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Microsoft-Activision deal to test US antitrust enforcement’s hard line

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

Microsoft is bracing for tight regulatory scrutiny, with its agreed-upon $75 billion acquisition of video game maker Activision Blizzard placed under the microscope of appointed progressives. to the top 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 easy even without a clear antitrust violation,” said one person with direct knowledge of how the company’s M&A team is preparing for the transaction. acceptance.

The person added that the fear inside the tech team is that Khan will use the transaction to demonstrate that she’s serious about getting into Big Tech. Activision investors seem to share that concern, as the company’s stock price is trading at a 13.5% discount to $95 per all-cash Microsoft share.

“This presents an ideal opportunity for antitrust authorities to act on the view of their leaders that the courts have been too lenient in allowing consolidation in many industries, especially the technology,” Bill Baer, ​​visiting fellow at the Brookings Institution and former head of DoJ antitrust.

The FTC and DoJ declined to comment on whether they will probe the megamerger. Which agency is likely to investigate the deal remains unclear.

Bobby Kotick, chief executive officer of Activision, has played down the risk of regulatory backlash, as tech giants like Apple and Google are also exploring the game.

Responding to calls for regulatory action, Microsoft said that the games market will remain “diverse and fragmented” even after the deal and has beaten some of its biggest tech rivals.

“The distribution of mobile games through Apple and Google, who can generate more money from the consumers who buy the game than the studios and developers actually make,” said Microsoft. game.

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

However, antitrust experts say federal agencies will look very closely at the focus of their leaders, the size of the takeover and the potential for harm to others in the industry. game industry.

Khan says the deterrent provided by action is “key” in competition law enforcement. The FTC chairman on Wednesday told CNBC that illegal mergers have been pursued in the past “because the consequences of proposing those deals were insignificant. . . the kind of deterrence we need to see to change the game, we don’t see. “

The deal with Microsoft was announced on Tuesday just hours before the FTC and DoJ said they would seek input from the public on Tuesday. amendment of merger rules to crack down on illegal transactions amid increased trading. Unified profile more than doubled between 2020 and 2021, the agencies said.

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

An acquisition probe would signal that the agencies want to give Microsoft the level of scrutiny they have given to companies. technology company.

“Big tech has been around for the past few years,” said Michael Carrier, a law professor at Rutgers University. “Microsoft seems to have avoided turning points, but in a deal like this, they could find themselves in that position.”

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

Khan told CNBC of the 1998 lawsuit: “The question is whether we could have seen the growth and success of these next-generation internet companies if the Justice Department had not done so. that action. “In that case, enforcement is critical to oxygenating the market and ensuring that those opportunities are there.”

The Microsoft-Activision deal would not represent the kind of simple market share concerns that plague most antitrust enforcement agencies. Instead, as a “vertical merger” that combines the software corporation’s distribution system and the video game maker’s content, it presents a tougher case.

A challenge from antitrust authorities could help them shape the rules around vertical consolidation – one of the topics they are seeking information on – after the FTC last year withdrew the rules. 2020 classic guidelines for these types of constraints are too loose.

For example, if the agencies were sued to block the transaction, they could argue that Microsoft could “disadvantage competitors” by having popular Activision games. Call of Duty or World of Warcraft Carrier said it only plays on its Xbox, not Sony’s PlayStation.

While the cases against vertical consolidation are among the most challenging to win, they have begun to occur in recent years amid increasingly stricter antitrust enforcement. . Carrier added: “This will be an interesting test case to see if the agencies are willing to challenge a merger that raises these vertical questions in the video game industry.

A recent challenge by US agencies to vertical integration was unsuccessful. DoJ in 2019 can’t be blocked AT&T’s $80 billion acquisition of Time Warner after a US federal appeals court ruled against the department.

But Khan appeared unconcerned at the prospect of the FTC losing its case in court, telling CNBC on Wednesday that “even if it’s not a heavy case, even if you have the risk of maybe losing, maybe There are great benefits to taking that risk. . . You lose all the photos you didn’t take”.

A $75 billion acquisition could fuel an increase cooperation between regulatory agencies on both sides of the Atlantic, according to Margrethe Vestager, EU competition chief, triggered by Khan’s appointment of the FTC.

“I would expect Europe, the US and the UK in particular to work closely on their assessments and on any possible outcomes,” Baer said. . .[for] These types of mergers have worldwide significance. “

Many people with direct knowledge of the transaction said Microsoft could face protracted investigations as EU officials scrutinize its multi-year acquisition, which has escaped scrutiny. legal supervision.

EU regulators are expected to look into potential anticompetitive issues based on the size of the deal, one adviser said. “It’s too big to be ignored,” the person said.

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