Quick links for the FTC v. MS case:
- Docket entries
- US District Court specific web for the case
- Summary of Day 1 - Followed from pages 1098 - 1124
- Summary of Day 2 - Followed from pages 1132 - 1175
- Summary of Day 3 - Followed from pages 1203 - 1252
- Summary of Day 4 - Followed from pages 1260 - 1303
- Summary of Day 5 - Followed from pages 1313 - 1369
PREVIOUSLY ON...
NEXT KEY DATES:
The appeal process against the CMA in UK
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Hello there!
Mods asked me if I could make an official thread about the Activision Blizzard King acquisition (from now on, ABK) to: 1) keep things more organised; 2) if possible, reduce the level of console warring.
This OT can be used to disccus anything related to this transaction and to post the latest news. I'll keep the OT updated as much as I can.
Should we start?
View: https://media.giphy.com/media/8YmZ14DOpivXMuckSI/giphy.gif
Why should I trust you?
OK then, why are we here?
What is antitrust or competition law?
How is antitrust affecting the ABK deal?
Who is supervising the ABK deal?
Why are so many countries reviewing the deal?
How does the review process work?
What are regulators reviewing?
What can regulators decide?
How are the different processes evolving?
All the countries have to approve it?
When is all this madness going to end? :p
The original deadline established by the parties was July 18th 2023.
On July 19th 2023, MS and ABK announced an extension and amendment of the merger agreement through a Letter Agreement, extending the outside date to October 18th 2023.
What are remedies and how could they affect the deal?
What types of remedies can be accepted and/or imposed?
How are remedies negotiated and implemented?
How do remedies work at the CMA and European Commission?
What happens if the deal doesn't get approved?
Related info
- Official web from Microsoft about the acquisition
- Quantitative Perspectives on Acquisition Targets From An M&A Banker
- Mergers & Acquisitions For Gaming: A Primer Into The Joys of Corporate Combinations We All Love
- Microsoft/Activision – Market Definition and Theories of Harm Under EU Competition Law
- Microsoft and Activision-Blizzard: Examining the Largest Tech Acquisition of All Time
- Docket entries
- US District Court specific web for the case
- Summary of Day 1 - Followed from pages 1098 - 1124
- Summary of Day 2 - Followed from pages 1132 - 1175
- Summary of Day 3 - Followed from pages 1203 - 1252
- Summary of Day 4 - Followed from pages 1260 - 1303
- Summary of Day 5 - Followed from pages 1313 - 1369
PREVIOUSLY ON...
- September 22nd: New Microsoft/Activision deal addresses previous CMA concerns in cloud gaming.
- September 22nd: preliminary approval from the CMA.
- September 25th: the CAT adjourned again the original appeal.
- September 26th: Ubisoft talks about the agreement with MS.
- September 27th: the FTC to resume the administrative process 21 days after the 9th Circuit rules on the FTC's appeal.
- October 6th: Microsoft planning to close on October 13th.
- October 13th: the CMA approved the acquisition with remedies, the divestment of the ABK cloud gaming rights.
- October 13th: MS officially closed the merger with ABK.
- October 16th: the Australian ACCC discontinued its review of the acquisition and let the merger go through.
- October 19th: the FTC is still appealing the PI decision to the 9th Circuit and it's reopening the administrative process.
NEXT KEY DATES:
- December 6th 2023: oral arguments in front of Ninth Circuit in relation to the FTC appeal.
- Spring 2024: decision from Ninth Circuit.
- Spring 2024: the FTC resumes the administrative process.
- February 5th 2024: placeholder trial date for the gamers' lawsuit.
The appeal process against the CMA in UK
Thanks to Pixis | Post 1,939
OK so there's some confusion here about what can and cannot be appealed and how this works with the CMA, and then various linking to CAT and/or court cases involving the CMA. I will try and break this down slightly (bearing in mind this no easy task!).
We are talking about a merger here which, for reference, the CMA are given jurisdiction to review (provided it meets the requirements therein) pursuant to the Enterprise Act in the UK. Under the Enterprise Act, parties aggrieved by a decision can appeal to CAT - however, and this is the crucial component - CAT will only apply a judicial review standard when reviewing a decision. In other words, they will not engage in the substantive merits of the CMA's decision but look only as to whether the way in which that decision was made was illegal or otherwise had some procedural impropriety involved (broadly speaking). As such, CAT will never (and cannot, under the Enterprise Act) review a decision of the CMA solely based on the conclusion the CMA came to.
