On January 18, 2022, Microsoft announced that it intends to acquire Activision Blizzard for $68.7 billion in an all-cash transaction. Under the terms of the agreement, Microsoft would own Activision, Blizzard Entertainment, and King under the Microsoft Gaming division as a sibling to Xbox Game Studios.
The acquisition would give Microsoft ownership of franchises including Call of Duty, Crash Bandicoot, Spyro, Warcraft, StarCraft, Diablo, Overwatch, and Candy Crush. In addition to being the most expensive video game-related acquisition to date, the deal would make Microsoft the third-largest gaming company in the world and the largest headquartered in the Americas, behind Chinese company Tencent and the Japanese conglomerate Sony. [1]
Upon the completion of the deal, Activision Blizzard would be a sibling entity to Xbox Game Studios under a new Microsoft Gaming division, allowing Microsoft to offer Activision Blizzard games on its Xbox Game Pass service. [2]
In this deal, Goldman Sachs and Allen & Company served as the financial advisors and Simpson Thacher and Skadden served as legal advisors to Microsoft and Activision, respectively. [3] However, due to the to the size of the acquisition, upon approval by both companies' board of directors, the deal needed to be reviewed and approved by several government commerce bodies for antitrust concerns. As one of the main competitors, Sony has publicly argued against the merger, claiming that the combined company would deny the PlayStation platform of games like Call of Duty by making them console-exclusive to the Xbox family. Nevertheless, Sony managed to make a binding agreement with Microsoft to keep Call of Duty on PlayStation for 10 more years until 2033, after the merge. [4]
Upon review and consideration several countries including Saudi Arabia, China, Japan, South Korea, Turkiye and Australia approved the deal while the EU initially filed a complaint against the acquisition in February 2023. However, upon Microsoft’s reaching a ten-year agreement with Nintendo and Nvidia, the European Commission (EC) also approved the deal on May 15th, 2023. [5] On the other hand, Federal Trade Commission (FTC) of the USA and Competition and Markets Authority (CMA) of the UK had several concerns for both companies, respectively stating that the companies "failed to protect the rights and dignity of their workers" and that "the transaction is likely to enhance monopoly power and worsen the negotiating position between workers and the parties." [6]
The FTC formally stated its intention to block the acquisition on December 8, 2022, expressing two main concerns. Primarily, the acquisition would harm consumers of Activision Blizzard's games and give Microsoft too much control of certain parts of the industry, such as cloud gaming. Secondly, the FTC pointed to the acquisition of Zenimax, claiming that Microsoft had initially agreed with the EU not to make their games exclusive to the Xbox as a concession, but Microsoft later violated this agreement. [7]
In response to the FTC's complaint, Microsoft claimed that one of the biggest platforms, Sony, has exclusive games that cannot be made for Xbox. Microsoft also said that to avoid undermining the player base, it plans to provide content for multiplayer Bethesda games, like Elder Scrolls Online and Fallout 76, for all platforms. [8]
The FTC turned down Sony's plea to quash a subpoena issued by Microsoft in February 2023, which asked Sony for internal records pertaining to their third-party exclusivity agreements. On June 12, 2023, the FTC filed a request for a preliminary injunction and a temporary restraining order to stop the merger. On June 13, 2023, the court issued the temporary restraining order, and from June 22 to June 30, 2023, a hearing was held to decide whether or not to issue a preliminary injunction on the agreement. Microsoft stated that if the injunction was to be upheld, they might think about walking away from the agreement, which they called a "three-year administrative nightmare." The FTC formally filed an appeal to the Court of Appeals for the Ninth Circuit on July 12, 2023, and the Ninth Circuit court denied the emergency appeal to block the merger on July 14, 2023. The FTC formally withdrew its challenge to the acquisition on July 20, 2023, though they would be able to refile later. [9]
On the other hand, Microsoft’s purchase of Activision Blizzard had not been easily gone through the UK’s CMA and approved. CMA performed a higher-level, two-phase review of the acquisition in the summer and autumn of 2022. According to the phase 1 ruling issued on September 1, 2022, the merger "may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom". Preliminary findings of phase 2 of the investigation reported on February 8, 2023, concluding that the acquisition "could result in higher prices, fewer choices, and less innovation for UK gamers", as well as less competition in the console and cloud gaming spaces. The CMA has recommended that Activision should at least divest the Call of Duty franchise but following Microsoft's commitments to ensure the release of Call of Duty on multiple platforms for ten years, in association with meeting other regulatory bodies, the CMA seemed to change its stance by late March 2023 stating that Microsoft's Activision Blizzard takeover “will not result in a substantial lessening of competition.” [10]
However, the CMA formally ruled against the merger on April 26, 2023, stating among various reasons that Microsoft already had a strong position in cloud gaming, and the merger would only strengthen that position. CMA also stated that Microsoft's concessions related to the ten-year contracts for Call of Duty on other platforms were not enough to satisfy their concerns and doubted that Microsoft would be able to port Call of Duty onto the Nintendo Switch. The CMA further prevented Microsoft to initiate any acquisition of Activision again in the future without seeking pre-clearance from the CMA. [11] Microsoft filed its appeal to the decision by the end of May, outlining five points of rebuttal mostly around the CMA's assessment of the cloud gaming market and Microsoft's current position within it. [12] The appeals process threatened the potential completion of the merger to the end of 2023.
