The US competition watchdog is appealing against a ruling that has said Microsoft could push ahead with its $69bn (£53bn) acquisition of the Call of Duty creator Activision Blizzard to create a video gaming powerhouse.
Confirmation of the appeal is the latest twist in a complex regulatory saga that involves a trio of powerful regulators scrutinising Microsoft’s biggest-ever takeover – with differing outcomes.
In the US, the Federal Trade Commission (FTC) is seeking to block the deal while in the EU, the European Commission has cleared the transaction. In the UK, the Competition and Markets Authority has blocked the takeover but has now given Microsoft an opportunity to get it through, saying this week it will listen to new proposals that meet its concerns.
Here we examine what happens next and why it matters.
Why do regulators have problems with the deal?
Microsoft is the owner of the Xbox gaming console and Activision is a leading games developer, producing titles such as World of Warcraft and Candy Crush Saga as well as the Call of Duty franchise.
In December, the FTC said it would seek to block the deal because Microsoft could hinder competitors to Xbox by restricting access to Activision games on its cloud gaming services (where content is streamed directly to devices like mobile handsets or TVs). In April, the CMA blocked the deal on the same grounds, despite Microsoft offering compromises including licensing Call of Duty to Sony, the maker of the industry-leading PlayStation console, for 10 years. The EU, however, has accepted Microsoft’s compromises on cloud gaming and has waved through the deal.
What happens next in the UK?
After a US court denied the FTC an injunction on the deal on Tuesday – saying the watchdog’s arguments against the takeover were unlikely to succeed – the CMA took the unusual step on Tuesday of saying the UK regulator was ready to discuss any fresh Microsoft proposal to get the deal through. The company said it had agreed to postpone an appeal against the original CMA decision in order to work on the compromise proposals.
The regulator issued a further statement on Wednesday, however, saying the deal would need to be restructured in order to get past its concerns. The CMA said: “They can choose to restructure a deal, which can lead to a new merger investigation.”
Stavroula Vryna, a partner at UK law firm Clifford Chance, says the CMA appears to be insisting on Microsoft carving something out of the deal. This could be offered along with the initial “behavioural” compromise – licensing Call of Duty over 10 years – offered by Microsoft previously.
“Reading the tea leaves of the CMA’s public statements on Wednesday, the CMA may be insisting on a divestment. A divestment could come instead of, or in combination with, Microsoft’s previously proposed behavioural remedy,” says Vyrna.
Alex Haffner, a partner at London-based law firm Fladgate, says the CMA is on the “back foot” because the EU has passed the deal and Microsoft’s chances of succeeding in the US have been enhanced by Tuesday’s court ruling. This could embolden the company to water down its compromise proposals to the CMA, he adds.
“The merging parties will clearly not feel they necessarily need to go as far as they otherwise might have,” says Haffner.
Nonetheless, if the CMA is looking for a divestment, and its concerns centre on games being blocked from other platforms, Microsoft may have to offer to sell some Activision titles. The company has said previously it will not sell Call of Duty – but it may now have to think the unthinkable.
What happens next in the US?
Rebecca Allensworth, a professor in antitrust law at Vanderbilt University in the US, says the CMA situation could delay the US process, which appears to be tilted towards Microsoft’s favour after a US federal court denied the FTC’s injunction attempt.
While the appeal is pending Microsoft and Activision may try to complete the deal, before a self-imposed deadline of 18 July (the FTC cannot order them to stop, hence the need for an injunction) although that seems unlikely, meaning they are likely to agree an extension. Under the terms of the deal, Microsoft must pay Activision a $3bn break fee if the transaction fails to compete by 18 July
There is another potential regulatory obstacle in the US. An FTC trial, presided over by an in-house judge, will be taking place from 2 August. Experts predict a twist in that process too,. If the regulator’s argument that the deal should be blocked is upheld, Allensworth expects it to be overturned in a federal court given the decision on the injunction.
She says: “Given the FTC seems to be working with some novel theories, is pushing the envelope somewhat and in the context of the federal court injunction decision, it means that if the FTC’s own judge tries to block the deal, it is likely the federal court will reverse that decision and allow the parties to merge in the end.”
Allensworth adds that any CMA-prompted alteration in the deal will probably be taken in the FTC and courts’ stride, and probably will not result in the deal being submitted for a fresh investigation.
Could the deal be closed in the US despite CMA objections?
If it is unlikely that the 18 July deadline will be met, Microsoft and Activision could agree an extension and attempt to close it in the US, although the FTC in-house hearing is looming.
Tom Smith, a partner at UK law firm Geradin, says Microsoft could go ahead with closing the US deal – and effectively carve out the UK business from the deal – while it awaits the outcome of a new UK investigation. “It is possible they [the CMA] could let Microsoft close the transaction and hold the two parties separate so that the CMA can still block it if they need to,” he told BBC Radio 4’s Today programme.
But that would be a messy scenario, particularly if it resulted in Microsoft quitting such an important gaming market. Anne Witt, a professor of antitrust law at EDHEC business school in France, says the entire situation is unique.
“The situation is highly unusual. I am not aware of anything like it having happened before,” she says.