On Sunday afternoon, following the news of the Vivendi-Activision merger, we spoke with several of the key players in the $18.9 billion venture. On the phone with us were Vivendi CEO Jean-Bernard Levy, Activision CEO Bobby Kotick, Blizzard CEO Mike Morhaime, Vivendi Games chairman René Penisson, and Activision CFO Thomas Tippl. We asked them to tell us when the talks began, why they thought this would be a good fit, and why governance goes to Vivendi and operational control to Activision. Here's what they had to say:

René Pennison: Hello, N'Gai

Bonjour, Jean-Bernard. Ca va bien? [Hello, Jean-Bernard. Are things going well?]

Jean-Bernard Levy: Looks like French is…[Drowned out by everyone's laughter.]

If only I spoke it well enough to conduct the interview in French. It's a bit rusty, but with ten years of learning French in Canada, it's not bad.

Levy: Where are you from?

I'm from Vancouver.

Levy: Oh, really. That's a big French-speaking community?

Pas vraiment, mais comme j'ai dit, j'ai étudié le francais en école pendant dix années…[Not really, but like I said, I studied French for ten years in school…]

Ah, formidable.

Merci beaucoup. The first question is, when and how did the talks begin between Vivendi and Activision?

Bobby Kotick: So I would say about a year ago, I got together with Bruce Hack who is the CEO of Vivendi Games to see if there was anything we might do together. About a month later, Jean-Bernard and Rene came to Santa Monica and we had a talk. Mike [Morhaime] and the Blizzard guys, as you can imagine, I've known for about 15 years or so. We started talking in January, and it was apparent pretty quickly that we had a great chemistry; that this business combination made a lot of sense and it really then became the mechanics, how you manage the opportunity. But it started earlier in the year.

You said "chemistry." What were the areas of commonality? What made you think that this would be a good cultural fit?

Kotick: There's so many places.

Levy: Before you talk about the chemistry, you first want to know whether it makes sense from a business perspective, and then you try to build the chemistry. From a business perspective, we saw that the assets are so complimentary. They make a perfect fit. The strength of Activision, who is the leading console publisher in the U.S.; the strength of Vivendi Games and Blizzard in the online business and the well-balanced customer base all through Asia and Europe and the U.S. meant that really we could take the new company to the highest level, because it had superior assets in several areas. Then we built also the chemistry little by little. These are things where you have to be patient, and it took us a little while to make sure that everyone would like the idea of the combination, that the key talent would be motivated, and this we have achieved very well as we have been making progress towards signing.

We built all this over the summer and the fall, and we are very happy now to have in place everything that will make it successful, because the strategy benefit is very obvious, and then there is a personal chemistry between everybody. As a shareholder of Activision Blizzard, with a lot of money at stake, I can say I'm giving all my trust to Bobby and his team to be able to do the integration and to motivate everybody to make it work. I can say that all the reactions I get are so positive about it that I'm really thrilled. So it's been great. We like very much this transaction. We believe it's a great opportunity for us, and we're demonstrating our commitment by investing some cash in the transaction—quite a significant amount—with the view to become the long-term majority stockholder in what we have created, which is the largest and most profitable pure-play company in that sector.

Who is the stronger publisher of the two in Europe, and what are your plans for Europe going forward on the publishing front?

Kotick: One of the reasons why it's such a complementary transaction, we have greater market share on the consoles in Europe, but Blizzard has leading market share in PC and online in every geography, not just the U.S. This is something that was an extraordinary opportunity for us. If you look at the success that Blizzard has had in Korea, in China, those are places where we have not really participated at all. Being able to now have under one roof all of the talent, all of the expertise, all of the capability to explore how together we can capitalize on these geographies like Korea and China will be very valuable going forward.

Back to your question about what are some of the things that really motivated us towards a transaction; we have a real commitment to quality. It's one of the paramount values of our company. Blizzard shares that. Just reading the emails from our studio heads, you could see that—they learned of this for the first time this morning—that they would rather have been paired with Blizzard than any other company in the videogame business because they view Blizzard as the imprimatur of quality in interactive entertainment. So that made the chemistry easy.

When we were sitting in the management presentations at Blizzard and listening to the way they describe how they think about their business, it was like sitting in our own management presentations. We really felt that we had the shared value and the commitment to quality in the way that you reward and recognize the people who are responsible for making the products, in the way you strategically think about the evolution of the business, and the same was true at the Vivendi corporate level. Jean-Bernard and Rene had a very similar view of the best way to create returns on capital, at the same time figuring out how to really value the creative component of the business and the people who are responsible for the development of the products. So from that standpoint it was very easy culturally for us to figure out how to make the transaction work.

Then, when you think about the long term, we were very focused on how you build our franchises to have value that's sustainable over the long term—that's the same strategy that Blizzard has employed. You look at how complementary products like Guitar Hero and Call of Duty are, we appeal to different audiences, different consumers, but with that same commitment to quality.

If I'm not mistaken, World of Warcraft is published through The 9 in China [in which Electronic Arts holds a 19 percent stake]. Is that something that's going to continue in the immediate future, or is that something you're going to look to bring in-house?

Michael Morhaime: This doesn't really affect our relationship with The 9. The 9 is our partner in China, like you said. We also have a partner in Taiwan, a company called Softworld; it doesn't affect that relationship either. In Korea, we operate directly; we have a Blizzard Korea office with over 200 employees. We remain very interested and excited about the future of all of the Asian markets.