If CAT determines any of the above has been engaged, it will send the decision back to the CMA again (typically). The CMA must then engage the review process again (but of course fixing the procedural issue that arose) and then it may make another decision. If the CMA makes the same decision - that is essentially the end of the line of appeals.
There is an extremely limited secondary appeal process under the Enterprise Act where if CAT permits, it can allow an appeal to the Court of Appeal by an afflicted party but only on a question of law (there is also a very very difficult appeal procedure directly to the COA if CAT deny the appeal, again on a question of law basis). A question of law can only arise effectively if CAT in its review reached a conclusion either a) on which no reasonable person could have come to or b) where there is no evidence to support a finding of fact on which CAT's decision was based. These are extremely high thresholds and again only, when boiled down, go to CAT's judicial review of CMA's decision. As such, there is again no means of actually appealing the conclusions made by the CAT (and in turn the CMA) in respect of the merits of their decision vis-a-vis a merger.
If you therefore see the CMA engaging in high court decisions, or decisions re fines like the ones above - these are not typically in respect of mergers but in respect of unrelated provisions of the Competition Act (which is another prominent piece of competition legislation in the UK) which deal with fixing agreements, penalties and occasionally abuses of dominant position (as well as some costs cases).
Source - me, M&A lawyer, qualified in the UK (involved in CMA cases, Commission cases and offshore competition cases).
Hope that helps!
Thanks to CeeCee | Post 43,947
Right - y'all made me dig out my login for the first time in three years so you better all appreciate this.
First up, I have a professional background related to this issue.
Second, There are at least 4 major errors of fact or understanding which are running endemic in the thread:
Also, please stop bringing up Brexit. In fact, as a fun bonus, EU competition policy is exactly what most people in this thread seem to not want - a heavily political process. EU decisions are made by the Commission - a body heavily subject to political influence. UK decisions are made by a politically independent body. To be explicitly clear: if you prefer the EU process, you prefer a political process.
- That the CMA is in any way subject to government intervention/"just take them to court". The appeal process goes to a tribunal, which can only intervene if their action was illegal, had incorrect process or was irrational. There is no other route to appeal to the courts and the UK Government cannot intervene even if they want to. The CMA is not run or controlled by the Government - attacking the CMA means you are attacking an independent organisation, not the UK Government or the Conservative Party.
- That irrational carries a colloquial meaning. Just because you think a conclusion is wrong does not make it irrational. Irrational, in this context means that it is so unreasonable that no rational person could reasonably have reached this conclusion.
- That the probability of the appeal succeeding is anything other than very low. Success rate at the CAT is not high, and a success would just mean that the CMA has to remake the decision having fixed whatever the issue in their process was.
- That the CMA is a political body, "overpaid", "idiots", or any other ad-hominem attack. The CMA is an independent body, staffed by people with deep and extensive knowledge and experience of competition law and issues, who are paid less than they could earn in the private sector (even quite senior staff are generally paid less than £100k). From professional experience, I can confidently say that the quality of the CMA's work and people is highly-regarded by professionals in the field.
-----
Hello there!
Mods asked me if I could make an official thread about the Activision Blizzard King acquisition (from now on, ABK) to: 1) keep things more organised; 2) if possible, reduce the level of console warring.
This OT can be used to disccus anything related to this transaction and to post the latest news. I'll keep the OT updated as much as I can.
Should we start?
View: https://media.giphy.com/media/8YmZ14DOpivXMuckSI/giphy.gif
Why should I trust you?
You shouldn't, I'm a lawyer :p xD
To be more specific, I'm a European lawyer and I've been working for almost 15 years on IT and competition law (antitrust). So, some of the things that I'm going to explain here I know them from my own experience and others and are just part of my day to day "legal readings".
I also like videogames, so I've been reading about these subjects in the videogame industry since at least the days of Activision Blizzard buying King (in 2016).
I was the one who shared for the first time here the official opinions of multiple companies about the ABK deal (including Sony and the famous "COD is unique and unrivalled"), as well as the official answer from Microsoft (claiming that Sony was paying to block games from Gamepass).
I was also the one who shared here for the first time the notification from MS to New Zealand where they said that the games from ABK doesn't have anything unique or special.
All those topics have become very popular in the media since then. :p
OK then, why are we here?
In January 18th, 2022, Microsoft announced plans to acquire Activision Blizzard for $68.7 billion.
- Official press release
- Merger agreement
- ABK shareholders approving the proposed deal
But this kind of transaction is subject to regulatory review before it can be closed and in this case, from multiples countries.
