Acquiring companies to grow and expand is what makes the commercial world go round. Facilitating everything from supply chain consolidation to access to prized intellectual property, M&A is vital for commercial law firms and their clients. They also attract massive publicity. Who could forget the $1 billion acquisition of Instagram by Facebook (now Meta), which despite at the time seeming impossibly large now looks like a steal given Instagram's estimated brand value of $33 billion? And for those caught up in the hit HBO TV show Succession, there's the frenzied dealmaking involving Waystar Roco, the great media conglomerate, and the tech giant, GoJo.
In business, then, large companies acquire smaller ones, growing stronger while eliminating opponents - a kind of corporate Pac-man. However, these ever-expanding firms threaten to monopolise key industries and create an unhealthy, uncompetitive marketplace. It’s no surprise then that governments and their agencies are quick to step in to regulate these moves through competition law.
A recent example is the decision of the UK Competition and Markets Authority (CMA) to block Microsoft's proposed $75bn acquisition of Activision Blizzard on the grounds that the tech giant could make Activision's games exclusive to its own cloud gaming service. Activision, maker of the popular game Call of Duty, has hit back, claiming that the CMA's decision undermines the UK's efforts to be an attractive country for technology companies. Both companies intend to appeal the decision at the Competition Appeal Tribunal, with Activision having recently hired Lord David Pannick KC as outside counsel, a legal heavyweight famed for his involvement in classic law student cases like R (Miller) v Secretary of State for Exiting the European Union (2016) and AF v Home Secretary (2009). If the deal does go down, it won't go down quietly.
The rationale behind the CMA's decision was unaffected by late moves from Microsoft to undermine it. According to the CMA, Microsoft, in acquiring games like Call of Duty, Overwatch and World of Warcraft, would have been able to limit their availability, given its control of 60% to 70% of cloud gaming services. During the investigation, Microsoft signed licensing deals with cloud gaming services including Nvidia's GeForce Now service and Boosteroid, as well as pledging to bring Call of Duty to Nintendo's Switch console, to prove that acquisition would facilitate competition, rather than hamper it. Such overtures, however, ultimately proved insufficient.
The CMA's ruling is a potentially fatal blow to Microsoft's largest deal ever. Although the EU has just given the green light to the deal, the Federal Trade Commission (FTC) in the US sued to block the deal last year. The CMA's decision is encouraging for the FTC, but the road ahead is still uncertain, given the heavy burden on the government in US antitrust cases and the different approaches taken by the CMA and FTC, which I will now explore.
The differences between the CMA and FTC cases
The main difference relates to the scope of the concerns raised by the respective regulators. For its part, the FTC alleges that if Microsoft gains control over Activision, it could manipulate pricing, degrade game quality or player experience on rival consoles and gaming services, change access terms to content, or withhold content from competitors, resulting in harm to consumers. The FTC's concerns extend to gaming subscription services, cloud gaming, and high-performance consoles. On the other hand, the CMA's case has a narrower focus, considering the potential harm to competition primarily in the cloud gaming market. Unlike the FTC, the CMA did not adopt the theory that the transaction would harm competition in the console market.
The concept of harm to future competition which lies behind the CMA's decision would be likely to face stronger resistance from US courts than English ones. As Daniel Francis, a law professor at New York University and former deputy director of the FTC's Bureau of Competition observed: "Ultimately, the CMA seems to have chosen a path where the FTC may find it harder to follow". The CMA's readiness to predict the future competitive environment has supporters in the US. According to Rebecca Haw Allensworth, an antitrust professor at Vanderbilt Law School, "European regulators' willingness to look at the future...is appropiate and something that we struggle with more in the US". The contrasting approaches also highlight the challenges of regulating fast-evolving industries like the gaming industry, where new technologies like cloud gaming are constantly emerging.
The implications of the cases
These cases have a number of important implications, both for Microsoft and for competition law in general.
As for Microsoft, the CMA's decision has threatened its aim with the Activision deal to bolster its presence in the gaming sector and help it compete with rivals like Sony and Nintendo. Microsoft has stated that it remains committed to the acquisition and plans to appeal the CMA's decision. However, experts say that this is a difficult path to take, and it's not uncommon for parties to abandon deals at this stage. If Microsoft is unable to acquire Activision, it may have to find other ways to strengthen its position in the gaming industry. While M&A offers the benefits of acquiring a ready-to-operate and renowned brand, Microsoft may have to look internally for a games development team with original IP and fresh ideas.
More generally, the gaming sector is just one of many sectors that are facing increased scrutiny from competition regulators. Big Tech has faced numerous challenges in recent years, especially in Europe. In September, for example, the EU's General Court upheld an EU antitrust decision fining Google a record €4.34 billion for violations relating to the consolidation of the dominant position of its search engine on Android devices. Now the Silicon Valley giants face legislation aimed at transforming competition on the internet. More hawkish antitrust officials in the Biden Administration are also making waves. Fears about regulatory intervention apparently derailed what could have been the biggest private equity buyout of 2023.
Indeed, more assertive regulators in both Europe and the US could have a chilling effect on other companies looking to make large acquisitions, especially in the tech sector. If regulators are more likely to challenge these deals, companies may be more hesitant to pursue them, which could ultimately limit innovation and harm consumers.
The Microsoft cases highlight the increased antitrust scrutiny faced by Big Tech. While the CMA's decision to prevent the acquisition of Activision may encourage the FTC, it remains to be seen whether its own challenge will be successful given the differences between the two cases. Regardless of the outcome, the cases demonstrate the growing assertiveness of competition regulators on both sides of the Atlantic. As for Microsoft, despite their wish to appeal they may have to hold off from future acquisitions that raise thorny antitrust issues. With great market power comes great regulatory responsibility.