The UK part of the Microsoft-ActivisionBlizzard merger process is standing at a crossroads (click on the image to enlarge):
There has been news in recent days concerning each of the three ways forward:
The President of the Competition Appeal Tribunal (CATribunal or just CAT) of the United Kingdom, Mr Justice Marcus Smith, conducted an initial case management conference on Tuesday.
The possibility of Microsoft and Activision Blizzard closing the deal over the Competition & Market Authority's objection was already recommended last month by Macquarie, one of the world's largest investment banks. On Thursday, MLex reported that Microsoft has an external legal team (or a team of teams) analyzing strategies for consummating the transaction despite the CMA block. The short term for that option is "closing over [the CMA]".
On Friday, Bloomberg also obtained confirmation of "closing over" being contemplated, but what's more important, Microsoft's president will meet with the UK's Chancellor of the Exchequer and CMA officials next week:
Microsoft President Brad Smith meets UK Chancellor Jeremy Hunt next week to vent his frustration at Britain's veto of the $69 billion takeover of Activision https://t.co/X5cHqct0y6
— Bloomberg UK (@BloombergUK) June 2, 2023In a CNN interview on Wednesday, Mr. Smith said Microsoft was "determined" to make the acquisition work, and focused on finding solutions. To me that means the deal will go through, but it should go through on the most positive basis.
The current merger agreement expires on July 18. That's only about six weeks from now. The parties couldn't appear more committed to this transaction, but at some point there must be closure. As a litigation watcher, I'd love the parties to take the left turn (CAT) or to "close over" (which would--as Bloomberg also notes--almost inevitably give rise to even more, and more protracted, litigation). The "ABK" (for Activision Blizzard King) topic has grown my Twitter follower base from 13K to 23K in only a few months, and growth has recently even accelerated. But as an app maker and as a consumer, I keep my fingers crossed for the high-level talks in London that will hopefully yield a good result for everyone other than those opposing the deal for anticompetitive reasons.
Let's take a quick look at the three options and relevant new developments:
Amicable resolution
The two key benefits of a settlement of the pending appeal would be (a) that resources would be freed up immediately for other things and (b) that there wouldn't be a winner and a loser. The only question would be how all stakeholders--including (but not limited to) consumers, cloud-streaming companies, and app developers--would benefit.
If a positive outcome was achieved, who would even care about whether the CMA or the European Commission or anyone else was right about market definition and different companies' market shares? All those questions would become merely academic.
What I've been observing on Twitter is that the EC is now very popular among gamers. When I mentioned that the deal was a case for unconditional clearance and that I preferred the Brazilian and Chilean decisions, someone responded:
The minority of consumers who celebrated the CMA block don't actually fear that the acquisition would result in less competition. They are "console warriors" who'd like Microsoft's Xbox to disappear without even thinking about how the removal of that competitive constraint would affect Sony's pricing and product decisions.
The CMA's competition concern is narrow. It's all about how Microsoft might leverage ABK's games, particularly Call of Duty, to strengthen its cloud gaming service (xCloud). Into that sole remaining theory of harm, the CMA imported its previously withdrawn ones (a conglomerate theory involving Azure, Windows, and the Xbox, as well as its console gaming services ToH by arguing that some cloud-gaming business models may not be compatible with a Bring Your Own Game approach).
I just can't see why it shouldn't be possible for the CMA and Microsoft--even more so with the most powerful minister of the current UK government moderating the talks--to figure out a win-win-win-win-win for the agency, the merging parties, gamers, cloud streaming companies, and game makers.
The EU remedies are a natural starting point. While I believe those already go beyond what can be reasonably expected and feel that the outcome shouldn't make the EU result appear grossly suboptimal, the CMA and Microsoft may come up with something that complements them and will benefit stakeholders. Obviously that part is in the eye of the beholder. If you ask me as an app maker, I'd ask Microsoft for a firm commitment to creating a universal mobile app store as soon as possible in a relevant jurisdiction (here, the UK, where a digital markets law named DMCC Bill--crafted largely by the CMA's current CEO--may be passed into law in the near term). I was not only disappointed that the CMA's final Microsoft-ABK report discounted the procompetitive potential of such an app store but even bewildered, given that the CMA--even on the very same day--published a document that linked the DMCC Bill to the merger ruling. If there is any connection, it's that particular procompetitive justification.