Enter the (antitrust or competition law) Matrix!
What is antitrust or competition law?
It's a field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. That means that the antitrust laws want to protect the interests of consumers and the public, as well as the entrepreneurs that start a new company.
For example, antitrust fights against monopolies, that's what happens when only one company is the supplier of a product o service. But it also fights against oligopolies, when a market is controlled by a few companies that to maximise profits collaborate to avoid real competition.
Those are two classical examples of anti competitive conducts but there are way more. For example, in the digital age things such as personal data, network effects, algorithms, patents and more are also used for anticompetitive conducts.
In any case, antitrust is not a new field, the Roman empire was the first to have laws about market competition (to protect the grain trade).
How is antitrust affecting the ABK deal?
Antitrust law has three main objectives:
- Prohibiting agreements or practices that restrict free trading and competition between business (that's a cartel).
- Banning abusive behaviour by a company dominating a market (altering prices, affecting revenues from third parties, blocking access to goods or services, etc).
- Supervising the mergers and acquisitions (usually know as M&A) of corporations to understand if that transaction is fine, it could harm competition, it can be approved but with conditions or it has to be rejected because it is too harmful for the market.
The last one is where the ABK deal fits, it's a M&A transaction that has to be supervised to understand if it can affect the market in the short, medium and even long term.
Who is supervising the ABK deal?
The competition and consumer protection agencies of the corresponding countries or regions (we are going to call them, regulators). There are more than 150 competition and consumer agencies in the world.
For example, in the United States that would be the Federal Trade Commission (FTC) and the Department of Justice (DOJ).
In Europe there is one regulator by country and when a deal goes beyond specific limits or thresholds and affects multiples Member States, then the European Commission (EC) intervenes.
In the ABK deal the FTC is the one reviewing the deal in the United States and the EC is the one doing it in Europe.
Why are so many countries reviewing the deal?
Although Microsoft and Activision Blizzard are American companies, the one doing the acquisition (MS) operates in multiple territories with its gaming business and is acquiring assets from ABK in multiples countries (UK, US, China, Japan, Spain, Australia, Canada, Ireland, etc). In addition to that, the turnover thresholds (or how much money does the company acquired in the specific country or region), are usually used by regulators to understand if they should review or not a transaction.
For example, the CMA in UK said that the turnover of ABK in the country was more than £70 million in FY2021. That means that it met the turnover test for UK and then the CMA has jurisdiction to review the deal.
According to Brad Smith (the president of Microsoft), the ABK deal needs approval from at least 17 jurisdictions. So yeah, the CMA, FTC and EC are important, but not the only ones.
How does the review process work?
This is what's called merger control or the procedure of reviewing mergers and acquisitions under antitrust or competition law.
The merger control process wants to prevent anti-competitive consequences of transactions before the concentration happens. That's why they do what is called substantive tests to analyse if the transaction can impede or lessen effective competition or if it could create a dominant position.
It's important to note that all the review processes have to comply with deadlines. So, regulators don't have an infinite amount of time.
Every country has its own law and specific requirements, but the main aspects of the process are similar.
A) Pre notification consultations with the regulator about formalities, scope of the info to send, first feedback about potential harms, etc.
B) Formal notification to the regulator about the plan to acquire the company (usually mandatory but you can take as much time as needed before sending it).
C) Phase 1 or first analysis of the deal (the majority of transactions end here). It usually takes 30-40 days.
D) Feedback from third parties, suppliers, competitors, etc. about the transaction (usually it happens between formal notification and Phase 1, but sometimes it means the start of Phase 2).
E) Phase 2 or a more thorough investigation. Usually done on large or complex mergers. It usually takes 3-6 months.
F) "Phase 3" or final approval by a competition tribunal (some countries do it but it's not the normal way).
In the ABK deal all the merger control processes already notified are in Phase 2 or Phase 3.
What are regulators reviewing?
As we said, the merger control process wants to prevent anti-competitive consequences of transactions before the concentration happens.
To do that, first of all we have to understand what type of merger we are dealing with.
There are three types of mergers:
- HORIZONTAL: this happens when a company buys a competitor at the same level of production and/or distribution of a good or service and in the same relevant market. This horizontal merger can generate unilateral and coordinated effects.
For example, there is a part of MS that develops and publishes games and ABK is mainly a developer/publisher of games. Then MS buying ABK is an horizontal merger. A potential unilateral effect in the ABK deal would be raising the prices of AAA games from MS/ABK because after the transaction maybe there are less alternatives to develop AAA games (that's why regulators are asking about this, by the way).
