How the Microsoft-Activision deal came back from the dead

If Microsoft Corp. completes its acquisition of Activision Blizzard in the coming months, the $69 billion deal will go down as one of the biggest comeback stories in the history of mergers.

By this past April, the gaming industry’s biggest acquisition ever appeared doomed. U.S. regulators had filed a challenge to the takeover and their counterparts in the UK had blocked it outright.

But Microsoft resurrected the purchase earlier this summer, deploying what amounted to a bluff that pitted U.S. and UK regulators against each another. And on Tuesday the UK agreed to open a fresh probe of the transaction, following an offer from Microsoft to sell the cloud rights of current and future Activision games released over the next 15 years to Ubisoft Entertainment SA.

If the transaction clears the UK’s new probe, it could solidify Microsoft’s status as the third-biggest player in the gaming world and signal a major defeat for ambitious competition regulators in the U.S. and the UK. This account of how Microsoft outmaneuvered regulators to shift its fortunes is based on interviews with more than a dozen company executives, advisers and competitor enforcers.

Microsoft first announced the acquisition in early 2022. Trouble arrived in December 2022 when regulators in the U.S. filed an administrative challenge to the deal. Then in April, UK antitrust enforcers at the Competition and Markets Authority, led by Sarah Cardell, blocked the takeover outright, saying it threatened competition in the multi-billion-dollar gaming market. The U.S. Federal Trade Commission, led by Lina Khan, scheduled a trial for August, weeks after Microsoft’s deadline to close the acquisition or be subject to a $3 billion breakup fee.

But the software giant led U.S. enforcers to believe it would consider an extreme move: completing the purchase in defiance of the British veto, a maneuver that provoked the FTC to file a federal lawsuit — a court battle that the company’s lawyers predicted they would win. In reality, Microsoft was secretly seeking to make peace with regulators in the UK and had no intention of circumventing the veto.Neither situation is fully resolved: Microsoft and Activision now await a decision from UK regulators on the fresh probe and the FTC is appealing a July 11 court ruling in favor of the acquisition. Because the European Union’s antitrust regulators approved the acquisition in May, Microsoft’s new proposal to the UK will not apply to the continent. But the EU may need to reopen its probe following Microsoft’s new pitch to the UK.

But Microsoft’s persistence has brought it back from the brink. Now, it’s cruising toward a new deadline for completion this fall, albeit without a guarantee that the new proposal will address concerns and get the green light.

Microsoft, Activision, Sony and the regulatory agencies involved declined to comment for this story.

Mission to Brussels

Much of the opposition to Microsoft’s monster offer for Activision came from Sony, whose Playstation is the No. 1 gaming console worldwide, ahead of Microsoft’s Xbox.

Sony’s success hinges on access to blockbuster titles like Activision’s blockbuster Call of Duty. The company estimates that in 2021 6 million Playstation gamers spent about 70% of their time playing Call of Duty with another 1 million spending all their time on the game. It feared that if the acquisition went through, Microsoft would have the power to remove the game and other popular Activision titles from Playstation, jeopardizing billions in revenues.

The FTC’s case against the deal mirrored Sony’s position: Once Microsoft owned Activision, it could withhold popular titles from rival video-game consoles and gaming subscriptions.

The agency filed its suit in its in-house court, where its administrative law judge would hear the government’s arguments in a trial set for August.

Other regulators followed the FTC’s lead. On Jan. 31, EU’s competition regulators laid out their formal antitrust concerns, which dealt largely with access to Activision’s console- and PC-based games.

But Microsoft maintained it still had avenues for approval. It planned to persuade UK and EU authorities to accept a remedy based on agreements with rivals, then to return to negotiations with the FTC.

In Brussels, Brad Smith, Microsoft’s chief legal strategist, went on a lobbying blitz. He argued against divesting Call of Duty as part of a remedy package, while announcing deals with rivals Nintendo Co. and Nvidia Corp. to keep Activision games on those platforms for a period of 10 years.

Thanks to the efforts of Smith and Phil Spencer, the CEO of Microsoft Gaming and head of Xbox, by late April, Microsoft and Activision advisers felt confident, even bragging to news outlets about completing the transaction in the following few weeks.

Then on April 26 everything came to a screeching halt when the CMA vetoed the acquisition.

The headfake

The UK decision focused exclusively on cloud gaming, a small but growing segment of the industry where players stream games to devices like mobile phones and smart TVs instead of using a console — like Netflix Inc. and Hulu, but for gaming.

Martin Coleman, the chair of the independent panel that reviewed the transaction, said Microsoft’s already-dominant position in cloud gaming would give it a head start over its competitors. Microsoft’s proposed remedy, including agreements to permit rivals to offer Call of Duty and other Activision games on their platforms, would require too much regulatory oversight, the UK found.

Microsoft and Activision immediately said they would appeal. But it would be a longshot. The UK agency had never before changed the outcome of a merger through an appeals process.

