strategic acquiror, which we refer to as “Company D.” The chairperson of the board of Company D stated that Company D was potentially interested in acquiring Activision Blizzard and that Company D would initially evaluate the viability of a potential acquisition of Activision Blizzard internally and revert to Mr. Kotick.
The following day, December 13, 2021, Mr. Kotick spoke to the chief executive officer of another potential strategic acquiror, which we refer to as “Company E,” as authorized by the Activision Blizzard Board of Directors the previous day, regarding Company E’s potential interest in acquiring Activision Blizzard. The chief executive officer of Company E indicated an interest in a potential acquisition of Activision Blizzard, but expressed concerns regarding the ability to execute a transaction between the parties. The chief executive officer of Company E stated that Company E would need to further consider internally any potential business combination. Mr. Kotick also spoke with another senior executive from Company E later the same day, who indicated that Company E would discuss potential strategic opportunities internally and revert to Mr. Kotick. A few days later, Mr. Kotick spoke with that senior executive of Company E who
informed Mr. Kotick that Company E was not in a position to pursue a full acquisition of Activision Blizzard although Company E would be interested in considering other potential transactions between the parties.
Based on the Activision Blizzard Board of Directors’ direction that Mr. Kotick not reach out to the fourth party if there appeared to be potential interest on the part of Company C, Company D and/or Company E, Mr. Kotick did not reach out to the fourth party pending further developments with Company C, Company D, and Company E.
Also on December 13, 2021, representatives of Allen & Company received an inquiry from a senior executive of Company C about a potential transaction with Activision Blizzard. In accordance with the Activision Blizzard Board of Directors’ directives, representatives of Allen & Company followed up with Company C and communicated to a Company C representative that for an offer to be attractive to Activision Blizzard, it should be structured as an all-cash acquisition of the entire company and that Company C should be prepared to move expeditiously.
On December 14, 2021, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. Activision Blizzard’s senior management presented to the Activision Blizzard Board of Directors updated financial forecasts regarding Activision Blizzard’s long-term financial performance for Activision Blizzard’s fiscal years 2021 through 2024, which had been downwardly adjusted from the Long-Range Plan by Activision Blizzard management to account for, among other things, the passage of time since the Long-Range Plan was approved by the Activision Blizzard Board of Directors on November 2, 2021, execution risk in the Long-Range Plan, and further insight into Activision Blizzard’s performance in the fourth quarter of 2021 — particularly the underperformance of the recently launched “Call of Duty: Vanguard” and the potential effects of that underperformance in 2022. Senior management noted that the updated financial forecasts were not intended to constitute a revised Long-Range Plan, and did not reflect any adjustments that Activision Blizzard might make in its strategy in response to Activision Blizzard’s performance in the fourth quarter of 2021. Activision Blizzard’s senior management further noted for the Activision Blizzard Board of Directors that, in the ordinary course, Activision Blizzard would assess its performance in the fourth quarter of 2021 to refresh Activision Blizzard’s outlook for the entirety of 2022, and would not typically refresh the outlook for years beyond 2022 at this stage of Activision Blizzard’s typical financial planning process, although it had done so at this time in order to provide the Activision Blizzard Board of Directors with an updated risk-adjusted view of Activision Blizzard’s potential prospective financial performance as it considered the potential transaction with Microsoft. The Activision Blizzard Board of Directors then considered and further discussed these updated risk-adjusted financial forecasts. Following such discussion, the Activision Blizzard Board of Directors approved use of such updated risk-adjusted financial forecasts for purposes of considering the potential transaction with Microsoft.