Coordinated effects happen when post merger, the new entity and their competitors coordinate their behaviour in an anti-competitive way. For example, let's say that MS/ABK, Sony and Nintendo coordinate themselves to block the access to the videogame industry to Amazon, Netflix or Google.
- VERTICAL: this happens when a company buys another one that operates at different but complementary level in the chain of production of the same final product. The company acquired can be part of the upstream (manufacturing) or downstream market (distribution).
For example, another part of MS manufactures hardware (Xbox) and distributes games (through digital stores and subscription services). ABK doesn't manufacture hardware and only a small part distributes games (but their own and without subcriptions). Well then, MS buying ABK is also a vertical merger.
Usually a vertical merger doesn't imply a loss in competition because the parties' products did not compete in the same relevant market. But vertical mergers can produce competitive harm though something called foreclosure. There are two forms of foreclosure:
1.- Input foreclosure: this would happen if MS/ABK restrict the access to what ABK would usually supply to everyone. For example, Call of Duty or any other game from them. It can also happen if MS/ABK gives access to Call of Duty but competitors have to pay more for it, if they release the game later, with less quality, less features or with new technologies that harm compatibility.
2.- Customer foreclosure: when Sony said in Brazil that ABK generated a lot of money for them, they were implying that customer foreclosuse could be happening because a competitor (MS) is acquiring one of its main clients (ABK) and if the deal goes though they could lose a lot of money. When the CMA in UK says that cloud gaming services are a nascent market and that MS acquiring ABK could harm competitors, they are talking about customer foreclosure because new potential competitors (Tencent, Netflix, Meta, Amazon, etc) are losing access to significative content (Call of Duty and more games).
So, all the talk about Call of Duty being exclusive or not is a question of vertical merger and input foreclosure.
But the ABK deal is a hybrid merger with horizontal and vertical effects.
- CONGLOMERATE: this happens with transactions between companies that operate in different product markets and without a vertical relationship. They are also called extension mergers and are usually used to enter a new or neighbouring market. MS buying Netflix could be something like that.
The ABK deal is not affected by this.
What can regulators decide?
1) They can approve the transaction without seeing any potential problems.
2) They can approve the transaction with remedies or commitments because they see potential problems.
There are two types of remedies: A) Behavioural remedies and B) Divesture remedies. The behavioural remedies have a sub class called IP remedies.
A behavioural remedy is a formal commitment to do something in the future. For example, "Call of Duty will be multiplatform for 10 years".
A divesture remedy is divesting part of the business where there is some overlap causing competition concerns. For example, "I'm going to keep Blizzard and King but I'm going to sell Activision".
An IP remedy is a mix of both, although it's usually considered more like a behavioural remedy. In this case the parties agree to license or assign intellectual property, including patents, licences, brands or data. For example, "I'm going to license Call of Duty to every subscription service for 10 years".
The remedies have to say WHAT you are going to do and HOW you are going to achieve that. Regulators prefer divesture remedies because behavioural/IP remedies are considered less likely to deal with any adverse effects as comprehensively and may generate market distortion.
3) Reject the transaction because it can harm competition and there is no potential remedy to solve it.
How are the different processes evolving?
APPROVED
- Australia: After more than a year with the timeline suspended, on October 16th 2023 the ACCC discontinued its review of the acquisition and said that it didn't intend to take any further action, letting the merger go through.
- UK: the original deal was blocked on April 26th 2023; the restructured deal was approved on October 13th 2023 with structural remedies.
- Taiwan: it was approved on October 9th 2023, without restrictions.
- New Zealand: it was approved on August 8th 2023, without restrictions.
- US: after a preliminary injunction and appeal, both denied, the acquisition was allowed to be closed on July 14th 2023, without restrictions. The FTC is appealing the decision to the 9th Circuit and plans to reopen the administrative process in Spring 2024.
- Canada: a letter from Canadian Competition Bureau dated June 28th 2023, stated that on May 5th, 2023, the Bureau communicated to Microsoft and Activision's Canadian counsel that the Bureau had concluded that the proposed merger was likely to result in a substantial prevention and/or lessening of competition with respect to gaming consoles and multigame subscription services (as well as cloud gaming). The Bureau said that it would continue to monitor the transaction. MS said that the formal waiting period preventing the deal to close expired and it would go ahead with the merger.
- Turkey: it was approved on July 13th 2023 without restrictions.
- South Africa: it was approved on June 30th 2023 without restrictions.
- South Korea: it was approved on May 30th 2023 without restrictions.
