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$75bn takeover agreed for gaming company seen as ‘ideal opportunity’ for agencies to flex muscle

The biggest deal in Microsoft’s history is set to become a test case for the leaders of US antitrust agencies who have vowed to tackle Big Tech’s market power.

Microsoft is bracing for intense regulatory scrutiny, with its agreed $75bn acquisition of video game maker Activision Blizzard set to be under the microscope of progressives appointed to leading antitrust roles in the Biden administration. They include Lina Khan at the US Federal Trade Commission and Jonathan Kanter at the US Department of Justice.

“Microsoft is fully aware that it won’t be a breeze even if there is no obvious antitrust violation,” said a person with direct knowledge about how the company’s M&A team is preparing to get the transaction approved.

The fear inside the tech group is that Khan will use this transaction to prove she is serious about taking on Big Tech, the person added. Activision’s investors appear to share such concern, as the company’s stock price is trading at a 13.5 per cent discount to Microsoft’s $95 a share all-cash offer.

“This is an ideal opportunity for the antitrust agencies to act on the view of their leaders that the courts have been too lenient in allowing consolidations in many industries, particularly the tech sector,” said Bill Baer, visiting fellow at the Brookings Institution and former head of the DoJ antitrust division.

The FTC and DoJ declined to comment on whether they would probe the megamerger. Which agency would potentially investigate the deal also remained unclear.

Bobby Kotick, chief executive of Activision, has played down the risk of regulatory pushback, as tech behemoths such as Apple and Google are also exploring gaming.

Responding to the calls for regulatory action, Microsoft said that the games market would still be “diverse and fragmented” even after its deal and took swipe at some of its biggest tech rivals.

“Mobile game distribution runs through Apple and Google, who can generate more money from consumers who purchase games than the actual studios and developers who make the games,” said Microsoft.

It added that it had “no intention of withdrawing games from existing platforms, and our strategy is player-centric — gamers should be able to play the games they want where they want. We believe this acquisition will only increase competition, but it is ultimately up to regulators to decide.”

But antitrust experts argue that federal agencies will be taking a very close look given the focus of their leaders, the size of the takeover and the potential harm to others in the gaming industry.

Khan says the deterring factor provided by taking action is “key” in enforcing competition law. The FTC chair on Wednesday told CNBC that illegal mergers have been pursued in the past “because the consequences of proposing those deals have not been significant . . . the kind of deterrence that we need to see in order to change the game, we’re not seeing.”

The Microsoft deal was announced on Tuesday just hours before the FTC and DoJ said they would seek input from the public on revamping merger rules to crack down on illegal deals amid a surge in transactions. Merger filings more than doubled between 2020 and 2021, the agencies said.

Herbert Hovenkamp, professor at Penn Law at the University of Pennsylvania, said that while it is too early to predict the complexity of a potential case against the transaction, “new merger laws [are] made by close calls, not by the easy cases.”

A probe into the acquisition would signal that agencies are keen to apply to Microsoft the level of scrutiny they have so far reserved for other tech companies.

“Big Tech has been in the crosshairs for the past couple of years,” said Michael Carrier, law professor at Rutgers University. “Microsoft has seemed to avoid the crosshairs, but in a deal like this they might find themselves in that position.”

An investigation would mark the biggest antitrust action against Microsoft since US authorities sued the company two decades ago in what became known as the “antitrust case of the century.” The government won after accusing the group of using its Windows monopoly to crush web browser pioneer Netscape.

“The question is whether we would have seen the growth and success of this next generation internet companies if the Department of Justice hadn’t taken the action,” Khan told CNBC of the 1998 lawsuit. “In that case, enforcement was critical to oxygenate the market and make sure that those opportunities were there.”

The Microsoft-Activision deal would not represent the sort of straightforward market share concerns that prompt most antitrust enforcement. Instead, as a “vertical merger” combining the software group’s distribution systems and the video game maker’s content, it would present a more challenging case.

A challenge from the antitrust agencies could help them shape rules around vertical mergers — one of the topics on which they are seeking information — after the FTC last year withdrew 2020-vintage guidelines for these types of tie-ups for being too lax.

If agencies sued to block the transaction they could argue, for instance, that Microsoft could “disadvantage competitors” by having Activision’s popular games Call of Duty or World of Warcraft only played on its own Xbox and not on Sony’s PlayStation, Carrier said.

While cases against vertical mergers are among the most challenging to win, they have started to pick up in recent years amid tougher antitrust enforcement. “This will be an interesting test case to see whether the agencies are willing to challenge a merger that presents these vertical questions in the video game industry,” Carrier added.

A recent challenge by US agencies to vertical mergers has been unsuccessful. The DoJ in 2019 failed to block AT&T’s $80bn acquisition of Time Warner after a US federal appeals court ruled against the department.

But Khan appears unfazed by the prospect of the FTC losing in court, telling CNBC on Wednesday that “even if it’s not a slam dunk case, even if there is a risk you might lose, there can be enormous benefits from taking that risk . . . You lose all the shots you don’t take.”

The $75bn acquisition could turbocharge the growing co-operation between regulators on both sides of the Atlantic, which according to Margrethe Vestager, the EU’s competition chief, was triggered by Khan’s FTC appointment.

Baer said: “I would expect in particular Europe, the US and the UK to co-ordinate closely on their reviews and on any possible outcomes . . .[for] these sorts of mergers which have worldwide implications.”

Having escaped regulatory scrutiny for years in Brussels, Microsoft could face lengthy probes as EU officials take a close look at its acquisition, said multiple people with direct knowledge of the transaction.

EU regulators are expected to dig into potential anti-competitive issues based on the size of the deal alone, said one adviser. “It is just too big to be ignored,” the person said.

Two huge US gaming deals in the space of a fortnight means the race is on to guess who might be third. Like Activision Blizzard and Zynga, the next acquisition target is likely to have an impressive library of game titles. Step forward Electronic Arts.

Video game publishers and the platforms competing for titles know that the $200bn gaming sector is in flux. Consoles are still popular but mobile gaming is the industry’s fastest growing segment. More players are streaming games via subscription services instead of buying them outright. Franchises are being milked for longer. To compete, companies are looking for more high profile content — known as AAA games.

EA fits the bill. The Redwood City company has produced The Sims and Fifa, a football game popular with both fans and professional players. It has made astute investments in mobile gaming development too, buying Glu Mobile and Playdemic last year in two cash deals for a combined $3.6bn.

With an enterprise value of $38bn, potential buyers would need deep pockets. This is not a problem in the tech industry. Apple has an enterprise value 71 times as large. Amazon, Meta, Google and Netflix are all expanding their gaming divisions too. Rival Sony may also be on the lookout to build up its portfolio of exclusive games.

EA’s 500m user accounts exceed Activision’s monthly active user total. But EA has been less successful at extracting money from players. The sub 20 per cent operating margin over the past year compares poorly with Activision’s 35 per cent.

EA has not experienced the same stumbles as Activision. Shares fell last year as negotiations over Fifa’s branding went sour. The sporting body was reported to request double its $150m per year licensing fee — a figure that would equal around half of EA’s forecast annual net income. But the game is popular enough to survive a rebrand and shares recovered. Less expensive than Zynga and less risky than Activision, EA is an attractive target.

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