At the meeting, Mr. Kotick provided an update to the Activision Blizzard Board of Directors on his communications with representatives of Company C, Company D and Company E and representatives of Allen & Company provided an update on their communications with Company C. The Activision Blizzard Board of Directors discussed the need to further ascertain the interest levels of Company C, Company D and Company E in a potential transaction and timing considerations in relation to responding to Microsoft’s non-binding indication of interest in view of Microsoft’s request for a response by December 13, 2021. Also at the meeting, the Activision Blizzard Board of Directors discussed certain information provided by Allen & Company regarding Allen & Company’s material relationships with Activision Blizzard and Microsoft during the preceding two-year period as previously provided to the Activision Blizzard Board of Directors. After consulting with Activision Blizzard’s legal advisors, the Activision Blizzard Board of Directors determined that, based on such information, there were no material conflicts that would preclude Allen & Company from continuing to serve as financial advisor to Activision Blizzard.
Later on December 14, 2021, Mr. Kotick met with the chief executive officer of Company A. During the meeting, the chief executive officer of Company A expressed that a strategic combination between the companies would be beneficial for both companies and their stockholders, but did not provide a proposal for a potential transaction. During the meeting, the chief executive officer of Company A did not communicate any requests to, or propose any specific actions from, Activision Blizzard.
Also on December 14, 2021, Mr. Spencer spoke with Mr. Kotick to request an update on Activision Blizzard’s response to Microsoft’s non-binding indication of interest. Following this conversation on December 14, 2021, in accordance with the Activision Blizzard Board of Directors’ directives, representatives of Allen & Company updated representatives of Goldman Sachs that additional meetings of the Activision Blizzard Board of Directors were planned in advance of Activision Blizzard delivering a response to Microsoft’s non-binding indication of interest.
On December 15, 2021, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. At this meeting, the Activision Blizzard Board of Directors was provided with additional financial information relating to Activision Blizzard, including financial forecasts of Activision Blizzard’s long-term financial performance as extended through fiscal year 2026. Allen & Company provided a summary of the preliminary proposed terms of Microsoft’s non-binding indication of interest and certain preliminary financial matters relating to Activision Blizzard based on the updated risk-adjusted financial forecasts approved by the Activision Blizzard Board of Directors on December 14, 2021, as extended through fiscal year 2026.
Mr. Kotick provided an update to the Activision Blizzard Board of Directors on the status of communications with representatives of Company C, Company D and Company E. Representatives of Allen & Company provided an update to the Activision Blizzard Board of Directors on their communications with representatives of Goldman Sachs and Microsoft’s stated areas of focus in due diligence should the Activision Blizzard Board of Directors authorize continued engagement with Microsoft.
The Activision Blizzard Board of Directors discussed a range of potential alternative responses in connection with the non-binding indication of interest received from Microsoft and the relative advantages and disadvantages of a combination with Microsoft compared to other potential counterparties, as well as continuing on a standalone basis, and also considered additional factors, including, among other things, the economic and competitive landscape of the current gaming and technology sectors. After discussions, the Activision Blizzard Board of Directors directed Messrs. Kotick and Kelly and representatives of Allen & Company to convey to Microsoft a request to increase its proposed purchase price from $90.00 per share to $100.00 per share. At the same time, the Activision Blizzard Board of Directors authorized management to proceed with its negotiations with Microsoft, without the need for further Board authorization, in the event management was able to increase Microsoft’s proposal to at least $95.00 per share.
Later that day on December 15, 2021, a senior executive of Company C communicated to representatives of Allen & Company that Company C would not be in a position to proceed with discussing a potential business combination with Activision Blizzard.
Later that evening on December 15, 2021, Messrs. Kotick and Kelly had a telephone call with Mr. Spencer. The parties discussed the potential business combination, and, as directed by the Activision Blizzard Board of Directors, Messrs. Kotick and Kelly requested that Microsoft increase its proposed purchase price to $100.00 per share. Mr. Spencer noted that further discussion would be required and that he would respond in the next day or two.
On the morning of December 16, 2021, the chairperson of Company D called Mr. Kotick and communicated that Company D was interested in potentially exploring an acquisition of Activision Blizzard and would facilitate a follow-up call with the chief executive officer and other senior executives of Company D to further discuss.
