Can One Country Scrap This $70 Billion Deal?

The acquisition deal between Microsoft and Activision Blizzard has run into a problem in the UK.Ahead of the April 26th decision from the CMA (Competition and Markets Authority), the market was pretty confident that they were going to sign off on the deal.

With the European Union rumoured to be signing off on the deal as well, stories spread that Microsoft was going to defy the FTC and just close the deal.

The CMA, however, ended up spoiling the party, which sent both Microsoft and Activision into fits of rage.

The $69 billion merger is now in mortal danger, thanks to the CMA and the nascent cloud video gaming market.


When the CMA announced that they were narrowing their review of the Microsoft-Activision merger to just cloud gaming (thereby throwing out console competition worries), many people thought that they were going to approve the merger for sure.

Instead, the CMA argued that Microsoft could potentially command too much of the cloud video gaming market, to the detriment of consumers in the United Kingdom and around the world.

Cloud gaming is a nascent market, and the CMA blocked the merger as they were worried that Microsoft could monopolize a new and growing market.

The European Union, in approving the deal, stated that Microsoft's 10 year deals with the likes of Nvidia and Boosteroid were pro-competitive.

In fact, the CMA and EU antitrust regulators have been throwing shots at each other in recent weeks, with the CMA taking to Twitter to specifically respond to the EU's findings.


So where does that leave the Microsoft-Activision merger?

Well, shares of Activision are currently trading at around $79/share, well below Microsoft's offering price of $95/share.

Analysts project that Activision would likely trade to $65/share on a deal break, which means that there is some optimism that the deal will go through.

With China, the European Union and Brazil (to name a few) having already approved the deal, Microsoft must now appeal the CMA's ruling with the CAT, which has the power to refute the CMA's findings and send it back to the CMA for reconsideration.

Some point out that companies have only won 33% of appeals with the CAT, though this is Microsoft that we are talking about, which is one of the most powerful companies in the world. Sure, they could lose the appeal, though you need to throw past results out the window.


Microsoft and Activision have a drop-dead date for the merger to be completed of July 18th, 2023. The two sides will need to negotiate an extension while the CAT hears Microsoft's appeal.

In the meantime, Microsoft also needs to contend with the FTC, which has sued to block the deal.

It's important to note, however, that the FTC does NOT have to approve the Microsoft/Activision deal.

Instead, they would have to sue to block the deal. This means that they would have to convince a US court that the deal is anti-competitive, which is hard to do when much of the world has already approved the deal.


So what happens now?

The likeliest course of events is that Microsoft and Activision extend their deal deadline while they wait to hear about the state of the CMA appeal. Some believe that Microsoft would need to offer Activision a higher price for a deal extension, though others believe that an increased deal break fee would do the trick.

Or, there is the possibility (this possibility has been floated by various analysts) that Microsoft might simply choose to close the deal. This would mean that Activision games would likely be left off of the Xbox cloud offering in the UK, and it would potentially open up Microsoft to fines from the United Kingdom.

The question, in this case, would be: what is the United Kingdom's appetite for a fight with Microsoft? The UK is struggling following Brexit, and getting into a protracted fight with Microsoft might not be the best idea.

Some thought that the UK government might possibly intervene, and this could still happen, though it seems unlikely.

There is also a possibility that Microsoft and the CMA could come together to negotiate some sort of a settlement, though both sides seem pretty entrenched in their positions.

The CMA has come under a tremendous amount of pressure after the deal block. Acquisitive companies, especially in the tech space, are obviously worried that any future deals that they may partake in might be scuttled by an aggressive CMA.


It's hard to imagine that Microsoft will voluntarily walk away from this deal.

This would be the biggest acquisition in the history of the company - a company that has acquired roughly 250 companies during their history.

If Microsoft capitulates, what would this mean for future mergers?


Proponents of the deal argue that the CMA made some egregious errors when they were coming up with their ruling. Many proponents of the deal feel as though the CMA made their decision early on to block the deal, and that they were just looking for a reason to block.


This is a bizarre situation that involves one of the world's biggest companies. Can one country really scuttle a $70 billion merger?


Here are some of the possibilities as to what might happen next, in no particular order of likelihood:

1. Microsoft wins CAT appeal, CMA eventually OKs deal.

CAT appeals are not quick to be decided upon, especially with a case as complex as the Microsoft/Activision merger.

With that being said, I think that this appeal will be fast-tracked.

With that being said, in this scenario, Microsoft wouldn't be able to close until early 2024, at the earliest.

2. Microsoft loses CAT appeal, walks away from deal.

In this case, Microsoft would need to pay Activision a $3 billion breakup fee.

3. Microsoft closes deal immediately, carves out cloud gaming in the UK, deals with FTC/CMA in court.

Would Microsoft actually go the nuclear route and close? It's possible, though they would face potential significant fines from the CMA. There is some precedent for this, though it remains to be seen if MIcrosoft would actually go this route.

4. Microsoft and CMA negotiate, announce settlement.

Some believe that this isn't possible. I disagree, especially given the involvement of Microsoft.

If Microsoft approaches the CMA and offers some additional remedies, the two sides might reach a compromise.


It's hard to imagine Microsoft just laying down and walking from the deal, especially given the acquisitive history of the company.

As mentioned, both the CMA and Microsoft appear to be entrenched in their positions, though the heat on the CMA is very strong. In fact, the head of the CMA recently said that he was surprised at the reaction to the deal block.

Will this deal eventually happen, and if so, when?

Filed under: General Knowledge

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