That is just one example. It's really up to the parties to work it out. A constructive solution will also go a long way toward reassuring investors of the UK not being a jurisdiction in which regulatory excess gets in the way of business. For instance, on Friday, SharePrices.com published an Alliance News article on analysts describing the UK as "less accomodating" for big business, and the negative impact that perception has on UK company valuations. On Monday, an opinion piece in the Financial Times warned that the CMA "risks undermining business dynamism" and argued that it was time for an independent review of the direction in which the CMA has been drifting over time.
Appellate Proceedings
Mr Justice Smith keeps pressing ahead. Since the Tuesday hearing, the court has shortened the time (as discussed there) for interventions (PDF). As a result, only those petitions for intervention that were filed before close of business on Friday will be considered. And the panel is now complete, with Professor Anthony Neuberger and the court's chairman Ben Tidswell joining Mr Justice Smith. I commented on the addition of those two high-profile members on Twitter.
The next case management conference will be held on Monday, June 12. I didn't like the CMA's attempt to slow-roll the proceedings, which even runs counter to the current UK government's strategic steer that urges the CMA to resolve matters expeditiously in the interest of the economy. I hope they'll do better on June 12. The CMA's outside counsel, Rob Williams KC, found it extremely difficult to come up with excuses for delay. As a result, he stuttered a lot. I mentioned that fact in my live Twitter coverage because I want my audience there to hear not only what happens in strictly formal terms but also get some "color." Obviously, that wasn't meant to denigrate him as a person, and when the focus shifts from case management to the actual issues, he may perform a lot better. I'd rather not underestimate him, but can't see how the CMA could realistically avoid that its decision will be quashed--except if the matter never comes to judgment.
Closing over
According to the MLex story I mentioned, which was corroborated by Bloomberg, the options that are being contemplated to close the deal despite the UK situation include, but may not be limited to, closing the deal anyway and defending it in court, in which case Microsoft would argue that the CMA decision was unlawful to begin with (which is also my view), and an alternative approach where Activision Blizzard would withdraw from the UK market in order to avoid the CMA's jurisdiction and open the door to the consummation of the transaction. Activision could still serve the market through UK distributors, but would not have a presence or sell directly to UK customers.
In a recent post I expressed concern that some regulators' disregard for the legal bounds of merger control may result in more appeals and in more Illumina-Grail-style case where deals get closed without even awaiting the outcome of a merger review.
The stakes would be high for the CMA as its inability to prevent this deal from closing would weaken it in the eyes of future acquirers of companies. And the worst-case scenario would then be for the CMA to lose the appeal.
Also, UK gamers would be adversely affected. Some choices available to consumers in other jurisdictions might not exist in the UK, or prices could be higher as a result of intermediaries maximizing their margins. Countless gamers might complain to Members of Parliament about the CMA if that happened.
This acquisition is way more important to Microsoft than Giphy was to Meta--and while the Meta-Giphy decision was also debatable, it was far easier to defend than the Microsoft-ABK block.
Until about eight days ago, I'd have been totally in favor of closing over. At this point I would prefer for the CAT to rule, given that I'm very optimistic the decision will be a bloodbath from which the CMA would not be able to recover--not in this case, and not with respect to other cases in the next few years. It's not just the appellate ruling: the hearing itself has the potential to become a nightmare for the CMA and its leadership. The assertion that Microsoft has a 70% market share in cloud gaming is so unbelievably indefensible that the CMA will look very bad if that appellate hearing goes forward.
The CMA needs to become more reasonable, but a generally weakened CMA would not even be in my interest as an app maker. I'd like them to implement the DMCC Bill (once enacted) forcefully and relentlessly. But they must now preserve the agency's credibility and assert their authority in a constructive way.
U.S. update
In other Microsoft-ActivisionBlizzard news, the Sony-supported class-action lawyers behind the private lawsuit in San Francisco have given notice of an appeal to the United States Court of Appeals for the Ninth Circuit of the denial of their motion for a preliminary injunction. I've commented on that one in a tweet. The short version is that the appeal is most likely not even going to be heard by the court (much less decided) before the deal is closed (or, in a hypothetical alternative, abandoned).
The Federal Trade Commission (FTC) appears very afraid of losing its in-house case over the Microsoft-ABK merger. The trial will begin in less than two months. The commissioners already had (and in the Illumina-Grail case exercised) the ability to overrule the agency's Administrative Law Judge (ALJ), and now they want it to be routine procedure that the commissioners decide, downgrading the ALJ ruling to a "recommended" as opposed to "initial" decision. I commented on that one on Twitter, too. In light of the Supreme Court's Axon decision, the FTC appears to be almost literally begging for more unconstitutionality challenges.