Also on the morning of December 16, 2021, Mr. Nadella requested a telephone call with Mr. Kotick. During the call later that morning with Mr. Kotick, Mr. Nadella inquired whether Activision Blizzard would consider a proposal below the $100.00 per share amount previously communicated to Microsoft. Mr. Kotick suggested to Mr. Nadella that Microsoft should provide its best and final offer and reiterated that Activision Blizzard was focused on taking actions that were in the best interests of its stockholders. Mr. Nadella reiterated Microsoft’s desire to move expeditiously.
Messrs. Kotick and Nadella had a series of telephone calls over the course of December 16, 2021. Mr. Nadella initially communicated Microsoft’s willingness to increase the price contemplated by Microsoft’s non-binding indication of interest from $90.00 to $93.00 per share on the condition that Activision
Blizzard grant Microsoft a 30-day exclusivity period. Mr. Kotick informed Mr. Nadella that he was not authorized to proceed at a price below $95.00 per share, but he was authorized to consider a $95.00 per share price with a 30-day exclusivity commitment at that price level and also would need an agreement from Microsoft on certain other key terms, particularly related to a reverse termination fee. Mr. Nadella responded that he would have to discuss further internally. Subsequently, Mr. Nadella proposed to increase the price provided for in Microsoft’s non-binding indication of interest to $95.00 per share and expressed willingness to engage in discussions on whether Microsoft would agree to a reverse termination fee and the quantum of such fee, as well as other transaction terms, at the appropriate time.
Later in the evening of December 16, 2021, representatives of Skadden sent a markup of the exclusivity agreement, which included a term sheet, to representatives of Simpson. Subsequently, representatives of Simpson contacted representatives of Skadden to discuss the exclusivity agreement and term sheet. On a telephone call, representatives of Skadden conveyed to representatives of Simpson that the term sheet reflected a number of key deal terms and were the basis upon which the Activision Blizzard Board of Directors would be willing to enter into exclusivity.
Early in the morning of December 17, 2021, representatives of Goldman Sachs called representatives of Allen & Company to discuss the exclusivity agreement and term sheet circulated by representatives of Skadden to representatives of Simpson the previous night.
Subsequently on the morning of December 17, 2021, in accordance with the Activision Blizzard Board of Directors’ directives, representatives of Allen & Company called representatives of Goldman Sachs, and representatives of Skadden called representatives of Simpson, to provide Activision Blizzard’s rationale for the positions taken in the exclusivity agreement and term sheet circulated by representatives of Skadden.
Also on the morning of December 17, 2021, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. Mr. Kotick provided an update on his communications with Messrs. Spencer and Nadella and the provision of the revised exclusivity agreement and term sheet to representatives of Simpson. Representatives of Allen & Company and Skadden provided an update on their respective follow-up communications with Goldman Sachs and Simpson regarding the exclusivity agreement and term sheet. A representative of Skadden provided an overview of the terms of the revised exclusivity agreement and term sheet to the Activision Blizzard Board of Directors. The Activision Blizzard Board of Directors also received an update on the status of the discussions with Company C, Company D and Company E. Mr. Kotick noted that he had not received at that time any communication from the chief executive officer of Company D after his discussion with the chairperson of Company D on December 16, 2021, and that Company C and Company E each had indicated that it would not be proceeding with discussions to acquire Activision Blizzard at that time. After discussions, the Activision Blizzard Board of Directors authorized management to enter into exclusive discussions with Microsoft on the basis of the $95.00 per share price proposed by Microsoft and on such additional terms as management deemed appropriate for up to a 30-day period, and directed Activision Blizzard’s management, led by Mr. Kotick, to continue negotiations with Microsoft.
Later on the morning of Friday, December 17, 2021, the chief executive officer of Company D emailed Mr. Kotick noting that Company D was keen to engage and explore a potential transaction and introducing other senior executives from Company D. Mr. Kotick responded to the chief executive officer of Company D sharing his direct telephone line in order to connect. A follow-up video conference was subsequently scheduled with such other senior executives for Monday, December 20, 2021.
Later on the morning of December 17, 2021, representatives of Simpson sent representatives of Skadden a revised exclusivity agreement and term sheet and noted Microsoft’s expectation to sign the exclusivity agreement as quickly as possible that day.
