Published on Jul 18, 2023
The Competition and Markets Authority’s likely clearance of Microsoft’s (MSFT) proposed $68.7 billion Activision Blizzard takeover could open a new route for companies to receive approval for their deals by reversing a “final” prohibition and avoiding an independent group’s scrutiny.
The most immediate beneficiary of this development is Broadcom (AVGO), which will no doubt keep the UK watchdog’s recent actions in mind as it seeks clearance for its planned $61 billion purchase of VMware (VMW).
The U.S. chipmaker could attempt to get a green light from the CMA with behavioral commitments, which the London-based enforcer generally rejects as ineffective. And if that doesn’t work, Broadcom could have another shot at approval by restructuring it with enhanced remedy proposals—potentially involving divestitures.
Alternatively, the CMA could avoid this extended back and forth—and the criticism that would likely accompany it—by clearing the VMware deal unconditionally. While inconceivable as recently as the beginning of last week, such an outcome now appears possible.
The CMA created this new procedural path for clearance when the agency said last week it would consider an unspecified amended form of Microsoft/Activision following its April 26 decision blocking the transaction. The announcement sparked anger among antimonopolists, who accused the British regulator of being swayed by Microsoft’s lobbying of government officials.
Microsoft and the UK watchdog are confident that a restructured transaction can address the authority’s concerns about the proposed merger, legal representatives for the CMA and U.S. tech giant told a London appeals court yesterday.
The probable path for British approval of the modified Activision transaction likely would exclude an independent inquiry group of competition-law experts that the CMA employs in phase 2 investigations to add rigor to the regulator’s decisions, according to a Capitol Forum analysis.
That plan involves Microsoft submitting to the regulator an amended—but not legally new—deal to buy Activision. The modified deal would still involve Microsoft buying Activision but wouldn’t necessarily require fresh Activision shareholder approval or new competition clearances in countries whose enforcers have already waved through the merger. Whether those authorities do require fresh merger approvals remains to be seen.
Yet as far as the CMA would be concerned, the modified deal structure could constitute a new relevant merger situation under UK law, triggering a new phase 1 assessment by the authority.
The move could be controversial because the CMA’s position has been that companies can’t offer new remedies once the authority’s independent inquiry group has issued its Final Report.
A CMA spokesperson said yesterday that merging parties “can choose to restructure a deal, which can lead to a new merger investigation.” The spokesperson added that “Microsoft and Activision have indicated that they are considering how the transaction might be modified, and the CMA is prepared to engage with them on this basis.”
“Discussions remain at an early stage and the nature and timing of next steps will be determined in due course,” the CMA said.
A spokesperson for Microsoft didn’t respond to requests for comment. A spokesperson for Activision Blizzard declined to comment.
Fast track. Microsoft could ask the CMA to use its “fast track” procedure so that the regulator can consider proposed remedies to address its concerns as early as possible. Companies can request the fast track if they accept that the CMA has enough evidence at an early stage in phase 1 to refer the deal for an in-depth phase 2 probe.
Ali Group used this mechanism to speed up the UK review of its plan to buy rival Welbilt last year. The CMA said at the time that the parties’ request for a fast-track review allowed it to conclude the phase 1 review within 10 working days, instead of the usual 40. The CMA on June 22 said it still had to consult on the remedies offered but on July 11 said it had accepted those undertakings in lieu of a phase 2 reference.
A fast-track request, though, in Microsoft’s case is complicated by the fact that the CMA in April issued a Final Report blocking the Activision purchase and is due to issue an order by August 29 that enforces the report’s conclusions.
But Microsoft and the CMA can overcome that hurdle by using section 41(3) of the Enterprise Act, the 2002 law that details the regulator’s powers and procedures. Under the provision, a Final Order must be consistent with the Final Report’s conclusions “unless there has been a material change of circumstances since the preparation of the report, or the CMA otherwise has a special reason for deciding differently.”
This language could cover Microsoft’s modified deal, especially if the CMA approves the restructured transaction under the fast-track procedure.
Inquiry group. The rub, though, is this procedure avoids an independent inquiry group that the UK usually involves in the review process to eliminate groupthink from its extended merger investigations. The CMA’s Board—which usually delegates its decision-making powers to a senior official—makes phase 1 decisions. But an independent inquiry group makes phase 2 decisions.
The April 26 decision to prohibit the Activision acquisition, for instance, was made by a group of competition experts chaired by former law firm partner Martin Coleman. An independent inquiry group would, it would seem, have no role in examining the new deal Microsoft proposes.
The watchdog’s guidance says, “Inquiry groups are required by law to act independently of the CMA Board, and therefore make their own independent decisions, based on the objective evidence before them.”
That level of scrutiny doesn’t apply to phase 1 cases and conceivably wouldn’t apply to Microsoft/Activision 2.0.
To be sure, the inquiry group will get to sign off on the Final Order relating to the existing Final Report. But if the CMA concludes before August 29 that Microsoft has presented a new relevant merger situation and that the deal’s altered structure addresses the authority’s concerns, the inquiry group will probably have little option but to determine there’s either been a material change of circumstances or a special reason why the order can’t reflect the Final Report.
This procedural path could benefit both Microsoft and the CMA. For Microsoft, the route is likely to be fast, allowing the deal’s completion by the end of next month, if not sooner. For the CMA, it allows the authority to sidestep the current Final Report without admitting an error.
It also means independent scrutiny is averted of this most unusual of cases. After all, the Microsoft/Activision inquiry group had postulated that a divestiture of both the Activision segment and the Blizzard segment of the target business might be necessary to allow the merger to proceed.
Whatever new structure Microsoft puts forward, it almost certainly won’t be nearly as far reaching, raising the question: Would an independent inquiry group clear a deal that doesn’t involve such an extensive asset sale?
Quashing. Yesterday’s hearing at the Competition Appeal Tribunal (CAT) focused on Microsoft’s appeal of the Final Report. Both the company and the CMA requested a stay of the appeal proceedings, which were due to start next week. But in deciding on whether to grant a pause, Sir Marcus Smith, the CAT’s president, pressed the parties on possible alternative routes.
One option explored by Smith involved quashing the Final Report and remitting the case to the CMA for further examination. The basis for doing so would be the same reason the parties could propose for expediting a new CMA decision—the modified deal proposal presents a material change in circumstances.
But quashing the report would, it seems, require the CMA to re-examine the case using its phase 2 procedure. This is the path followed when the CAT sends a case back following companies successfully challenging a CMA decision.
Under those circumstances, a new independent inquiry group is appointed—known as a “Remittal Group”—which produces a new Final Report. The group can consist of the same individuals that made up the initial phase 2 inquiry group, as was the case in the recent Facebook/Giphy case.
These groups tend to reach to the same conclusions as the initial inquiry groups that prohibited the deals.
But no remittal group will review a new Microsoft/Activision deal that triggers a phase 1 review. Smith yesterday granted a conditional pause in the Final Report appeal proceedings—aiding that plan.
That would be a convenient outcome if the CMA—as its critics have charged—buckled under political pressure to reassess the Activision acquisition.