- China: it was approved on May 19th 2023 without restrictions.
- Europe: it was approved on May 15th 2023 with behavioural remedies.
- Ukraine: it was approved on April 27th 2023 without restrictions.
- Japan: it was approved on March 28th 2023 without restrictions.
- Chile: it was approved on December 29th 2022 without restrictions.
- Serbia: it was approved on November 28th 2022 without restrictions.
- Brazil: it was approved on October 5th 2022 without restrictions.
- Saudi Arabia: approved it on August 22nd 2022 without restrictions.
All the countries have to approve it?
Yes, that would be the ideal scenario.
In fact, the merger agreement (page 68) when talking about "Regulatory Approvals" expressly mentions 4 approvals that will be needed: US, UK, Europe, China. Everything else is just under the concept of "...and certain other jurisdictions". So, at least those 4 jurisdictions should give the go ahead.
In a cross border transaction like this one the regulators from the different countries or regions are usually coordinated and one of the reasons is to avoid very different outcomes.
For example, maybe the majority of regulators approve the deal without problems but some of them ask for specific remedies for their local market. That could work for MS/ABK.
Or maybe the majority of regulators approve the deal but some minors ones don't. In that case, MS/ABK would probably go to court to appeal the decision and would probably win because courts are usually more favorable to parties than regulators. Although that could take some years, if the market is not too big/important, maybe it could work for MS/ABK.
It could also happen that an important regulator approves the deal (the FTC in US) but another big one rejects it (the EC in Europe or the CMA in UK). In that case, MS/ABK could appeal the decision but that's going to be a long and tough battle. When that happens the parties usually abandon and cancel the deal.
When is all this madness going to end? :p
The original deadline established by the parties was July 18th 2023.
On July 19th 2023, MS and ABK announced an extension and amendment of the merger agreement through a Letter Agreement, extending the outside date to October 18th 2023.
What are remedies and how could they affect the deal?
Remedies are tools used by competition authorities or regulators to maintain or restore competition in the market when an investigation about a transaction and the analysis of the different theories of harm reveals that the merger will likely result in substantial harm of competition.
In those cases, implementing some specific obligations and conditions to the transaction (remedies) can help to avoid the identified harms to the market, the merger can still go ahead and it doesn't have to be prohibited.
The terminology is a bit confusing because there are different ways to says almost the same. The general term is "remedy/remedies", but the European Commission calls them "commitments", the CMA refers to them as "undertakings in lieu" or UILs and in the US they are called "consent orders" (FTC) and "consent decrees" (DOJ).
Here we are going to call them remedy/remedies.
Parties start talking about remedies as soon as the negotiation of the deal begins. This means that between November 2021 and January 2022 MS and ABK started talking about them. The merger agreement is the instrument used by the parties for this.
When the Activision Blizzard Board of Directors considered the risks of the merger, the regulatory ones where obviously there (page 46):
The possibility that regulatory agencies may delay, object to or challenge the merger or may impose terms and conditions on their approvals that adversely affect the business or financial results of Activision Blizzard or Microsoft and the fact that Microsoft is not required to agree to remedies that would reasonably be expected to (x) result in a material adverse impact on Activision Blizzard and its subsidiaries, taken as a whole, (y) have a material impact on the benefits expected to be derived from the merger by Microsoft or (z) have more than an immaterial impact on any business or product line of Microsoft.
This means that MS can sell, license or restrict assets and rights from ABK to get the merger approved but only if that doesn't have a material effect on ABK, the benefits that MS was expecting from the deal or if that could even affect MS's businesses.
So, could MS accept to sell the Activision Publishing subsidiary (COD, Crash, Tony Hawk, etc) as a remedy to get the merger approved? In theory yes, but I think that such an operation would affect the benefits that MS is expecting from the merger. Therefore, very unlikely.
What types of remedies can be accepted and/or imposed?
They are generally classified as structural remedies when they require the divestiture of a business, an asset or IP rights or behavioural remedies when they impose an obligation to engage, modify or constrain the future conduct of the parties.
Examples of structural remedies:
- Divesting all or part of the business acquired to a suitable purchaser (for example, MS sells Activision Publishing to Take2 and keeps King and Blizzard).
- Carving a divestiture package out of the two merging businesses, with the purchaser keeping some of both businesses and selling some of them too (for example, Take2 buys Activision Publishing and some studios from MS, keeps COD and all the studios working on it but sells everything else to EA and Ubisoft).
- Keeping the acquired business and divesting the business already owned (for example, MS sells almost all the Xbox game studios but keeps ABK complete).