In the early afternoon on December 17, 2021, Messrs. Kotick and Spencer discussed open points in the term sheet and overall timing, with Mr. Spencer noting Microsoft’s desire to move expeditiously into exclusivity that day and the due diligence process.
From the afternoon of December 17, 2021, through the morning of December 20, 2021, representatives of Skadden and Simpson had multiple calls discussing open points with respect to the exclusivity agreement
and term sheet, focused on the parameters for a reverse termination fee and other regulatory related provisions to be included in any definitive agreement in connection with the proposed transaction.
On December 20, 2021, Messrs. Kotick and Kelly, together with a representative of Allen & Company, had a video conference with senior executives from Company D. Mr. Kotick discussed that Activision Blizzard could represent an attractive strategic combination for Company D, but explained that circumstances had changed since he first spoke with Company D’s chairperson and that it now was likely that, very shortly, Activision Blizzard would not be in a position to engage in additional discussions for some period of time. Mr. Kotick also suggested that Company D could readily perform due diligence on Activision Blizzard in the meantime based on publicly available information. The representatives of Company D expressed that Company D was not prepared to proceed expeditiously on the basis of publicly available information and implied that Company D would only be interested in relaying an indication of interest if provided with an opportunity to review confidential information. Following this call, no further discussions were held with Company D.
Also on December 20, 2021, Messrs. Kotick and Kelly exchanged telephone calls with Mr. Spencer during which they discussed open issues on the term sheet, including, among other things, the quantum of the reverse termination fee.
In the evening of December 20, 2021, representatives of Skadden and Simpson exchanged further updated drafts of the term sheet. Subsequently, in the evening of December 20, 2021, the exclusivity agreement was executed. The exclusivity agreement included a term sheet specifying the quantum and payment conditions of the reverse termination fee and other regulatory related provisions to be included in the definitive merger agreement, if executed.
On December 21, 2021, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. Mr. Morgado informed the Activision Blizzard Board of Directors that Activision Blizzard had entered into an exclusivity agreement with Microsoft on the prior evening. A representative of Skadden described to the Activision Blizzard Board of Directors the terms of the exclusivity agreement, including the non-solicitation and confidentiality restrictions contained therein, and the term sheet, including the quantum, timing and events triggering the payment of the reverse termination fee by Microsoft to Activision Blizzard. The Activision Blizzard Board of Directors discussed Microsoft’s anticipated due diligence process and next steps with respect to negotiating a potential acquisition agreement with Microsoft.
On December 27, 2021, access was provided to representatives of Microsoft and its outside advisors to a virtual data room hosting Activision Blizzard materials. Microsoft and its advisors engaged in due diligence from the period of December 27, 2021 through the execution of the merger agreement on January 18, 2022, which process included a number of videoconference meetings and telephone calls attended by members of Activision Blizzard senior management, representatives of Activision Blizzard’s outside legal, financial and accounting advisors, members of Microsoft senior management and representatives of Microsoft’s outside legal, financial and accounting advisors, as applicable, on various business, financial, tax, accounting and legal matters.
On December 29, 2021, representatives of Simpson sent an initial draft of the merger agreement to representatives of Skadden. The draft included the following key terms, including regulatory provisions, most of which were previously provided in the non-binding term sheet: (i) a requirement that Microsoft use reasonable best efforts to obtain antitrust approvals, but no obligation for Microsoft to agree to any divestures or limitations on its post-closing business that would (x) have a material adverse impact on Activision Blizzard and its subsidiaries taken as a whole or (y) (1) have a material impact on the benefits expected to be derived from the proposed merger by Microsoft or (2) have a more than immaterial impact on any business or product line of Microsoft; (ii) a termination fee payable by Activision Blizzard to Microsoft equal to 3.75% of the transaction’s equity value in the event of a termination of the merger agreement in certain circumstances, including following a change in recommendation by the Activision Blizzard Board of Directors or if Activision Blizzard enters into an alternative acquisition agreement with respect to a superior proposal; (iii) an outside termination date of 12 months from signing, subject to two automatic extensions for consecutive three-month periods if all conditions to closing are satisfied other than the
conditions regarding the receipt of regulatory approvals and the lack of any legal injunction (in connection with regulatory regimes); and (iv) a termination fee payable by Microsoft to Activision Blizzard in the event of a termination of the merger agreement as a result of a legal injunction (in connection with antitrust regimes) or the failure to obtain necessary antitrust approvals by the outside termination date (as extended) if certain conditions are met of (x) $2,000,000,000 if the termination notice is delivered during the first 12 months from signing, (y) $2,500,000,000 if the termination notice is delivered 13 to 15 months from signing and (z) $3,000,000,000 if the termination notice is delivered after 15 months from signing.