The CMA's decision initiated a political debate within the UK, especially after the EU approved the deal since it contradicts with the current prime minister Rishi Sunak’s aims to make the UK the technology industry leader in Europe. Representatives of the CMA have defended their position to Members of Parliament, standing their ground that the proposed merger would give Microsoft an extensive competitive advantage. [13]
Following the verdict from Judge Corley to deny the injunction for the FTC; Microsoft, Activision Blizzard, and the CMA have reached an agreement to apply to the Competition Appeal Tribunal (CAT) for pausing their lawsuit for two months to further negotiate and resolve the dispute. A few hours after a US federal court ruled the deal could go ahead, the CMA announced that it could look again at a modified proposal and later said a restructured deal could satisfy its concerns subject to a new investigation. [14]
According to Bloomberg News, this deal includes a divestiture of their cloud gaming rights in the UK to appease the CMA. [15]
Unfortunately, both Microsoft and Activision Blizzard face legal challenges other than those against the competition authorities of various countries. For example, the New York City Employees' Retirement System, shareholders of Activision Blizzard, filed a lawsuit against the company in April 2022. They argued that the company swiftly entered into an acquisition deal with Microsoft to conceal the alleged wrongdoings of CEO Bobby Kotick. These wrongdoings were brought to light during the ongoing DCEH lawsuit, and the company sought to avoid any potential liability. [16]
Additionally, Sjunde AP-Fonden, a Swedish government-run pension fund with investments in Activision Blizzard, initiated a lawsuit in November 2022 in the US. The lawsuit alleges collusion between Microsoft and Activision Blizzard in the formation of the deal. The lawsuit claims that due to Activision Blizzard's weakened position resulting from the workplace harassment lawsuit brought by the California DFEH, Microsoft negotiated with Kotick and Activision Blizzard to buy the company at a reduced price. [17]
Furthermore, a group of gamers filed a lawsuit against Microsoft in December 2022 to block the merger under the Clayton Antitrust Act of 1914 which enables consumers to file such lawsuits. The suit argued that should the merger go through, Microsoft's combined power would disrupt the video game marketplace, giving Microsoft the capability to outpace competitors and take a stronger hold. However, the suit was dismissed twice by the federal court in March and May 2023 on the basis that gamers had not shown sufficient evidence of harm to the industry should the merger go through and that they failed to show how they would be damaged by the merger. The group subsequently filed an emergency request at the Supreme Court of the United States on July 16, 2023, to halt the merger but this request was denied by the Court the next day. [18]
Following numerous legal challenges and disputes with competition authorities, Microsoft's largest deal in history is currently anticipated to conclude by October 18, 2023.
