Microsoft's bid to reverse UK's Activision deal block will be a tall order — and a time suck

Microsoft lost no time today in vowing to appeal the UK merger regulator's block on its proposed acquisition of game developer Activision Blizzard. But reversing a Competition and Markets Authority decision is a tall order:  It hasn't happened in a merger case in recent memory.

While a handful of merging parties have succeeded in getting their deals remitted on appeal and reevaluated, they ultimately faced the same decision.

The appeal — to the Competition Appeals Tribunal in London, known as the CAT — will also add months to the process: It could be decided by the tribunal only by the end of the year, and if it does win a reassessment of the merger, a final decision could even be pushed to 2024.

Nor is this Microsoft's only hurdle: It awaits a May 22 deadline for a decision from the European Commission, and in the US an administrative trial at the Federal Trade Commission’s in-house court is set to start Aug. 2. Reviews are also ongoing in Australia, where the deadline is suspended for the regulator to engage with overseas counterparts, and in New Zealand, where it's set for June 9.

And on July 18, the parties' merger agreement expires, giving Activision the chance to walk away with a $3 billion break fee if it wants out.

Microsoft has accused the CMA of overreach.  It said the UK authority must consider the “extra-territorial nature” of any remedies, particularly where the effects outside the UK are great. Prohibiting the deal worldwide would be “disproportionate” because it would have impact beyond the UK, Microsoft said.

CAT workings

Microsoft and Activision have four weeks from the date they were notified of the decision, or from its publication, to lodge an appeal at the CAT.

An appeal of a CMA decision is reviewed by the court only based on a "judicial review" standard,  meaning the CAT looks only at whether the CMA acted illegally, irrationally or improperly, such as by considering factors that it ought not to have taken into account, failing to consider important factors or otherwise exceeding its authority.

Importantly, that stops well short of a full review of the facts and evidence or a consideration of the merits of the transaction. It means, too, that the court can and does allow the CMA a healthy degree of discretion in its decisions.

Microsoft can still argue that the regulator misapplied law — by applying an incorrect legal standard — or that it didn't take account of evidence that any reasonable regulator would have considered, or that it violated the company’s procedural rights. But it needs to fit its complaint into a limited number of legal boxes.

On Microsoft's side is that the CAT does move quickly to organize a hearing. For example, Cerelia Jus Rol appealed a merger veto handed down by the CMA in January and has a hearing scheduled for July.

That’s a lot quicker than in the EU system, where it takes years to get a hearing at the General Court. For example, an appeal was lodged against approval of E.On's Innogy merger in 2019; the hearing took place just last week.

History lesson 1: Meta, JD Sports

Success at the CAT would not look like a triumph, however, as it would likely see only a remittal of the merger back to the CMA, which would then review the transaction for a second time.

Meta is one of very few companies that has succeeded in getting a deal sent back for reconsideration. In November 2021, the CMA ordered it to unwind its completed acquisition of Giphy, Meta appealed, and the CAT issued a ruling eight months later, upholding all but one of the CMA’s findings. It found for the parties on a procedural ground relating to the sharing of third-party confidential information.

In light of the finding, the CMA reconsidered its decision and conducted an expedited review, issuing its final decision three months later, last October. It was another block, and the same day Meta said it would give up and sell Giphy off.

Prior to Meta-Giphy, only one company, JD Sports, had succeeded in getting a CMA decision remitted, although that was in relation to the regulator's actual merger analysis.

The impact was very limited. Sportswear retailer JD Sports won an appeal against the CMA's block on its purchase of rival Footasylum, with the CAT ruling in November 2020 that the regulator had acted irrationally in its review by failing to follow up on inquiries about the impact on Footasylum suppliers or its primary lender.

After reconducting its investigation, though, the CMA again ordered JD Sports to sell off Footasylum. It found that despite increased competition from companies such as Nike and Adidas, and the impact of Covid-19, Footasylum would remain in good financial health.

History lesson 2: Sainsbury's, Tobii

Supermarket chain J Sainsbury was also successful in an interim challenge to the CMA’s procedure in its attempt to buy rival Asda in 2018. It had complained that CMA’s timetable didn’t afford the parties or the regulator enough time to consider all evidence, given the unprecedented scale and complexity of the case.

It was the first time a company had challenged the lawfulness of the CMA’s administrative timetable since the watchdog was established in 2014. The CAT agreed with them and ruled that the CMA's timing was unfair. It granted additional time, but still ended up blocking the deal. The companies didn't appeal.

In 2020, assistive-technology maker Tobii scored a sliver of a win in its appeal against a UK veto of its merger with rival Smartbox Assistive Technology. The CAT agreed with one of the Swedish company's five grounds for appeal.

It said the CMA hadn't shown enough of an evidence base to substantiate a vertical theory of harm of input foreclosure. The regulator had not taken “reasonable steps” to assess all economic data, the CAT said.

The CMA said the ruling didn’t affect its core finding that Tobii must sell Smartbox to an approved purchaser, and the tribunal subsequently refused to allow Tobii to appeal the decision.

Back to the present: Microsoft's plight

There is no shortage of points where Microsoft and the CMA diverge. The company says the regulator has overestimated the popularity of cloud gaming, the ease with which Activision’s content can be made available to the cloud, and the relevance of Microsoft’s other activities, such as Windows and cloud storage for cloud gaming.

Microsoft also says, of course, that the deal will create more competition in video gaming and that this should outweigh any concerns. The CMA has disagreed, saying it fears Microsoft would use the deal to ramp up prices.

Microsoft can appeal any part of the decision, and the CMA’s findings on the tech giant's remedy proposal are likely to be central to its challenge.

The regulator identified a number of specific shortcomings in the proposal. For example, it said the remedy didn’t cover the whole gamut of cloud gaming services, notably multigame subscription services, nor other types of PC operating systems.

Microsoft said blocking the merger based on concerns about the impact on cloud gaming services as a nascent technology was not “proportionate”. And given its willingness to address any concerns, it may query whether it was given sufficient chance to do so.

But the CMA went on to assert that a behavioral remedy is akin to sector regulation, “replacing market forces in a growing and dynamic market with mandated regulatory obligations ultimately overseen, and enforced by, the CMA — in this case at a global level.”

Such a situation was worse than a veto, it argues. But is such an approach to remedies in a global deal reasonable? The company can point to plenty of other regulators that have considered behavioral remedies acceptable, often with oversight provided by monitoring trustees, arbitration panels and courts.

No doubt Microsoft is also casting a close eye over all the economic assumptions made by the regulator. The CMA already had to drop one theory of harm against the deal after discovering an error in its calculations.

Can a mistake on the econometrics be caught by judicial review? Giving Microsoft a sliver of hope, the 2020 verdict in Tobii’s appeal suggests it can.

—Additional reporting by Andrew Boyce.