Microsoft and UK CMA Unearth Troubling Issues

On Tuesday, Microsoft Corp. achieved a significant victory against US trustbusters who aimed to halt its $69 billion acquisition of Activision Blizzard Inc. However, it was in London where the software giant secured an even greater triumph.

Britain’s Competition and Markets Authority, which initially blocked the deal in April, has said it is prepared to consider “proposals … to restructure the deal” that address its concerns. This is not how the UK antitrust process usually works – and the consequences are far-reaching. Merging parties facing a CMA veto have the usual remedy: an appeal. Microsoft had started the process and it has now been suspended.

How could things go? We are in unprecedented territory in terms of major M&A in the UK.

The CMA reiterated that Microsoft’s ownership of Activision’s game catalog could harm competition in the cloud gaming market. It also rejected Microsoft’s proposed remedy — a decade-long commitment to make Activision games like Call of Duty available to rival streaming platforms under certain conditions.

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While the CMA has yet to issue a formal order blocking the deal, it confirmed on Wednesday that merging parties cannot propose new remedies after the publication of the final report, as in this case. However, the regulator says it may propose a restructuring, which will trigger a new investigation.

It is crucial that the CMA sticks to its existing processes. Failure to do so would invite a lawsuit from Microsoft rival Sony Group Corp., which opposes the Activision acquisition.

The CMA’s comment on the hearing of proposals suggests that Microsoft would have a reasonable idea of whether any revised agreement would survive another investigation. Could this new transaction then be approved after a single, expedited investigation without repeating the preliminary and thorough investigations that its predecessor went through? Presumably, Sony would need another opportunity to make challenges.

While companies and regulators can agree a new deal within the rubric, there are two problems with implementing the UK merger after this period. The first is that the CMA’s processes clearly need revision. If there really is an acceptable structure here, surely we should have dug it up a long time ago. Coincidentally, last month the CMA launched a consultation on how it conducts in-depth assessments. This now has a heightened meaning.

Remember, the CMA had to revise its “interim findings” on the Microsoft contract. These preliminary conclusions come late in the investigation process and correspond to the final verdict. And this was not an isolated incident. The same thing happened last month with the combination of vehicle salvage companies Copart and Hills Motors. The agency probably needs to give the merging parties more time to respond to their thoughts before publication.

The second is that the CMA may need to reconsider its position on so-called “behaviour-based” remedies, which Microsoft’s remedies include. The problem is that the behavior that solves problems today may not work if the market evolves. Microsoft’s approach may be to make the remedies so binding that the CMA can claim they are “structural” remedies.

Accepting remedies that are primarily behavioral but dressed up as structural would still damage the CMA’s credibility because of its political status. It is surely time to formulate a more nuanced philosophy. In the end, the European Commission accepted Microsoft’s remedies, even though it agreed with the CMA that trade was harmed without them. And objections from the U.S. Federal Trade Commission failed to persuade a judge to block the deal this week.

You can see the push on both sides to get a UK resolution. Microsoft and Activision want their alliance to progress as quickly and smoothly as possible. The CMA wants to avoid having its negative position on the current agreement overturned on appeal. Because cloud gaming is an emerging and changing market, there was always a greater chance that a negative verdict might not hold up at trial. Add to that the CMA’s woefully poor preparation for hearings, and the risk of confusion is very real.

Consumers need strong regulators to protect them from powerful companies. Overturning the appeal would damage the CMA’s credibility and require a post-mortem inquiry into how the agency reached a decision that could not be defended in court. But it’s important to remember that Microsoft managed to make a lot of noise about the CMA’s opposition being “bad for Britain” – throwing its weight around like a domineering company in need of curbing. It would be a terrible result if the CMA is seen to change its mind under external pressure rather than because the facts changed.

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