Microsoft preparing to close Activision deal despite FTC suit: sources

Microsoft is making plans to complete its $69 billion acquisition of Activision Blizzard — despite the Federal Trade Commission’s December move to block the deal over antitrust concerns, The Post has learned.

Microsoft is feeling optimistic about securing UK approval for its acquisition — which has been attacked by FTC Chair Lina Khan as an unfair mega-merger that will stifle competition across the video-game sector — this week, according to sources close to the tech giant.

That’s because antitrust regulators in the UK and EU in recent weeks have made surprising progress toward approving the merger — swayed by Microsoft’s pledges to give rivals including Sony and Nintendo access to its blockbuster “Call of Duty” video-game franchise, sources said.

While approval from the UK’s Competition and Markets Authority is expected this week, Microsoft is hopeful that a final approval from the European Commission will come next month, the source close to the situation said.

That, in turn, could make the challenge from the FTC — which on Dec. 8 filed a complaint to stop the deal with an FTC Administrative Law Judge — an uphill battle, according to antitrust experts.

“They are going to cram this down the FTC’s throats,” a source close to the situation said.

If it gains European approvals, Microsoft’s plan is to quickly close its merger of the “Call of Duty” maker for $95 a share, the source said.

On Tuesday afternoon, Activision was trading at $85.63. The shares would likely shoot up to near $95 if Microsoft closes the merger and fall to around $75 if Microsoft abandons the deal, a trader said.

Usually, it is easier to win a case to block a merger by going through an internal FTC judge as opposed to a US District Court. But an FTC judge cannot issue a preliminary injunction to stop a deal from closing.

That was not seen as a major issue at the time since Microsoft had not received UK or EU approvals. However, Microsoft has made concessions making the UK Competition and Markets Authority (CMA) more comfortable with the controversial merger.

“The CMA has been the toughest regulator over the last several years with tech deals,” the source close to the situation said.

Microsoft, which owns the Xbox gaming console, has been working to win CMA approval by agreeing in recent weeks to give companies like Ubitus and Boosteroid access to Activision games on their cloud-based video game streaming services for 10 years.

It also signed a deal with Nintendo, which presently does not have access to “Call of Duty”.

A big concern for regulators has been that Microsoft would keep Activision games only on Microsoft’s “Game Pass” subscription service, hurting competitors who were trying to launch their own cloud gaming services.

CMA said earlier this month it was only concerned about competition issues in the cloud and was no longer worried about Microsoft dominating the console market where it competes with Sony’s PlayStation.

Microsoft CEO Brad Smith said publicly that Khan’s FTC did not even want to discuss these kinds of concessions.

The FTC can still file for a temporary injunction from a US Federal court to stop the merger from closing but getting that ruling is far from a sure thing, a DC antitrust source not on either side of this case said.

“By law the FTC only needs to raise serious, doubtful questions about a merger to get an injunction,” the source said. “But as a practical matter the judge is evaluating the merits of the case.”

“If Microsoft makes a deal with the Brits and the European Union it can say that antitrust concerns are resolved, and if you’re a judge that’s not a helpful fact for the FTC.”

“The FTC will be out there alone and it will make it more difficult for it to get any decision approved by the court,” Penn University Professor and Anti-trust Expert Herbert Hovenkamp told The Post.

Legal experts have said for months they believed the FTC complaint was already going to be difficult to win.

The FTC alleges that Microsoft in being a major maker of consoles through Xbox and owning Activision would have too much market power.

It “asserts that the Microsoft-Activision transaction would “creat[e] a combined firm with the ability and increased incentive to withhold Activision’s valuable gaming content from, or degrade Activision’s content for, Microsoft’s rivals,” law firm Arnold & Porter which is following the case said in a note to clients.

“FTC points out that 10 of the top 15 console games sold between 2010-2019 were Call of Duty games, and the latest game in the franchise—Modern Warfare II, released in 2022—generated $1 billion in sales in its first ten days of release.”

But, Arnold & Porter also points out that Microsoft says it is only the third largest console marker and has no share in mobile gaming.

“Microsoft’s proposed acquisition is that of a customer buying an important supplier—a vertical acquisition—and vertical cases are typically harder for the antitrust regulators to bring. The Antitrust Division’s unsuccessful attempts to block AT&T’s acquisition of Time Warner and United Health’s acquisition of Change Healthcare are recent cases in point,” Arnold & Porter says.

If a federal judge rules against a temporary injunction that will make it much harder for the FTC to win in its internal court, the source close to the situation said.

Khan was hoping to block this deal without ever having to win in court, sources said.

The FTC got a relatively late hearing date when it filed the complaint to stop the merger in its internal court. The hearing is now scheduled for Aug. 2, and that is several weeks after Microsoft’s July 18 merger deadline with Activision expires.

FTC internal hearings normally also take more than one year to conclude.

The belief was Activision after July 18 would walk away from the deal collecting a $3 billion termination fee, sources said. That would make the underlying merger case moot since there would no longer be a merger to block.

“The FTC was trying to kill the deal with process,” the source close to the situation said explaining that delays helped the regulator.

The safe move now for Khan is to stay the course and not seek a Federal Court injunction if the CMA and European Union approve the merger, the antitrust source said.

And then either negotiate the best settlement it can get from Microsoft along the same lines as the European deals.

Or keep pursuing the case in its internal court and hope to win and get the merger unwound, though that could take more than a year.

“To my mind, that is the smart play,” the antitrust source said.