Prepared By: Sude Çapoğlu
References:
1. The Economist Business, ‘Why Microsoft is splashing $69bn on video games?’, January 22, 2022, available at https://www.economist.com/business/why-microsoft-is-splashing-69bn-on-video-games/21807242
2. Warren, Tom, ‘Microsoft to acquire Activision Blizzard for $68.7 billion’, The Verge Tech News, January 18, 2022, available at https://www.theverge.com/2022/1/18/22889258/microsoft-activision-blizzard-xbox-acquisition-call-of-duty-overwatch
3. Jackson, Sierra, ‘Simpson Thacher, Skadden drafted for Microsoft’s $69 bln Activision buy’, Reuters, January 18, 2022, available at https://www.reuters.com/legal/transactional/simpson-thacher-skadden-drafted-microsofts-69-bln-activision-buy-2022-01-18/
4. Foo Yun Chee, ‘Exclusive: Microsoft likely to offer EU concessions soon in Activision deal -sources’, Reuters, November 28, 2022, available at https://www.reuters.com/markets/deals/microsoft-likely-offer-eu-concessions-soon-activision-deal-sources-2022-11-28/
5. Phillips, Tom, ‘EU approves Microsoft's $68.7bn Activision Blizzard bid’, Eurogamer, May 15, 2023, available at https://www.eurogamer.net/eu-approves-microsofts-687bn-activision-blizzard-bid
6. Carpenter, Nicole, ‘Senators push for FTC review of Microsoft and Activision’s $69B deal’, Polygon, April 1, 2022, available at https://www.polygon.com/23006125/microsoft-activision-blizzard-ftc-review-us-senators
7. FTC Press Release, ‘FTC Seeks to Block Microsoft Corp.’s Acquisition of Activision Blizzard, Inc.’, December 8, 2022, available at https://www.ftc.gov/news-events/news/press-releases/2022/12/ftc-seeks-block-microsoft-corps-acquisition-activision-blizzard-inc
8. Sinclair, Brendan, ‘Microsoft
calls FTC unconstitutional’, Games Indusrty.biz, December 23, 2022, available
at https://www.gamesindustry.biz/microsoft-calls-ftc-unconstitutional
9. Warren, Tom, ‘FTC v. Microsoft: all the news from the big Xbox courtroom battle’ Verge Tech News, July 19, 2023, available at https://www.theverge.com/23768244/ftc-microsoft-activision-blizzard-case-news-announcements
10. Nightingale, Ed, ‘Microsoft's Activision Blizzard takeover "will not result in a substantial lessening of competition", says provisional CMA findings’, Eurogamer, March 24, 2023 available at https://www.eurogamer.net/microsofts-activision-blizzard-takeover-will-not-result-in-a-substantial-lessening-of-competition-says-cma
11. Gerken, Tom, "UK further restricts Microsoft and Activision merge", BBC, May 11, 2023, available at https://www.bbc.com/news/technology-65557230
12. Ivan, Tom, "Microsoft files appeal against UK decision to block its Activision Blizzard deal", Video Games Chronicle, May 24, 2023 available at https://www.videogameschronicle.com/news/microsoft-files-appeal-against-uk-decision-to-block-its-activision-blizzard-deal/
13. Phillips, Tom, ‘UK MPs grill regulator over Microsoft Activision Blizzard deal block, day after EU grants approval’, May 16, 2023, available at https://www.eurogamer.net/uk-mps-grill-regulator-over-microsoft-activision-blizzard-deal-block-day-after-eu-grants-approval
14. Reuters, ‘Microsoft, UK regulators given more time to resolve dispute over $75B Activision deal’, The New York Post Tech News, July 17, 2023 available at https://nypost.com/2023/07/17/microsoft-uk-regulators-granted-pause-of-appeal-over-activision-deal/
15. Nylen, Leah; Ludlow, Edward; Bass, Dina, ‘Microsoft, Activision Eye UK Rights Sale to Get Merger Done’, Bloomberg News, July 14, 2023, available at https://www.bloomberg.com/news/articles/2023-07-13/microsoft-activision-weigh-sale-of-some-uk-cloud-gaming-rights#xj4y7vzkg
16. Totilo, Stephen, ‘New York City sues Activision, targeting CEO Bobby Kotick’, Axios, May 4, 2022, available at https://www.axios.com/2022/05/04/new-york-city-sues-activision
17. Leonard, Mike, ‘Activision's $69 Billion Sale to Microsoft Draws Challenge’, Bloomberg Law, November 27, 2022, available at https://news.bloomberglaw.com/in-house-counsel/activisions-69-billion-sale-to-microsoft-draws-court-challenge
18. Spangler, Todd, ‘Supreme Court Rejects Last-Minute Bid to Block Microsoft's Activision Blizzard Takeover’, Variety, July 19, 2023, available at https://variety.com/2023/digital/news/supreme-court-rejects-block-microsoft-activision-blizzard-deal-1235673366/
