In January 2022, Microsoft Corp. (MSFT, Financial) announced its plans to acquire Activision Blizzard Inc. (ATVI, Financial) for a whopping $69 billion in a bid to strengthen its market position in the fast-growing video game industry. As expected, the proposed deal not only sparked investors' interest, but also attracted regulatory scrutiny.
Sony Group Corp. (SONY, Financial), a main competitor, was quick to oppose the deal, citing the possibility that Microsoft will eventually make popular video games developed by Activision Blizzard exclusively available to Xbox users, thereby dealing a heavy blow to its PlayStation. In response, The Federal Trade Commission in the U.S. and the Competition Market Authority in the U.K. were quick to announce they would closely evaluate the deal before allowing it to go through.
U.K. regulators fire the first shot
The CMA is expected to issue its final report on the Microsoft-Activision deal by April 26, but the watchdog published its preliminary findings on Feb. 8, which indicated it could significantly harm U.K. consumers. The report highlights three ways in which consumers will be disadvantaged:
- The deal could result in consumers paying higher prices for video games in the future.
- Consumers are at risk of having fewer choices in the future.
- The video gaming industry is at risk of having fewer innovative products in the future because of a lack of competition in the industry.
The CMA also sent a letter to Microsoft listing some possible solutions to rectify the problems that may arise with the completion of the deal. They included:
- A partial divestiture of Activision Blizzard, including the business associated with the popular Call of Duty franchise.
- Divestiture of either the Activision segment or the Blizzard segment of the business.
- Termination of the deal.
Based on the remarks of U.K. regulators in its preliminary report, it seems reasonable to expect they will oppose the deal officially in the coming months based on its seemingly anti-competitive nature. Such a decision will pave the way for the FTC to go down the same path. The FTC is expected to announce its decision on the proposed deal by August, with the case set to go to trial in the administrative court on Aug. 2.
Microsoft has a challenging journey ahead to win the approval of regulators in the U.K., the U.S., the European Union, Australia and China before the deal can be completed. If the tech giant fails to execute the acquisition, it will be liable to pay $3 billion as a breakup fee to Activision.
The possible consequences of a failed deal
If the deal fails, both Microsoft and Activision stand to lose a lot as the market has already priced in the expected synergies of the combination. However, if the deal goes through, the combined video game business will become the third-largest player in the space, which should bode well for Microsoft’s growth expectations. However, without the valuable brand assets of Activision, Microsoft is likely to gain market share at a slower rate in the coming years.
Years of growth ahead
Although acquiring Activision will enable Microsoft to grow at an accelerated pace, even without the deal, Microsoft remains well-positioned to expand. Microsoft Azure is a leading player in the global cloud computing market, an industry that is expected to grow in leaps and bounds over the next decade with the corporate world and government entities aggressively transforming their business processes to embrace cloud computing.
LinkedIn is increasingly becoming the number one platform in the world for professionals who are looking for new career opportunities, opening the door for Microsoft to monetize its more than 800 million users. LinkedIn continues to invest in developing high-quality content and to attract industry leaders as content creators on the platform. These initiatives, coupled with the platform’s unique appeal as a business-to-business sales network, will drive LinkedIn revenue higher in the coming years.
The subscription business has taken off as well, with Office subscriptions now being used widely in the corporate world as well as for personal use. The company’s decision to shift to a subscription business model is already paying handsome rewards, and Microsoft will eventually be able to lure more customers from emerging markets as IT infrastructure development projects in these regions provide internet access to new users.
Takeaway
U.K. watchdogs dealt a blow to Microsoft with the release of its preliminary findings on the proposed acquisition deal. Unless the company finds a way to alleviate these concerns by implementing one of the proposed solutions or negotiates new terms with the authority, the final decision is unlikely to be any different from this preliminary decision.
While the expected regulatory headwinds in the coming months may deteriorate investor sentiment toward Microsoft, the company's stock remains attractively valued considering the long runway for growth for its cloud business, subscription business and LinkedIn.