EU regulators also focused on cloud gaming. But unlike in the UK, officials in Brussels looked favorably on Microsoft’s side agreements. Margrethe Vestager, the EU’s competition chief, told a small group of reporters the acquisition would “kickstart” the cloud streaming industry, which represents just 1% to 3% of the entire gaming market. The deal would bring Activision’s popular games to cloud services, thereby expanding consumer choices on how to play, she said.The EU cleared the purchase on May 15, but with conditions. Microsoft would have to license Activision’s content to EU game-streaming providers and hire a monitor to oversee its compliance. With that approval in hand, Microsoft and Activision’s team focused on appealing the UK’s veto.On May 30, the appeals court agreed to hold a speedy hearing beginning in July, a fast timetable that could return a quick decision. Then on June 6, Microsoft’s Smith met with UK Chancellor Jeremy Hunt. Hunt had publicly questioned the CMA’s decision, while still acknowledging the body’s independence from government. After the Hunt meeting, Smith said, “if there are problems, we want to solve them.”

During the first week of June, reports of an audacious move by Microsoft surfaced: bypass the UK veto order, press ahead with the transaction and withdraw Activision from the UK market altogether — in other words, to close in every country except the UK.

Suddenly, the FTC found itself in an impossible situation. It had been set to hear the case in August in its in-house court, which only rules on a merger’s legality; to actually block a deal from closing, the agency must win in federal court, where it often faces judges skeptical of enforcers’ arguments. Now, the timeline to prepare a legal challenge had been shortened.

The FTC had held off on going to federal court in December because Microsoft couldn’t legally close its acquisition amid ongoing antitrust reviews in the UK and EU. Doing so would incur fines of up to 10% of Microsoft’s annual revenue in the EU. Plus, the CMA’s April veto of the deal barred the merger from closing globally, negating the need for a U.S. court order.

For Microsoft and Activision, ignoring the UK veto could come at a steep cost — up to 5% of the global revenue of Microsoft and Activision, combined. Or Microsoft could withdraw Activision from the country altogether, another expensive proposition — the UK is the game maker’s second-largest market.

As reports spread that Microsoft had been toying with a work-around to complete the transaction, the FTC asked the company for a written pledge not to close without the UK, people familiar with the negotiations said. But the company’s litigators declined to offer such reassurance.

Microsoft had forced the FTC’s hand. On June 12, the agency sued in San Francisco federal court, citing the risk that Microsoft and Activision would close the transaction despite the UK veto.

In fact, Microsoft and Activision never intended to close the deal without the UK’s sign off, people familiar with the talks said — it had all been a ruse. But Microsoft’s headfake had given it the chance to argue its case in public.

Trial ruling

In court, the FTC sough to convince Judge Jacqueline Scott Corley that Microsoft would have an incentive to withhold Activision’s popular games from Sony.

But it could produce no emails suggesting such an agenda, and could not elicit any admissions to that effect from their own witnesses, including Microsoft CEO Satya Nadella. During the proceedings, Corley reminded the agency’s lawyers that the court cared about potential harm to consumers — not to Sony.

For Microsoft, the task would be to undermine the FTC by undercutting Sony. Its lawyers sought to show that the regulators had exaggerated Sony’s concerns about the future of Call of Duty and other popular titles.

To guide the attorneys during the proceedings, the Microsoft team enlisted the aid of Spencer, the Xbox chief. For witnesses, the team turned to Sarah Bond, who oversees Microsoft’s relationships with thousands of game developers and partners, and Bobby Kotick, Activision Blizzard’s CEO.

During the trial, an attorney for Microsoft read aloud from emails Jim Ryan, the head of Sony Playstation, sent to a fellow Sony executive just after the announcement of the purchase. In the emails, Ryan said he expected to see Call of Duty “on PlayStation for many years to come.” While he preferred “this didn’t happen,” the company would be okay, he wrote. On the stand, both Nadella and Spencer also pledged that Microsoft would keep the game on PlayStation.

On July 11, Corley ruled against the FTC, saying that the agency had failed to show how the merger would harm gamers. The court would later deny the FTC’s request to block the acquisition while the agency appealed her ruling to a higher court.

Microsoft’s lawyers sent Corley’s decision to the CMA, highlighting sections spelling out her view that the deal would foster competition. Microsoft had already been intalks with UK regulators over a possible remedy to ease their concerns, but officials would consider this possibility only if the company paused its appeal. With Corley’s ruling now in hand, Microsoft consented to a pause in the UK litigation, per the CMA’s request.

Within an hour of Corley’s decision, the CMA, in an unprecedented move, agreed to give Microsoft a second chance to ease the UK’s concerns with the purchase. Lawmakers had accused Cardell of buckling under political pressure from lawmakers concerned that the block could slow investment in Britain’s tech industry.

In an interview with Bloomberg, Cardell denied the agency had caved. She reiterated that the CMA, as a non-ministerial department, operates free from such intrusion.

Within days of its court win, Microsoft reached a deal with Sony, albeit one that is less favorable in some ways for Microsoft’s larger rival. When the acquisition was announced in 2022, Spencer had offered Sony five years of access to all 50 Activision games currently available on PlayStation. By July 2023, Sony and Microsoft reached a 10-year agreement — but only for Call of Duty.