Microsoft’s
proposed $69 billion acquisition of
Activision Blizzard
has divided international regulators, which is not good news for U.S. companies keen on M&A.
The split complicates the prospects for future deals and has the potential of curbing value-adding acquisitions for some of the world’s biggest technology companies.
This was triggered by the European Union’s approval of the Microsoft deal on Monday, which clashed with a prior rejection by the U.K.’s antitrust body.
How did this happen?
Since the U.K. left the European Union its Competition and Markets Authority now acts as an independent regulator on large mergers. British lawmakers are currently debating legislation that would hand it more power to scrutinize big tech companies.
While European lawmakers have been vocal critics of big U.S. technology companies in the past, this week’s split suggests a shift that could see Britain replace the EU as the one of the world’s toughest enforcers and the one to win over in terms of future megamergers.
There are lessons to be learned from the
Microsoft
(ticker: MSFT)-
Activision
(ATVI) deal that could help companies such as
Apple
(AAPL),
Amazon
(AMZN),
Alphabet
(GOOGL), and
Meta
(META) clear future hurdles.
What’s the issue with the Microsoft-Activision deal?
The deal would hand Microsoft significant power in the nascent cloud-gaming business. Cloud-gaming allows users to stream videogames via a variety of devices and could eventually replace consoles and gaming computers.
Controlling Activision’s content could give Microsoft a powerful advantage in attracting users to its cloud-gaming service, potentially hurting rivals such as
Sony
(SONY) and Nintendo (7974.Japan).
Microsoft sought to offset concerns by offering a series of 10-year licensing agreements that would ensure European consumers could play all current and future Activision games on any cloud-gaming service of their choice. The U.K.’s Competition and Markets Authority rejected similar proposals in late April and, as we now know, EU regulators approved the deal on May 15.
Why did regulators disagree?
The EU’s stance is that by slapping conditions on the Microsoft-Activision deal now, it can set ground rules around the cloud-gaming sector and open up the market. It said the commitments would represent an improvement, as Activision doesn’t currently license its games to cloud-based game-streaming services.
What’s key to note here is this suggests the EU favors ‘behavioral remedies’ when it comes to mergers between big technology companies—extracting commitments that the merged business won’t engage in anticompetitive behavior. It could also hint that the EU hopes an accommodating environment for mergers will stimulate Europe’s own tech industry.
“The commitments will unlock significant benefits for competition and consumers, by bringing Activision’s games to new platforms, including smaller EU players,” the European Commission statement said.
While the EU appears to have focused on the immediate effects on the merger, the U.K.’s CMA took a skeptical line over how well behavioral remedies would hold up in the longer term. That’s a crucial difference of opinion.
In the CMA’s own decision, it said the proposed licensing agreements left a “significant risk” that Microsoft would end up in conflict with cloud-gaming rivals and highlighted the difficulties of enforcing the proposals.
“We don’t really know where [cloud gaming] is going to go and depending upon how you want to define it, you could be including everything from just how the tech works to the content and infrastructure around it. That can potentially lead to quite different interpretations,” George Osborn, director of policy communications at consultancy firm Taso Advisory, told Barron’s.
Blocking the deal entirely indicates U.K. regulators going forward could rely more on ‘structural remedies,’ which include measures such as forcing companies to break themselves up or sell parts of their business to address antitrust concerns. That’s not good news for Big Tech.
What happens next?
In the U.S., the Federal Trade Commission (FTC) has already sued Microsoft in an attempt to block the deal. A hearing on the case is due to take place in early August but the outcome of the U.S. lawsuit is likely to be heavily conditioned by events in the U.K.
Thomas Smale, CEO of M&A advisory firm FE International, said that although the FTC operates independently and its decisions are not directly bound by those of other countries, it often takes international precedents and trends into account. “Therefore, the UK’s approach to vertical mergers in the gaming industry might be a factor that informs the FTC’s perspective or discussions on similar matters,” he said.
Microsoft and Activision Blizzard are expected to appeal the U.K. decision in a British court. While the EU ruling could provide some marginal support for their case, it will be a stiff test—with the U.K.’s CMA having a strong historical record of prevailing against appeals. Analysts at Raymond James this week put the chances of a successful deal at just 10% to15%.
A more radical alternative put forward by analysts at Macquarie Research would be for Microsoft to close the deal anyway and look to bypass British objections by not offering Activision content on any cloud-gaming services in the U.K, including its own.
“[That] would result in a legal battle with the CMA but one we think worth fighting as it is precedent-setting for an acquisitive company to allow one country to block a $75 billion deal,” the Macquarie analysts wrote.
Were Microsoft to take on such a battle and win, it could have a meaningful implication for its peers and beyond. While it would rile the U.K. regulator, it could also neuter its impact on the global regulatory stage.
Should Microsoft leave the CMA decision unchallenged, it could embolden regulators far and wide that have previously left most decisions to bigger peers.
Write to Adam Clark at [email protected]
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