Yesterday the UK Competition & Markets Authority closed the original Microsoft-ActivisionBlizzard merger decision by issuing a final order based on its April 26 blocking decision, but simultaneously opened a new investigation of a modified version of the deal with a Phase 1 deadline on October 18 (which is also--and not coincidentally--the last day of the extended term of the merger agreement). The title of the new investigation is Microsoft / Activision Blizzard (ex-cloud streaming rights) merger inquiry. The long form of the parenthesis is "excluding Activision Blizzard, Inc.’s non-EEA cloud streaming rights."
The stock market views that announcement, taken together with public statements by the CMA's CEO, as a sign that the deal is now very likely to close. The spread is at its lowest. And Bloomberg is already describing this merger as (potentially) "one of the biggest comeback stories in the history of mergers" (which is an underestimated as it will indisputably be the biggest merger story ever).
This post--which may in fact be the last one on that merger before (all going well) some final comments on the closing of the deal--has three parts. In the first two parts, I want to talk about who and what is not getting enough credit so far for having--if Wall Street is right--very likely resolved an incredibly delicate situation. The third part serves the purpose of explaining more specifically what is known about the modified transaction and why I believe it should put the matter to rest, though I believe there is no legal basis for any regulator to request any behavioral or structural remedies given that this deal doesn't even get close to what a court of law--as opposed to political institutions overleveraging their hold-up powers--would consider to raise competition concerns. There are only fake concerns. Made-up stuff that is a miscarriage of justice. Most competition authorities cleared the deal unconditionally. Those regulators got it right because they faithfully and honorably applied the law, which is too much to ask for in the U.S., the EU, and the UK when a Big Tech company makes an acquisition these days...
If you wish to go straight to the part that explains the modified deal, click here.
1. Underappreciated: the Competition Appeal Tribunal's decisive action and guidance
It really annoys me to see the CATribunal (or just CAT) underestimated every step of the way. When the CMA issued its Apri 26 merger blocking decision, so-called experts described the appeal (which Microsoft announced immediately after the decision) as futile. They said that the Judicial Review standard--the applicable standard of appellate review in the UK for government agency decisions--presented an insurmountable hurdle. They said the CMA would ultimately avoid an "irrationality" holding if it just throws all sorts of "there could be an issue there" conclusions into a decision, with the CAT then supposedly being unable to find that if the CMA identified smoke in all sorts of places, it was irrational to see a 50% likelihood of fire. They said the CAT would--and allegedly (which is at least debatable) even had to--remand any decision to the CMA for further consideration, causing not only major delay but also leading to the same outcome anyway.
In this particular case here, I believe the CAT would likely have thrown out the CMA decision in such a way that it could either have found that a remand was pointless or, if it had remanded anyway, there would have been no wiggle room left for the CMA. That would have proven those "experts" wrong. They were lucky to avoid this because it appears that a solution has been found that will obviate the need for further litigation over this merger in the UK.
The CMA engaged in stalling because it wanted to avoid not only a CAT ruling but also a multi-day hearing, which I believe would have been a nightmare for the agency.
Some people wrongly believed that the CMA became interested in a constructive solution because the FTC lost its bid for a preliminary injunction. In reality, that was the expected outcome. In the other event, the merger would have been abandoned in all likelihood, and then there wouldn't have been a point in a new UK investigation of a modified deal. But if there was one thing in connection with this whole merger that definitely won't have shocked the CMA, it was the FTC's defeat in court.
The CAT clearly made its presence felt. And when the CMA and Microsoft agreed to stay the appeal of the April decision (shortly before a hearing was going to take place), the CAT's president, Mr Justice Marcus Smith, summoned both sides' counsel to his courtroom to discuss at a case management conference whether there was a good-faith basis for putting the UK appeal on hold. The day before that hearing, Microsoft announced a 10-year Call of Duty deal with Sony (obviously subject to the condition precedent of this acquisition being consummated), which Mr Justice Smith read about and suggested as a basis for clearing the merger now on the basis of a major change of circumstance (MCC).
I was live-tweeting about that hearing, and instantly supported the court's proposal. I was disappointed that counsel (on both sides) was unreceptive to that idea. But then, toward the end of July, Microsoft actually did make a filing that formally asked the CMA to clear the original deal (without a divestiture of streaming rights) in light of the Sony agreement and other key facts and developments. In my opinion, the CMA's April 26 decision was wrong, and yesterday's rejection of that MCC argument was also wrong. But I can see the CMA's institutional interests here:
They faced a dilemma. They may have realized that their April decision was completely wrong, and they must know how isolated they are on the world stage (with the greatest respect for Australia and Canada, those jurisdictions would not be able to prevent the deal from closing, especially not at this stage). There was and still is a debate over whether the UK's regulatory environment is hostile to business and a turn-off for foreign direct investment. So it would have been good in some ways for the CMA to just clear the deal yesterday.
But they also had another consideration here: their sacrosanct procedures. It is an oddity that the final report (which in this case was rendered in April) is the final "decision" (and can be appealed), but is followed by an interim order and, subsequently to that one, a final order, which is like a regulatory injunction. The final order is meant to be consistent with the final report except under the most egregious of circumstances. They just didn't want to act in a way that might encourage the parties to future merger reviews to take certain measures (such as restructuring a deal) only between the final decision and the final report. I have no doubt that this was the decisive consideration, as the CMA's CEO said in one of her interviews yesterday that what's happening here shows to merging parties that they should propose certain solutions early in the process.