- The sale of key assets (for example, MS keeps ABK complete but sells all the studios working on COD excluding Treyarch, Infinity Ward and Raven).
Examples of behavioural remedies:
- Price controls (for example, Sony gets access to COD and other ABK games on the same terms and fees for 10 years).
- Commitments to continue supplying certain customers (for example, Sony gets access to COD until 2028). In fact, this is the one that MS is offering right now.
- Licensing/assigning brands and/or IP rights; although this one can be a mix of structural and behavioural remedy (for example, MS keeps ABK almost complete but licences the COD IP + sells some ABK studios to Take2; or MS has to licence Windows Server to any new entrant on the cloud gaming market on fair and equal terms for 10 years).
- Firewall provisions, to restrict the access to and dissemination of competitively sensitive information within a company (for example, MS agrees to not access commercially sensitive information from Sony that ABK has obtained during the marketing agreement with them).
- Hold separate provisions, when the relevant business is run independently of the merged entity (for example, MS gets ABK complete but Activision Publishing starts operating separately, as a competitor.)
- Non-discrimination, or to treat other market participants in a fair and even-handed manner (for example, Sony and other competitors will get access to COD on the same date, with the same features, with the same level of interoperability, etc. until 2030).
- Anti-retaliation provisions, to prevent the merged entity from retaliating against customers or other market participants for transacting with the merged entity's competitors (for example, MS won't rise fees to EA or Ubisoft if they start working with Sony on a competitor to COD).
- Prohibitions on certain contracting practices, like exclusivity, bundling or tie-in (for example, MS cannot sign agreements with PC manufacturers to offer free promotions of Gamepass PC until 2030).
- Prior approval provisions, to impose additional filing or reporting obligations in respect of future transactions (for example, MS must inform regulators before any gaming acquisition from now on).
There a few more, but I think that these ones are the most common and relevant for this case.
Remedies, and not prohibitions, as the primary tool used by regulators (in the US, Europe and beyond) to address anticompetitive effects from mergers.
All the regulators have a preference for structural remedies because they are more useful to prevent significant impediment to effective competition and they don't require monitoring measures (always expensive for the regulator). But at the same time, regulators also accept behavioural remedies in certain cases (specially in vertical mergers, like the ABK one).
Dynamic industries or markets characterised by rapid change, innovation and disruption present unique challenges for merger control, as it is not always clear how a potential remedy can affect competition. The ABK case affects a couple of nascent markets (cloud gaming and subscription services) as well as a dynamic industry (videogames).
In any case, sometimes no remedy is good enough to deal with the adverse effects identified or maybe it's so complex that the regulator cannot determine if effective competition will be restored. In those cases, the deals are usually abandoned, or if not, prohibited.
How are remedies negotiated and implemented?
Planning for remedies starts very early in a transaction, normally while negotiating the deal.
Remedy planning involves: 1) identifying possible competition concerns; 2) identifying what remedies can address those issues according to legal standards; 3) the rationale for the transaction; 4) the efficiencies of the merger; 5) deciding what remedies to offer and when, specially in multi-jurisdictional cases.
In horizontal mergers only structural remedies will be acceptable. In the ABK deal there are horizontal issues but they are not relevant beyond the digital distribution of games. But even in that case it shouldn't be problematic.
Regulators are more sceptical of behavioural remedies, but they are accepted, particularly in vertical mergers. The majority of the issues discussed in the ABK deal are from the vertical side.
When designing and negotiating the scope of the remedies package, internal business documents can be problematic if they hint to or just say what assets the companies would be willing to divest. For example, the CMA gives a lot of importance to internal documents these days (there were lots of references to them during the Phase 1 decision).
When negotiating with regulators there are a few things to take into account: 1) timing; 2) scope of the remedies package; 3) the goals of the client; 4) preserving credibility with the regulator; and 5) gathering sufficient information about the regulators' concerns.
It's been said that there are two main approaches to remedy negotiations: the "funnel approach" and the "front-loaded approach":
A) The funnel approach involves starting the debate with the regulator by discussing the easiest issues first and working through each issue to convince the authority that the transaction raises no concerns regarding that issue. If the parties run out of time or there is no way to convince the regulator, it's time to think about remedies.
The main advantage of the funnel approach is that it sends a strong message from the parties that they are not willing to accept remedies beyond the minimum required. Therefore, the regulator will focus more on evaluating the arguments presented and not so much about what remedies should be adopted for now.
