Xbox maker Microsoft announced Tuesday a $68.7 billion cash purchase of "Call of Duty" maker Activision Blizzard. The largest gaming deal in history is being called the tech giant's move towards a virtual future. 

The deal represents the American multinational's bet on the "metaverse," the virtual online worlds where people can work, play and socialize, as many of its biggest competitors are already doing so.

"Gaming is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms," Microsoft chief executive Satya Nadella said.

It will also bolster Microsoft's firepower in the booming video gaming market where Tencent and Sony take the lead. 

Microsoft, one of the biggest companies in the world, largely thanks to corporate software such as its Azure cloud computing platform and Outlook franchise, is offering $95 per share – a 45 percent premium to Activision's Friday close.

Activision's shares were last up 26 percent at $82.10, still a steep discount to the offer price, reflecting concerns the deal could get stuck in regulators' crosshairs.

Reuters reports that a source familiar with the matter said Microsoft would pay a $3 billion break-fee if the deal falls through, suggesting it is confident of winning antitrust approval.

According to Refinitiv data, the Microsoft-Activision deal would be the largest all-cash acquisition on record, trumping Bayer's $63.9 billion offer for Monsanto in 2016 and the $60.4 billion that InBev bid for Anheuser-Busch in 2008.

The tech major's shares were last down 1.9 percent.

Zhou Wei, the founding partner of CCV, expects that the deal will get a "smooth" approval by the regulatory arm.

Microsoft will acquire a lot of IP from Activision by this purchase, which will help in developing more complex games in the future, he added.

The deal comes at a time of weakness for Activision, maker of games such as "Overwatch" and "Candy Crush." Before the deal was announced, its shares had slumped more than 37 percent since reaching a record high last year, hit by allegations of sexual harassment of employees and misconduct by several top managers.

The company is still addressing those allegations and said on Monday it had fired or pushed out more than three dozen employees and disciplined another 40 since July.

Activision CEO Bobby Kotick would continue as CEO of Activision following the deal, but added that "the Activision Blizzard business will report to Phil Spencer, CEO, Microsoft Gaming" once the takeover is complete, according to the acquisition announcement. 

However, Reuters reports that Kotick is expected to step down once the deal is closed, citing source familiar with the plans. 

In a conference call with analysts, Microsoft boss Nadella did not directly refer to the scandal but talked about the importance of culture in the company.

"It's critical for Activision Blizzard to drive forward on its renewed cultural commitments," he said, adding "the success of this acquisition will depend on it."

The race in metaverse

Tech companies from Microsoft to Nvidia have placed big bets on the so-called metaverse, with the buzz around it intensifying late last year after Facebook renamed itself as Meta Platforms to reflect its focus on its virtual reality business.

While Microsoft already has a significant beachhead in the sector as one of the big three console makers, it has been making investments including buying "Minecraft" maker Mojang Studios and Zenimax in multibillion-dollar deals in recent years.

It has also launched a popular cloud gaming service, which has more than 25 million subscribers.

Executives talked up Activision's 400 million monthly active users as one major attraction to the deal and how vital these communities could play in Microsoft's various metaverse plays.

Activision's library of games, could give Microsoft's Xbox gaming platform an edge over Sony's Playstation, which has for years enjoyed a more steady stream of exclusive games.

Data analytics firm Newzoo estimates the global gaming market generated $180.3 billion of revenues in 2021, and expects that to grow to $218.8 billion by 2024.

According to Newzoo, Microsoft's gaming market share was 6.5 percent in 2020 and adding Activision would have taken it to 10.7 percent.

"This is a significant deal for the consumer side of the business and more importantly, Microsoft acquiring Activision really starts the metaverse arms race," David Wagner, equity analyst and portfolio manager at Aptus Capital Advisors said.

"We believe the deal will get done," he said, but cautioned, "This will get a lot of looks from a regulatory standpoint."

(With input from Reuters)