By Jon Swartz
Microsoft made concessions to appease regulators, but acquisition shows vertical deals can still be approved
Microsoft Corp.’s long and circuitous offer to acquire Activision Blizzard Inc. not only changed the gaming market, but very likely upended potential future moves by federal regulators to block vertical deals, a central tenet of their antitrust campaign against big tech in recent years . years.
Indeed, the $69 billion mega-deal, the largest acquisition in the consumer technology sector since AOL bought Time Warner for $182 billion in 2000, shatters a recent move by the Federal Trade Commission, particularly to curb the growth of big tech.
Over the past decade, Big Tech has gained even more momentum thanks to so-called vertical agreements which allow companies to develop into new sectors of activity. In addition to Microsoft’s (MSFT) acquisition of Activision, examples include Amazon.com Inc.’s (AMZN) $13.4 billion purchase of Whole Foods in 2017 and Facebook’s 2014 acquisitions ( META), as the company was then called, photo-sharing app Instagram for $1 billion and messaging service WhatsApp for $19 billion.
Out of $24 billion in tech deals since 2013, 20 are classified as vertical deals, according to market researcher Dealogic.
Read more: Microsoft’s Activision deal gets green light from UK regulator
Big Tech’s mantra seems to be “merge now while you can” because the law makes it difficult for vertical deals to get out of hand. “It’s almost impossible,” Abiel Garcia, a former assistant attorney general for the state of California, said in an interview.
After relying for decades on a University of Chicago antitrust philosophy that says big companies undercut competition by creating higher prices for consumers and reducing product choices, federal regulators have shifted their focus strategy towards a so-called neo-Brandeisian principle based on the impact of vertical transactions which harm companies. This has been the top priority of FTC Chair Lina Khan and Jonathan Kanter, the Justice Department’s top antitrust official.
But so far that ploy has failed, and Microsoft’s deal to buy Activision is another blow to Khan, who was appointed in 2021 promising to curb the growth of big tech, and to Kanter. The FTC and Justice Department have attempted to block at least a dozen major transactions over the past two years, without much success so far.
Microsoft-Activision is the latest example of a case that the courts “haven’t bought into,” Garcia said, because of their reluctance to make precedent-setting decisions on vertical deals that would be very likely to be overturned on appeal.
“It’s difficult to prove there is harm” in vertical agreements, Garcia said. Deterring, or even stopping, Big Tech megatransactions requires a congressional solution, he added, but there has been a dearth of meaningful tech legislation over the past two decades. Two bills dealing with stifling competition, innovation and monitoring technological acquisitions are introduced in the Senate, as in the previous session, without much momentum.
California, which has led the nation in protecting consumers’ digital privacy, is considering what changes it might make to its antitrust laws.
In the meantime, the acquisition machine continues to work tirelessly. This year, Google, Apple Inc. (AAPL) and Alphabet Inc.’s (GOOGL) Meta Platforms Inc. (GOOG) have gobbled up nearly 200 companies in deals that went unreported because they didn’t did not reach $111. 4 million threshold established by the FTC under Section 7A of the Clayton Act.
“More acquisition rounds are likely, which could create larger and even more powerful digital ecosystems,” warned Diana Moss, former president of the American Antitrust Institute, in a study from early 2021. “The updated statistics days show a persistent under-application of the law on mergers. in digital.”
How Microsoft persevered with Activision
Federal regulators found themselves on the losing side of outdated antitrust law, skeptical courts and shrewd concessions from Microsoft.
The software giant, which was ensnared in an antitrust saga with the Justice Department in the 1990s and early 2000s, made several compromises to get the current deal approved. It agreed to offer continued access to “Call of Duty,” one of Activision’s flagship games, on the digital platforms of other companies such as Sony Group Corp. (JP: 6758) and Nintendo Co. (JP: 7974). Additionally, Microsoft announced it would license part of Activision’s cloud gaming business to a British rival.
The lack of new antitrust laws makes it even harder for regulators to win cases, says Yuri Khodjamirian, chief investment officer at financial services firm Tema ETFs, who has written on the subject. “In many ways, antitrust law is quite retrospective, while technology is forward-looking, in that it often develops undefined markets such as cloud gaming,” he said.
“In Europe, a regulator like the European Commission does not have to prove its case in court. The EC is judge, jury and executioner. It has a lot of room to maneuver,” said Khodjamirian, who resides in London.
Despite its latest setback in court and even as the Microsoft-Activision deal closes, the FTC intends to continue its challenge to the merger, according to a spokeswoman who called the deal a “threat to competition”.
The agency’s long-term goal could be to act as a deterrent against an industry that essentially had automatic permission to suck up small businesses for more than a decade, antitrust experts say.
“Don’t just look at the record of wins and losses. The threat of federal action could deter deals and cause some companies to abandon acquisitions, legal experts say. The FTC has made it clear that companies will face to seven-way opposition until Sunday.” Garcia said.
Ultimately, regulators are “trying to solve a societal problem without a legal solution.” As a society, we have deliberately made a pact with Big Tech for products and services,” Khodjamirian said. “People like Amazon products in exchange for our data, and some want to go back.”
A 2021 Bain study concluded that technology acquisitions do not harm competition or customer value. “When the facts are examined, most big tech M&A spending actually benefits consumers and does not hinder competition. This is evident in Bain’s analysis of all acquisitions over 300 million dollars, totaling more than 150 billion dollars, from 2005 to 2020 by the five American hyperscalers: Alphabet, Amazon, Apple, Facebook and Microsoft,” he says.
-Jon Swartz
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10/21/23 0859ET
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