Problems with the funnel approach? 1) You need a lot of time; 2) if you didn't plan properly and at the end of the day remedies have to be negotiated, maybe you have to rush the process; 3) if after all the discussions the obvious solution was implementing remedies, the parties may loss credibility with the regulator.
B) The front-loaded approach involves presenting a proposal to the regulator almost from the beginning with what the parties are willing to divest to solve the potential issues very quickly. This approach is useful to close a deal as soon as possible, for example because the remedy package is clear and won't be questioned. The problem is that the parties will probably offer way more than what is really needed.
Both approaches can be used at the same time. For example, you can start with the funnel approach but when you see that the regulator is not going to be convinced, you switch to the other one.
Seeing that MS set a time limit of 18 months to close the deal and that they are not offering remedies by the end of any Phase 1, it looks like they are not willing to offer any huge remedies package and are using the funnel approach right now.
If the parties have to sell assets or businesses, a three way negotiation and sale process between the parties, the regulator and the purchaser begins. It can be a long and complicated process. I don't think that a divesture process is likely in this case, but let's just say that the purchaser has to be suitable. That means that the purchaser should have:
- The corresponding financial resources for the purchase
- A business plan for running the acquired business
- The appropriate back-office and other corporate infrastructure support from the seller
- The corresponding transition service agreements and supply agreements with the seller
- An appropriate level of knowledge and experience relevant to running the acquired business
Finding that purchaser and going ahead with the divesture has to be done in a specific period of time and always before the date set by the parties to close the deal.
During multi-jurisdictional cases, like this one, this whole process is a bit more complicated because the design of the remedies package has to take into account multiple competition authorities (in the ABK deal, at least 17). So, you have to present the transaction in a coherent manner but also the potential remedies.
In these cases the timing of notifications is important, because what one jurisdiction says can be used as a point of reference by the other ones. But sometimes it's better if you played them in parallel. It depends on the case. The geography of the relevant markets is important too. For example, if they are very local it's going to be harder to present a unified remedies package. But if the markets are global, then the issues are probably going to be very similar in every country and you could offer very similar remedies.
In the ABK deal the issues seem to be very similar in every jurisdiction and the majority of relevant markets have a global side. So, a global approach to remedies is more possible. The timing of notifications seems to indicate that almost all the big jurisdictions are running in parallel right now (UK, EU and US), with probably the US being the first to decide, then UK and finally the EU. But MS was upset with the CMA because they expected to get approval in Phase 1.
So, no idea if this was the original strategy or it changed due to the circumstances.
How do remedies work at the CMA and European Commission?
CMA
There are common principles that apply to the assessment of remedies at Phase 1 and 2. Therefore, the remedy must be:
For the CMA there are 3 main categories of remedies:
- Effective (possible adverse effects, appropriate duration and timing, practicality or acceptable risks)
- Cost effective
- Proportionate
- Consider relevant customer benefits
- Structural (prohibition, divesture, IPs)
- Behavioural (IPs, enabling measures, controlling outcomes)
- Recommendations of regulations and conduct (when it lacks the ability to carry out relevant measures by itself)
During Phase 1 and pre-notification, the CMA cannot impose a remedy and only the parties can offer them.
In the case of Phase 1, if there are competition concerns, remedies can be offered as an alternative to go to Phase 2. During this stage the CMA can only propose modifications to the remedies offered by the parties. During Phase 1 is unlikely that the CMA will consider behavioural remedies unless those are workable and effective within the short timetable.
During Phase 2, the CMA will only consider possible remedies after it has reached its provisional finding and the conclusion is that the merger will have an anti-competitive outcome. In that case, the CMA will also publish a Notice of Possible Remedies to act as a starting point for discussion of remedies. Now the parties (and even third parties) can suggest alternatives to the initial remedies proposed by the CMA.
In this case, the CMA will consider its own proposals, the remedies proposed by the parties and the ones from third parties (non-confidential versions of these proposals will be published). After multiple hearing and consultations, the CMA will publish the Final Report with the final decision about the merger and the nature and scope of the remedies to implement.
The final stage would be the implementation of remedies, creating a new timetable, considering interim measures, establishing key milestones, etc.
European Commission
When assessing a proposed remedy, the European Commission will take into account if the remedy:
The characteristics of the market in question and the type, scale and scope of the remedy are also analysed.
- Is able to fully resolve the competition concerns.
- Can be implemented within a short time period.
- Will require additional monitoring once has been implemented.
- Is a permanent solution.
- Is proportionate and workable in practice.
- Preserves any merger-specific benefits.
