Microsoft prepares to close Activision deal despite FTC lawsuit: sources

Microsoft plans to complete its $69 billion acquisition of Activision Blizzard — despite the Federal Trade Commission’s December move to block the deal over antitrust concerns, The Post has learned.

Microsoft is feeling optimistic about getting UK approval for its acquisition – which has been attacked by FTC chair Leena Khan as an unfair mega-merger that would stifle competition across the video-game sector – this week, according to sources close to the tech giant.

That’s because antitrust regulators in the UK and EU have made surprising progress toward approving the merger in recent weeks — swayed by Microsoft’s promises to give rivals including Sony and Nintendo access to its blockbuster “Call of Duty” video-game franchise, the sources said.

With approval expected this week from the UK’s Competition and Markets Authority, Microsoft hopes final approval from the European Commission will come next month, a source close to the situation said.

That, in turn, could make a challenge from the FTC — which filed a complaint Dec. 8 with an FTC administrative law judge to block the deal — an uphill battle, according to antitrust experts.

“They’re going to shove this down the FTC’s throat,” said one source close to the situation.

If it gets European approval, Microsoft plans to quickly close the merger of its “Call of Duty” maker at $95 a share, the source said.

Activision was trading at $85.63 on Tuesday afternoon. Shares would rise to around $95 if Microsoft closes the merger and around $75 if Microsoft abandons the deal, one trader said.

Generally, it is easier to win a case to block a merger by going through an internal FTC judge as opposed to a US district court. But an FTC judge can’t grant a preliminary injunction to prevent a deal from closing.

As Microsoft did not get UK or EU approval it was not seen as a major problem at the time. However, Microsoft has made concessions to make the UK Competition and Markets Authority (CMA) more comfortable with the controversial merger.

“CMA has been the toughest regulator with tech deals in the last several years,” said a source close to the situation.

Microsoft, which owns the Xbox gaming console, has been working to get CMA approval for 10 years, agreeing in recent weeks to give companies like Ubitus and Boosteroid access to Activision games on its cloud-based video game streaming services.

It also struck a deal with Nintendo, which currently does not have access to “Call of Duty.”

A big concern for regulators has been that Microsoft would keep Activision games only on Microsoft’s “Game Pass” subscription service, which would hurt competitors who are trying to launch their own cloud gaming services.

The CMA said earlier this month that it was only concerned about competition issues in the cloud and was no longer concerned about Microsoft’s dominance in the console market, where it competes with Sony’s PlayStation.

Microsoft CEO Brad Smith has said publicly that Khan’s FTC doesn’t even want to discuss such concessions.

The FTC could still file for a temporary injunction from a U.S. federal court to prevent the merger from closing but getting that ruling is not a sure thing, said a D.C. antitrust source not on either side of the case.

“The FTC is required by law to raise serious, questionable questions about a merger to seek an injunction,” the source said. “But as a practical matter the judge is evaluating the merits of the case.”

“If Microsoft makes a deal with the Brits and the European Union, it can say the antitrust concerns are resolved, and that’s not a helpful fact to the FTC if you’re a judge.”

“The FTC will be out there on its own and it will make it much more difficult for the court to take any decision,” Herbert Hovenkamp, ​​a Penn University professor and anti-trust expert, told The Post.

Legal experts have said for months that they believed the FTC complaint would already be difficult to win.

The FTC alleged that Microsoft would have greater market power because it is the main console maker through Xbox and owns Activision.

It “claims to create a Microsoft-Activision transaction”.[e] “joint firms with the ability and increased incentive to withhold or degrade Activision’s valuable gaming content for Microsoft’s competitors,” law firm Arnold & Porter, which is pursuing the case, said in a note to clients.

“The FTC shows that 10 of the top 15 console games sold between 2010-2019 were Call of Duty games, and the latest game in the franchise-Modern Warfare IIReleased in 2022—selling $1 billion in its first ten days of release.”

But, Arnold and Porter also point out that Microsoft says it’s only the third-largest console marker and has no stake in mobile gaming.

“Microsoft’s proposed acquisition is a customer buying an important supplier—a vertical acquisition—and vertical cases are generally difficult for antitrust regulators to bring. The Antitrust Division’s failed attempts to block AT&T’s acquisition of Change Healthcare by Time Warner and UnitedHealth are recent cases,” says Arnold & Porter.

If a federal judge rules against a temporary injunction that would make it more difficult for the FTC to win in its internal court, a source close to the situation said.

Khan was hoping to block the deal without ever winning in court, the sources said.

The hearing date got relatively late when the FTC filed a complaint to block the merger in its internal court. The hearing is now scheduled for Aug. 2, and is several weeks after Microsoft’s July 18 merger deadline with Activision.

FTC internal hearings also typically take more than a year.

It was believed that Activision would walk away from the deal after July 18, charging a $3 billion termination fee, the sources said. That would render the underlying merger case moot as there would no longer be a merger to block.

“The FTC was trying to finish the deal with the process,” a source close to the situation said, adding that the delay helped the regulator.

The safe move for Khan now is to stay the course and not seek a federal court injunction if the CMA and the European Union approve the merger, the antitrust source said.

And then either negotiate the best settlement they can get from Microsoft, like the European deals.

Or continue to pursue the case in its internal courts and hope to win and get the merger out of the way, though that could take more than a year.

“In my mind, it’s a smart play,” the antitrust source said.