During the weeks of January 3, 2022, and January 10, 2022, Messrs. Kotick and Spencer and respective members of Activision Blizzard and Microsoft senior management, along with their respective outside legal advisors, discussed and negotiated certain key open points in the merger agreement, including the quantum of the termination fee payable by Activision Blizzard, the treatment of employee equity awards, and the scope of the interim operating covenants, as well as severance and retention matters and due diligence matters on a number of video and telephone calls.
On January 6, 2022, at the request of Activision Blizzard, representatives of Skadden sent a revised draft of the merger agreement to representatives of Simpson.
On January 7, 2022, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. Mr. Kotick provided an update on the status of the potential transaction with Microsoft, including the state of Microsoft’s due diligence, negotiation of the draft merger agreement, and contacts with representatives of Microsoft. A representative of Skadden provided an update on the status of the potential transaction from a legal perspective, including Activision Blizzard’s responses to Microsoft’s due diligence requests, Activision Blizzard’s progress in preparing and providing via a virtual data room documents responsive to due diligence requests, and due diligence calls between representatives of Activision Blizzard and Microsoft and their respective advisors.
On January 10, 2022, representatives of Simpson sent a revised draft of the merger agreement to representatives of Skadden.
On January 11, 2022, in a videoconference with representatives of Microsoft, Goldman Sachs, Allen & Company and members of Activision Blizzard senior management in attendance, Mr. Zerza discussed Activision Blizzard’s preliminary financial results for the fourth quarter and full year of 2021. These financial results were subsequently provided to Microsoft via Activision Blizzard’s data room.
On January 13, 2022, at the request of Activision Blizzard, representatives of Skadden sent a revised draft of the merger agreement to representatives of Simpson.
On January 14, 2022, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. Members of Activision Blizzard senior management presented to the Activision Blizzard Board of Directors Activision Blizzard’s financial results for the fourth quarter of 2021. Members of senior management noted that, as previously discussed with the Activision Blizzard Board of Directors, Activision Blizzard had failed to meet its revenue projections for the fourth quarter of 2021 given the underperformance of the recently launched “Call of Duty: Vanguard.” Mr. Morgado noted to the Activision Blizzard Board of Directors that Activision Blizzard’s financial results for the fourth quarter and full year of 2021 would be incorporated to update the financial forecasts as approved by the Activision Blizzard Board of Directors on December 14, 2021, and shared with Allen & Company for purposes of its financial analysis and opinion, if and when requested, in connection with the proposed transaction with Microsoft. Certain of these updated financial forecasts also were shared with Microsoft and its advisors later that day.