Mike, in Vivendi, you were a big fish in a sizable pond, but now you're a big fish in a really big pond. Given how responsible Blizzard has been for the success of Vivendi as a whole, how convinced are you that you can maintain the high quality you've been known for when…it's kind of like A-Rod going to the Yankees, he's still A-Rod, but now there's Derek Jeter and all these other stars around him getting attention.

Morhaime: Just to go and rephrase your question: we were a big fish in the Vivendi Games pond, but certainly not the Vivendi pond.

Kotick: In fact, that was one of the big benefits of this transaction. In a company the size of Vivendi, it was very hard to get credit for the value of Blizzard. But as a part of our combined Activision Blizzard, it's going to be a lot easier for them to get credit. So in a lot of ways, I think it's the reverse, N'Gai. I think that now what's happened is that they've become a big fish in a smaller pond.

This is a company that's going to generate $500 million of operating income this year. They're a big fish from two perspectives. One, from a financial perspective, but more importantly, probably, for our company, from a creative perspective. They are generally regarded as one of the best development studio publisher businesses in all of videogames.

Morhaime: Just to add to what Bobby said, from a Blizzard perspective and also from a Vivendi perspective, the structure of this deal really helps to unlock the value that is trapped within Vivendi games and Blizzard. Because as such a small part of Vivendi, I don't think the investors really were looking very closely at what was going within the Blizzard Entertainment business. This gives more visibility to that, and also gives people a direct way to invest in the games business that we're a part of.

Bobby, you've resisted getting into MMOs for years now. Every time I've asked you about it, you've said that the rewards didn't outweigh the risks as far as Activision is concerned. Following the merger, will World of Warcraft stand alone as Activision Blizzard's sole MMO, or will the combined company seek to turn other franchises into MMOs, like World of Diablo, World of Guitar Hero, or World of Duty?

[Everyone laughs.]

Kotick: The reason that I've always told you that is that we didn't really feel that we could compete against Blizzard. That was the risk part. They just do this so well. We're hoping that we'll figure out ways over the long term to tap into all of that institutional knowledge. But no, these companies are going to operate the way that they do today. Blizzard is going to be its own self-contained company continuing to do what it does as a part of the combined enterprise. If there's an opportunity for us to figure out how to commercialize our franchises online, you can't ask for a better group of people to bounce ideas off of than Mike and his partners.

How was it determined that Vivendi would own 52 percent of the combined entity?

Levy: Together with Rene, when we thought about that transaction, and the discussions we had with Bobby and with Brian, we all thought we needed to achieve two goals. One was for Vivendi—we felt it was part of our strategy—to have majority control of our assets. And at the same time, there was a need, as there was going to be a change of control for Activision, to provide the Activision shareholders with an exit opportunity at a premium. This is what we have achieved with this structure. Whatever happens, Vivendi will have as a minimum 52 percent of the equity. And whatever happens, the Activision shareholders with an exit opportunity at a 30 percent premium. This is the way we looked at it, and this is a bit of an innovative structure, we're happy to put it in place, and at the end of the day it's pretty simple. It has two steps: one at closing and then the tender offer a few days after closing. Maybe Thomas, you want to--

Thomas Tippl: From an Activision shareholder point of view, I would say the brilliance of the structure is that if you believe in the power of this new combination, you can hold on to your shares, you don't have to tender and you can participate in the growth opportunities that Jean-Bernard and Bobby and Mike have described. So you get the best of both worlds; you can make your own choice whether you want to come along for what is going to be a fantastic ride, or whether you want to cash out a thirty percent premium.

Got it. From what I've read in the press release, the governance is controlled by Vivendi, with six of the eleven seats on the board of directors, while Activision has the lead operational control. Is that a reflection on the relative number of hit franchises that Activision has generated versus Vivendi Games, or is it something else?

Levy: I will answer for Vivendi first. The governance is that of a controlled listed company. There are three independent directors; they have specific duties with respect to the protection of the minority shareholders. We know that, and we will be very respectful of that. It's not so difficult for us because we are a decentralized company; we don't want to interfere with the operations of the company, and we know how to abide by those rules.

In terms of the operations of Activision Blizzard, Bobby has been taking Activision from very, very small, quite a while ago now, to very, very big and successful after more than 15 years. Bobby brings with him such experience, such a great team, that giving him the position of CEO has been quite an obvious decision, but with the caveat that we have made sure that the Vivendi Games team and the Blizzard team will be involved at the highest level, and I think this is reflected by the management structure that has been put in place.

Kotick: I think one of the things that made this an easy transaction to enter into, N'Gai, is that we've always had a culture of partnership. If you look at who our partners have been in the past, we've always managed to figure out how to work well with people who have a commitment to excellence and a passion for excellence, and that carries though in the way that this company is organized. We're sitting here with a group of people who I think share that vision for a culture of partnership. We're looking forward to being able to work with the folks at Blizzard who have established standards for excellence that I think we all aspire to. And so it made it a very easy decision for us to do this.

What should your friends to the North at Electronic Arts take away from this deal? What should they be concerned about?

Kotick: Well, we're now the largest, most profitable pure play videogame publisher in the world. We have the highest margins; twice the operating margins of our next nearest competitor. But look, competition is great for this industry. This combination will hopefully elevate the bar for everybody in terms of product quality, because I think the most important message that can come out of what we've done is that we have a collective commitment to quality. But they're a terrific competitor, and I think what you're likely to see is a greater consumer experience over time in our products, and a greater consumer experiences that you'll likely see from Electronic Arts.