The merging parties are the ones who propose remedies in this case. They also have to show that the remedies offered eliminate the problems and restore effective competition. The Commission is the one who has to proof that the conditions for a prohibition are met, irrespective of whether remedies have been offered or not.
For the European Commission there are 3 main categories of remedies:
Remedies usually contain a review clause that allows the Commission to grant an extension of deadlines or, in some exceptional cases, waive, modify or substitute the remedies.
- Divestment (full or partial divestiture of a business or asset)
- Removal of links with competitors (like minorities stakes between the parties and competitors)
- Other remedies (including access to an intellectual property right, network, input or an infrastructure on fair terms; the change of long-term exclusive contracts; other behavioural remedies).
Remedies can be offered during Phase 1 and Phase 2.
During Phase 1 remedies make more sense when the competition problem is easy to identify and fix. They are usually offered to avoid Phase 2.
During Phase 2 remedies must be offered within 65 working days since the start of Phase 2. Depending on when that happens, the basic period of 90 days can be extend up to 125 working days. Remedies during Phase 2 are usually more specific and complex.
The European Commission usually conducts market tests for almost all remedies proposals in order to test if competition issues are properly addressed. These market tests are used for transparency purposes and to give third parties an opportunity to express their views before the final decision.
What happens if the deal doesn't get approved?
The merger agreement said that MS and ABK expected the deal to close in 12 months (January 18th 2023) or less. But the agreement also included two possible extensions of 3 months each one (until April 18th 2023 and the other one until July 18th 2023).
Those extensions applied automatically by January 18th 2023 and April 18th 2023 because the transaction was still pending regulatory approval.
After extending and amending the merger agreement on July 19th 2023, the new outside date is October 18th 2023. The Letter Agreement to the Merger Agreement also establishes a new increasing breakup fee:
- August 29th: if the merger is not closed by then, the breakup fee will be increased from $3,000,000,000 to $3,500,000,000.
- September 15th: if the merger is not closed by then, the breakup fee will be increased from $3,500,000,000 to $4,500,000,000.
- October 18th: new outside date; the merger agreement can be terminated by then if the parties agree or the merger has not been consummated prior to 11:59 p.m. (Pacific time).
Originally, the the transaction could have been terminated by MS or ABK if:
The transaction could have been terminated by ABK if:
- Both parties agree.
- The Activision Blizzard stockholders reject it (it was already approved, so it's doesn't apply anymore).
- A court or a regulator rejects the deal and there is no way to appeal it.
- There is a new law that prohibits this kind of deal.
- By January 18th 2023 or April 18th 2023 the deal was still pending but NOT for regulatory reasons.
The transaction could have been terminated by MS if:
- There is an infringement of the agreement by MS and during the period to resolve that, MS doesn't do anything.
- Before the approval by Activision Blizzard stockholders, ABK receives a better offer and pays MS a $2,270,100,000 termination fee.
If the deal doesn't happen, someone has to pay for it :p
- There is an infringement of the agreement by ABK and during the period to resolve that, ABK doesn't do anything.
- The Activision Blizzard Board of Directors doesn't recommend the deal anymore.
Activision Blizzard had to pay Microsoft a termination fee of $2,270,100,000 if:
Originally, Microsoft had to pay Activision Blizzard a termination fee of:
- MS was still waiting for the ABK stockholders meeting to happen by the termination dates.
- Regulatory conditions were not satisfied and the reason was a breach by ABK.
- ABK infringes the agreement.
- The ABK stockholders reject the deal.
- The Activision Blizzard Board of Directors doesn't recommend the deal anymore.
- ABK receives a better offer.
Reasons for this possible termination fee in favor of ABK:
- $2,000,000,000, if the termination notice was provided prior to January 18th, 2023.
- $2,500,000,000, if the termination notice was provided after January 18th, 2023 and prior to April 18th, 2023.
- $3,000,000,000, if the termination notice was provided after April 18th, 2023.
- A court or a regulator rejects the deal and there is no way to appeal it.
- There is a new law that prohibits this kind of deal.
- MS infringes the agreement.
- Regulatory conditions were not satisfied and the reason is a breach by MS.
Related info
- Official web from Microsoft about the acquisition
- Quantitative Perspectives on Acquisition Targets From An M&A Banker
- Mergers & Acquisitions For Gaming: A Primer Into The Joys of Corporate Combinations We All Love
- Microsoft/Activision – Market Definition and Theories of Harm Under EU Competition Law
- Microsoft and Activision-Blizzard: Examining the Largest Tech Acquisition of All Time
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