If the CMA clears the deal on its modified basis, there may still be some discussion over whether the CMA is a liability for the prosperity of the UK, but it won't be too bad. Timing is also a consideration. The UK's prime minister gave the CMA a strategic steer that stressed, among other things, the need to make swift decisions so as not to hold up business. There must be due process, but they should be able to wrap up that Phase 1 investigation of the modified deal way ahead of schedule. In some other major jurisdictions, the Phase 1 timeline is closer to one month while in the UK it's closer to two.
The UK merger reform situation should be reformed in any event. There are issues. It's an opaque process, which makes it particularly unfair. The CMA should not always get a second bite at the apple when the CAT overrules it. And even though I believe the CMA's errors in this case could have been corrected even under the UK's exacting Judicial Review standard, that one should change. Even in connection with the DMCC Bill, which is the UK's equivalent of the Digital Markets Act, I believe the CMA's decisions should be subject to a full appellate review (as opposed to just "legal error" and "irrationality"). And I'm saying that even though I'm an outspoken critic of Apple and Google's app store duopoly.
If Microsoft's acquisition of Activision Blizzard is consummated in the end, the CAT will have played a key role, though in a world of two-second attention spans and "experts" who don't know what they're talking about, it would have taken a more binary outcome (such as a CAT ruling that would have quashed the CMA decision on multiple grounds) for more people to realize it. I look not only at binary outcomes but also at the first or second derivative, and that's why I think the CAT has been great here, even though it may never have to rule on the case.
2. Undervalued but (hopefully) ultimately rewarded: Microsoft's tireless dealmaking
Besides the important role that the CAT played, there is another factor here that is often overlooked. Even when many people (also including most merger arbitrageurs) deemed the deal dead, Microsoft never stopped trying to work out solutions with other market actors, including the only vocal merger opponent, Sony. And now the Ubisoft deal that creates a new merger situation.
Many other companies would have had a "fight or flight" instinct. They'd either have decided to bet on litigation ("fight"), or they'd have given up ("flight"). Microsoft was appealing the UK decision, but never stopped trying to find constructive solutions. They held on to their vision of bringing more games to more gamers through more channels.
I don't know if any acquirer has ever made such a Herculean effort on the dealmaking front to get a deal cleared--and in this case, we're talking about a deal that was legally above board regardless of any remedial agreements or other concessions.
In such dealmaking processes, there are unsung heroes. Those negotiations do not take place in public. The results speak for themselves.
A Microsoft-internal email has been leaked to the press. Microsoft Gaming CEO Phil Spencer reportedly credited Xbox VP Sarah Bond for her "exceptional leadership throughout this process." I saw her testimony at the San Francisco federal courthouse (very convincing), and I follow her on X (Twitter). We'll never know what exactly Mr. Spencer was referring to, but chances are that Mrs. Bond achieved major breakthroughs on the dealmaking front that paved the way for regulatory clearance.
3. New deal: Ubisoft acquires Activision Blizzard streaming rights
What the CMA and Microsoft announced yesterday was just a high-level summary of what makes the new merger situation different from the original one. What we know is that Ubisoft will acquire the streaming rights to all existing Activision Blizzard PC and console games as well as all the ones to be released during a period of 15 years following the closing of the deal. Whatever falls under that capture clause is then perpetually available to Ubisoft, though customer demand will obviously shift to newer games, such as new sequels.
This will not limit Microsoft's ability to offer Activision Blizzard titles as part of its Game Pass subscription service, and Microsoft will be able to stream those games on its xCloud service. However, Ubisoft will also have all of those games, and it will apparently be able to sublicense them as well. So there is simply no such thing as a foreclosure risk then.
It is an academic question of semantics whether this is a structural or behavioral remedy. There are strong arguments for it being structural as it is an acquisition: Ubisoft buys something and is then in charge. And while there is a time limit, a 15-year capture clause and perpetual rights to whatever falls under the capture clause should satisfy even the most demanding regulator.
Ubisoft is a well-resourced, sophisticated market actor. And the company has been independence for decades (it belongs to its founders, the Guillemot family).
One of the problems the CMA would have faced in the CAT is the question of comity (respecting other jurisdictions). It is unfortunate that the Microsoft-Ubisoft deal is global as opposed to UK-specific. I don't think UK politicians want the CMA to act as the world's policeman for mergers. It doesn't reflect favorably on the UK from a foreign investment point of view. It suggests that serious reform is needed. But if it allows the merger to be consummated, then so be it.
The Microsoft-Ubisoft agreement has a carve-out for the European Economic Area (which is the UK plus Norway, Iceland, and Liechtenstein). That's because Microsoft had made a remedy commitment to the European Commission. While I disagree with the bogus concerns the European Commission raised in its (meanwhile published) decision, those royalty-free streaming rights were appreciated by gamers worldwide. The Microsoft-Ubisoft deal, according to what was announced, keeps that type of remedy intact for the European Economic Area. That benefits such companies as Nvidia and Boosteroid.
The EC now has to think about whether this requires a formal new merger notification. And if the conclusion was that a new review was formally necessary, I still don't anticipate major problems. In the end, all that matters is that there will be more choice and competition than otherwise. Ubisoft is not going to monopolize cloud gaming, and it is a French company, which the European Commission couldn't officially consider a reason for clearance but politically it will play a role.
All of this is unnecessarily complex, and I hope it will be over soon--with a positive outcome. The CMA's concern was all about Microsoft leveraging Activision Blizzard's games to dominate cloud gaming. The mere fact that Microsoft is now prepared to enter this deal shows that there were and are indeed other priorities (above all, mobile gaming).