Allen & Company then provided the Activision Blizzard Board of Directors with an update on, among other things, recent developments in the gaming industry, including a recent publicly announced transaction in such industry and its comparison to the potential transaction with Microsoft. Prior to the meeting, the Activision Blizzard Board of Directors also was provided with certain updated information from Allen & Company regarding its material relationships with Activision Blizzard and Microsoft during the preceding two-year period, which information was consistent with the information previously provided. Representatives
of Skadden then presented on the Activision Blizzard Board of Directors’ fiduciary duties in the context of considering a change of control transaction and presented a detailed summary of the key terms of the draft merger agreement, including the structure of the proposed transaction, the consideration to be received by stockholders of Activision Blizzard of $95.00 per share in cash, the treatment of Activision Blizzard’s equity awards, certain restrictions on Activision Blizzard’s business and operations during the pendency of the transaction, proxy statement filing and stockholder meeting requirements, director and officer indemnification, Microsoft’s regulatory undertakings, the provisions restricting the solicitation of, and relating to the consideration of unsolicited, alternative acquisition proposals that would apply to Activision Blizzard and its representatives during the pendency of a transaction, the ability of the Activision Blizzard Board of Directors to change its recommendation, anticipated closing timing, closing conditions and the termination rights and fees and remedies available to Activision Blizzard and Microsoft in the event the potential transaction was not consummated, and noted remaining open points. Representatives of Skadden also presented to the Activision Blizzard Board of Directors certain regulatory considerations with respect to the potential transaction with Microsoft.
On January 14, 2022, at the request of Activision Blizzard, representatives of Skadden delivered an initial complete draft of Activision Blizzard’s confidential disclosure schedules to the merger agreement, certain sections of which had been previously provided, to representatives of Simpson.
Between January 14, 2022, and January 18, 2022, representatives of Activision Blizzard and Microsoft and their respective legal advisors had multiple conversations to resolve outstanding matters under the merger agreement and Activision Blizzard’s confidential disclosure schedules to the merger agreement and exchanged multiple drafts of the merger agreement and Activision Blizzard’s confidential disclosure schedules to the merger agreement.
On January 17, 2022, the Activision Blizzard Board of Directors held a meeting by videoconference, with members of Activision Blizzard senior management, and representatives of Allen & Company, WilmerHale and Skadden, in attendance. Representatives of Skadden reviewed the key terms of the merger agreement, including changes from the terms discussed at the meeting on January 14, 2022, noting that one remaining open issue was the amount of the 2022 dividend that could be paid by Activision Blizzard and whether Activision Blizzard would be permitted to pay a dividend in 2023 and, if so, the amount thereof. Also at this meeting, Allen & Company reviewed with the Activision Blizzard Board of Directors its financial analysis of the merger consideration, and rendered an oral opinion, confirmed by delivery of a written opinion dated January 17, 2022, to the Activision Blizzard Board of Directors to the effect that, as of such date and based on and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations on the review undertaken as set forth in such opinion, the merger consideration to be received by holders of Activision Blizzard common stock (other than, to the extent applicable, Microsoft, Sub and their respective affiliates) pursuant to the merger agreement was fair, from a financial point of view, to such holders. After discussions, including as to the matters described below under “— Recommendation of the Activision Blizzard Board of Directors; Activision Blizzard’s Reasons for the Merger,” the Activision Blizzard Board of Directors unanimously determined to delegate the final resolution of the dividend issue to an ad hoc committee of directors of the Activision Blizzard Board of Directors, consisting of Messrs. Morgado, Kelly and Corti, and (i) determined that the terms of the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of Activision Blizzard and its stockholders; (ii) declared advisable, approved and authorized in all respects the execution and delivery of the merger agreement by Activision Blizzard, the performance by Activision Blizzard of its obligations thereunder, and the consummation of the transactions contemplated thereby upon the terms and conditions set forth therein; (iii) directed that the adoption of the merger agreement be submitted to a vote at a meeting of the stockholders of Activision Blizzard; and (iv) recommended that Activision Blizzard stockholders adopt the merger agreement.
Following the approval of the merger agreement and the transactions contemplated thereby (including the merger) by the Activision Blizzard Board of Directors, Activision Blizzard and Microsoft finalized the merger agreement, including the resolution of the outstanding dividend issue, which Mr. Nadella and Mr. Kotick discussed during the evening of January 17, 2022, and the resolution of which was approved by the ad hoc committee of the Activision Blizzard Board of Directors. Early in the morning on January 18, 2022, Activision Blizzard and Microsoft executed the merger agreement, and, prior to the opening of trading on January 18, 2022, issued a joint press release announcing the execution of the merger agreement.
