Microsoft Prepares to Close Activision Deal Despite FTC Lawsuit: Sources

Technique

April 25, 2023 | 3:13 p.m


Microsoft plans to complete its $69 billion acquisition of Activision Blizzard — despite a move by the Federal Trade Commission in December to block the deal over antitrust concerns, The Post has learned.

Microsoft is bullish about securing UK approval for its acquisition — which FTC chairwoman Lena Khan has attacked as an unfair mega-merger that would stifle competition across the video game sector — this week, according to sources close to the tech giant.

That’s because UK and EU antitrust regulators in recent weeks have made surprising progress toward approving a merger — dented by Microsoft’s pledges to give competitors including Sony and Nintendo access to the blockbuster “Call of Duty” video game franchise, sources said. .

The source close to the situation said that while approval from the UK’s Competition and Markets Authority is expected this week, Microsoft is hopeful that final approval will come from the European Commission next month.

That, in turn, could make the FTC’s challenge — which on December 8 filed a complaint to stop the deal with an FTC administrative law judge — an uphill battle, according to antitrust experts.

“They’re going to shove this up the FTC’s neck,” said a source close to the situation.

If it gets European approvals, Microsoft’s plan is to quickly close its merger with the “Call of Duty” maker at $95 a share, the source said.

If it gets European approvals, Microsoft’s plan is to quickly close its merger with the “Call of Duty” maker at $95 a share, the source said.
AP

On Tuesday afternoon, Activision was trading at $85.63. A trader said the shares would likely rise to around $95 if Microsoft closes the merger and fall to around $75 if Microsoft abandons the deal.

It is usually easier to win a merger prevention case by going to an internal judge in the Federal Trade Commission than in the US District Court. But an FTC judge can’t issue a preliminary injunction to prevent the deal from closing.

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This was not seen as a major issue at the time because Microsoft had not received approvals from the UK or the European Union. However, Microsoft made concessions that made the UK’s Competition and Markets Authority (CMA) more comfortable with the controversial merger.

“The CMA has been the strictest regulator over the past several years when it comes to tech deals,” said the source close to the situation.

Microsoft, which owns the Xbox game console, has been working to win CMA approval by agreeing in recent weeks to give companies like Ubitus and Boosteroid access to Activision games on its cloud-based video game streaming services for 10 years.

The FTC claims that Microsoft being a major console maker with Xbox and owning Activision will have significant market power.
Reuters

It also signed a deal with Nintendo, which currently does not have access to “Call of Duty”.

A major concern for regulators was that Microsoft would keep Activision games on Microsoft’s “Game Pass” subscription-only service, hurting competitors who were trying to launch their own cloud gaming services.

The CMA said earlier this month that it is only concerned with competition issues in the cloud and is no longer concerned about Microsoft dominating the console market as it competes with Sony PlayStation.

Microsoft CEO Brad Smith has said publicly that Khan’s Federal Trade Commission doesn’t even want to discuss these types of franchises.

The FTC can still apply for a temporary injunction from a US federal court to stop the merger shutdown, but obtaining that ruling is not a sure thing, said an antitrust source in D.C. who is not on either side of the case.

“By law, the FTC only needs to raise serious, dubious questions about the merger to get an injunction,” the source said. “But in practice, the judge evaluates the merits of the case.”

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“If Microsoft makes a deal with the British and the EU, they can say their antitrust concerns are resolved, and if you’re a judge, that’s not a useful fact for the FTC.”

Federal Trade Commission Chair Lena Khan
Reuters

“The FTC will be on its own and make it much more difficult for them to get court approval of any decision,” Herbert Hovenkamp, ​​a University of Pennsylvania professor and antitrust expert, told The Post.

Legal experts have said for months that they think the FTC’s complaint will indeed be hard to win.

The FTC claims that Microsoft being a major console maker with Xbox and owning Activision will have significant market power.

It “confirms that a Microsoft-Activision transaction would” create[e] “It is a combined company with the ability and increased incentive to withhold valuable Activision gaming content from, or dilute Activision content to, Microsoft competitors,” Arnold & Porter, the law firm pursuing the case, said in a note to clients.

The FTC reports that 10 of the top 15 console games sold between 2010-2019 were Call of duty games, and the latest game in the franchise—Modern Warfare II, which was released in 2022 — generated $1 billion in sales in the first 10 days of its release. “

A major concern for regulators was that Microsoft would keep Activision games on Microsoft’s “Game Pass” subscription-only service, hurting competitors who were trying to launch their own cloud gaming services.
Corbis via Getty Images

But, Arnold & Porter also points out that Microsoft says it’s only the third largest console brand and has no involvement in mobile games.

“The proposed acquisition of Microsoft is a customer’s purchase of a significant resource — a vertical acquisition — and vertical cases are usually difficult for antitrust regulators to bring in. The antitrust department’s failed attempts to block AT&T’s acquisition of Time Warner and United Health’s acquisition of Change Healthcare,” Arnold and Porter say. are recent cases in this regard.

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The source close to the situation said that if a federal judge rules against a temporary injunction it will make it harder for the FTC to win in its home court.

Sources said Khan hoped to block the deal without having to win in court.

The Federal Trade Commission got a relatively late hearing date when it filed a complaint to stop the merger in its internal court. The hearing is now scheduled for August 2, several weeks after the deadline for the July 18 merger with Microsoft’s Activision expired.

Internal FTC hearings typically take more than a year to conclude.

The belief was, sources said, that after July 18 Activision would walk away from the deal to collect a $3 billion termination fee. This would make the core merger issue moot because there would be no merger being blocked anymore.

“The FTC was trying to finish the deal with the process,” said the source close to the situation, explaining that the delays helped the regulator.

The antitrust source said the safe move now for Khan was to stay the course and not seek a federal court injunction if the CMA and EU agreed to the merger.

Then negotiate the best settlement you can get from Microsoft along the lines of European deals.

Or continue to pursue the case in its home court in the hope of winning and overturning the merger, even though that may take more than a year.

“In my opinion, this is the smart play,” said the antitrust source.





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