How Wall Street Reacts to Its Biggest Scandals
On Jan. 18, Microsoft announced that it will be making its biggest acquisition yet. For $75 billion, Microsoft looks to acquire Activision Blizzard, a huge leader in video game development, making this the biggest cash-fundended takeover since the start of the pandemic. This deal will make Microsoft the world's third-largest gaming company and will allow them to move forward in the rollout of Game Pass, Microsoft's video game subscription streaming platform aimed at being "the Netflix for gaming." Activision has some of the biggest intellectual properties in gaming such as Call of Duty, Guitar Hero, and World of WarCraft. Microsoft had previously approached Activision regarding a sale but the CEO of Activision, Bobby Kodak, had not been interested in selling. But in November 2021, things changed.
Reports came out documenting allegations that long-time CEO of Activision, Bobby Kodak, was aware of sexual misconduct allegations within the organization but had failed to report them to the company’s board of directors. For years, Kodak had known of sexual harrasment within Activision and instead of informing the board, he settled out of court when Activision was faced with the charges. Following reports in the news, Activision's stock fell and Microsoft saw its opportunity. They approached Activision a second time regarding a sale and Activison was receptive. Although the board of directors supported Kodak regarding the allegations publicly, privately, some were worried about Kodak's leadership ability. With backlash from the board and many of Activision’s shareholders, selling the company seemed to provide a solution.
This is not the first time a company decided to sell itself to repair the damage in wake of it’s misconduct. Most notably, after investing in the subprime mortgage market starting in 2003, Bear Stearns misled its investors about the financial state of the firm’s two largest hedge funds and their exposure to subprime mortgage-backed securities. The business collapsed as more people could not meet their mortgage obligations and was bought by JP Morgan on March 16, 2008. Jamie Dimon, the CEO of JP Morgan Chase, would later regret the decision, as it cost several billion to close out failing trades and settle litigation against Bear Stearns.
Another example of scandalous activity resulting in a buyout is the case of WorldCom, a telecommunications company that used accounting methods to boost the stock price - the scandal is the largest accounting fraud to this day. When the tech boom went bust and companies stopped spending as much on telecom services and equipment, WorldCom used accounting tricks to appear as if they had increasing profitability. Bernie Ebbers,then-CEO of WorldCom, had borrowed $408 million from Bank of America to cover margin calls, using his WorldCom shares as collateral. Ebbers,forced to step down as CEO, was later convicted of securities fraud and sentenced to 25 years in prison. After emerging from bankruptcy and rebranding as MCI, Versizon bought its assets in 2004.
There are many other ways in which misconduct has shaped the future of organizations and impacted market trajectory. In 2010, there were 14 confirmed suicides at giant consumer electronics company, Foxconn. This drew attention to the poor labor conditions of the factory, the long hours required, and the little food that employees received. This scandal threatened to tarnish the reputations of some of Foxconn's largest US customers, including Apple and Hewlett-Packard.
Although an organization's financial stability, ability to grow, and captured market share are all key factors in determining a company's success, many of those may fly by the wayside in light of its leaders' decisions to misbehave.
Picture Caption: Activision's recent acquisition by Microsoft raises questions to its renewed receptivity
Picture Credit: Pixabay