SNEJF - FTC Vs. Microsoft: FTC Wins

2023-07-05 12:00:00 ET

Summary

• Or rather, they’ve already won.
• What’s next in the process.
• What you can do about it.

What the FTC already won

Last month, the Federal Trade Commission/FTC filed a lawsuit against the proposed Microsoft Corporation ( MSFT ) acquisition of Activision Blizzard, Inc. ( ATVI ). The suit seeks a preliminary injunction/PI which would block the companies from consummating their deal until the FTC completes their administrative case against it. If the judge grants the PI, the companies will probably abandon their deal. Microsoft would probably pay Activision the $3 billion breakup fee on the Tuesday, July 18, 2023, walk date. Activision would probably use much or all of that to buy back shares.

If the judge rejects the request for a PI, then the deal might be able to close. Activision lawyers stated categorically that the ruling on a PI will decide the deal's fate. They expect the FTC will abandon their challenge absent a PI. That is because the FTC administrative process is - by design - intended to kill deals without due process. The process is far too slow to allow companies to successfully navigate it. I am using $75 as the ATVI standalone value on a deal break.

From the beginning of their suit against Microsoft and Activision, the three Democratic FTC commissioners were clear that their focus was to protect the merging companies' competitors, especially Sony ( SONY ) as opposed to protecting competition and customers. It got to the point that the FTC lawyers were actively lobbying for Sony in open court, trying to push Microsoft executives to make more generous commitments to a multibillion dollar foreign rival.

Microsoft wants to own Activision because Microsoft is falling behind in mobile gaming. Mobile is over 50% of gaming and mobile gaming is dominated by Apple ( AAPL ) and Google ( GOOG , GOOGL ). So far, Microsoft's mobile offering is mostly limited to Minecraft but it will need to expand to effectively compete. Where Microsoft is most focused, this deal will make the market more competitive, not less. If the FTC cared about either competition or customers, they would sooner require this merger than block it.

While Microsoft is focused on mobile, the FTC was more concerned about Activision's multiplayer shooter game Call of Duty/CoD. The FTC cares about Call of Duty because Sony cares about it. In particular, the worry is that it is a popular game and Microsoft could favor its own consol. However, neither Microsoft nor Activision ever intended to keep CoD off of Sony's PlayStation consol. But here's how the FTC has already won: they indicated their opposition to the merger in December 2022. In February 2023 in response, Microsoft began making legally binding commitments to offer CoD elsewhere such as on streaming services. Nvidia Corporation ( NVDA ) would have opposed the deal, but flipped to supporting it as a result.

Under oath, Sony Interactive Entertainment CEO Jim Ryan claimed that he wanted Microsoft to commit CoD to PlayStation, but behind the scenes he said that he wasn't worried about it.

I don't want a new Call of Duty deal. I just want to block your merger.

- Jim Ryan, CEO of Sony Interactive Entertainment

Meanwhile Microsoft was trying to solve the purported antitrust issue, offering Sony to keep CoD on PlayStation and expressing a willingness to sign a contract. Under oath, Microsoft Gaming CEO Phil Spencer committed to offering CoD on Sony and Nintendo current and future platforms for 10-years. Nintendo signed that deal but Sony didn't.

The Sony/FTC case against this deal was predicated upon an economist's expert report that said that if 20% of users would switch from Sony PlayStation to Microsoft Xbox if necessary to get CoD then the deal would be anticompetitive. But the 20% was just backfilled in order to make the argument that they were trying to make. It was pretextual and motivated. It was simply an input. If one inputs the number "20%" into an expensive and complicated formula called a Vertical Foreclosure Model, then the formula says that this deal harms customers. But if one inputs the number "15%" then the formula says that this deal doesn't harm customers. It isn't proof. It isn't even an argument. It is merely a syllogism.

What's next in the process

Now that the parties submitted their proposed findings of fact and conclusions of law this past Friday, final submissions Monday and the judge had time to work on her decision Tuesday, the order could come at any time. Then Microsoft would decide if it wants to contend with the UK CMA (which also blocked the deal) or Activision (which could demand a price bump to extend the merger beyond the July 18th walk date). The former would probably be cheaper. However, it has its risks. Illumina ( ILMN ) closed their Grail acquisition around the EU and as a result faces a potential fine of up to $453 million. Microsoft could be wary of a similar fate.

What you can do about it

It is not the harm to Sony that we are concerned with; it is the harm to the consumer.

- Judge Jacqueline Scott Corley.

If she determines that there is no evidence of harm to consumers, then she will reject the PI. She could indicate that the FTC already won in the sense that their challenge led Microsoft to offer a series of agreements to offer CoD on various other platforms for the long-term. If the deal closes, more customers will be able to access CoD than can get it today. ATVI will converge towards the $95 deal price. Possibly more dramatically, near dated calls could converge on prices indicating that the deal could close quickly.

Conclusion

If the FTC is trying to protect competition on behalf of customers, then it can already declare victory in the Microsoft-Activision deal because Microsoft's contractual commitments ensures that competition will be preserved and enhanced as the move further into mobile gaming.

TL; DR

This deal is pro-competitive and this judge is smart; she will probably say that the FTC already achieved its purported goal when she rejects the PI.

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