Microsoft’s (MSFT) largest-ever acquisition, a pending $68.7 billion all-cash purchase of gaming giant Activision Blizzard (ATVI), comes with distinct, and potentially significant, legal hurdles.
For one, Microsoft will need to satisfy U.S. and global antitrust regulators that its ensuing deal won’t harm competition. What's more, Microsoft will have to manage probes and lawsuits beleaguering Activision Blizzard over alleged sexual harassment and discrimination against female staff.
Antitrust experts say the deal’s vertical, rather than horizontal, structure puts it in a category that tends to raise fewer concerns for regulators and makes challenges more difficult. Generally, horizontal deals combine companies in the same industry; vertical deals involve two more distinct industries.
However, experts caution that aspects of the $68.7 billion all-cash tie up, which Microsoft says will make it the world’s third-largest gaming company by revenue, could still pose sticking points.
“It used to be controversial to say vertical mergers can be anti-competitive because you're not eliminating any head to head competition,” Vanderbilt University Law School professor Rebecca Haw Allensworth tells Yahoo Finance. ”But now we're starting to realize just how much you can unfairly disadvantage horizontal competitors, if you get access to an input that they need.”
Microsoft logo is seen on a smartphone placed on displayed Activision Blizzard’s games characters in this illustration taken January 18, 2022. REUTERS/Dado Ruvic/IllustrationThe Xbox factor
In Microsoft’s case, Allensworth and others say, its ownership of gaming console Xbox, combined with gaming content from Activision Blizzard, could catch regulators' attention.
Jim Speta, a professor at Northwestern University Pritzker School of Law and of counsel at Eimer Stahl, says though the transaction doesn’t raise significant red flags, the tie-up makes the eventual company “very different” from other gaming companies.
“Already, you’re seeing questions about whether Microsoft would take the Activision Blizzard content and make it exclusive to Xbox,” Speta says.
That move would increase the likelihood that regulators would sue to block the deal or else ask Microsoft to limit the extent of content exclusivity, Speta said.
Regulators will also likely examine mobile gaming and console gaming markets, separately, and possibly drill down on how the transaction impacts competition in specific genres, such as shooter or sandbox games, according to Janelle Wrigley, director of antitrust at Thomson Reuters Practical Law. They may also examine the transaction’s broader impact on emerging markets, like the metaverse, a still nascent technology aiming to support parallel lives over virtual reality.
Once regulators decide on the relevant markets, they'll review Microsoft’s leverage within them, asking whether its new position will harm consumers.
“There is nothing wrong with exclusivity by itself," Wrigley says of the scenario where Microsoft makes certain games exclusive to Xbox. "The question is whether gaining that control over Activision’s games would give Microsoft the ability to raise prices or otherwise harm consumers, because gamers would be unwilling or unable to switch away."
If regulators do identify antitrust issues with the deal, they could propose that certain assets be spun off, or that certain content remain non-exclusive, rather than filing a lawsuit.
Still, Wrigley said, “I think neither Microsoft nor the antitrust agencies would find that kind of outcome palatable, which is why I think it could end up in court."
Microsoft back in Big Tech antitrust conversation
Even if the deal's vertical nature dispels concerns over competition, lawyers say Microsoft should expect regulators to scrutinize the purchase due to the recent focus on Big Tech’s market dominance. Moreover, the Justice Department and the Federal Trade Commission on Tuesday announced their intention to revise merger guidelines.
Though Microsoft has evaded the heavy antitrust scrutiny that has targeted its Big Tech peers since the U.S. Justice Department challenged its dominance in personal computing operating systems in 1998, the lawsuit is a not-so-distant reminder that it's still among tech giants.
“People talk about the Big Four — Google (GOOG, GOOGL), Apple (AAPL), Facebook (FB), Amazon (AMZN) — Well, really there's Microsoft,” Allensworth says.
“Really it's the Big Five," Speta adds. "Some people think that they belong in this back in this conversation."
Ultimately, Wrigley believes the deal will likely go through in the U.S., despite a potential court battle or long investigation that experts say could take anywhere from six months to a year and a half.
International regulators, including European authorities, could pose a tougher challenge.
“I find it unlikely that the European Union would just rubber-stamp the deal,” Yale Law School lecturer Nikolas Guggenberger says of its antitrust regulator, the European Commission.
Activision's sexual harassment, discrimination claims
Sexual harassment and discrimination actions pending against Activision Blizzard add another layer of legal complexity for Microsoft.
In August, California's Department of Fair Employment and Housing sued Activision, claiming female employees were subjected to sexual harassment and unequal pay. The agency also contested a ruling from the Equal Employment Opportunity Commission that blocked it from intervening in its $18 million settlement with the company. Shareholders followed with their own suit, claiming Activision failed to inform investors about the agency's probe.
Later in November, The Wall Street Journal reported that longtime CEO Bobby Kotick knew of sexual harassment and rape claims at the company but failed to report some of them to the board. One rape allegation reportedly settled out of court, also without the board's knowledge.
Speta says the actions that remain intact at the time of Microsoft’s acquisition could become Microsoft’s responsibility to manage, though if Activision Blizzard becomes a wholly-owned subsidiary of Microsoft, liabilities would be contained within the subsidiary company.
“The other thing that we don't know is, to what extent Activision has relevant insurance policies or indemnity agreements, which would cover any liabilities to the extent those liabilities are reduced to money judgments at some point in the future,” Speta says.
Microsoft did not respond to Yahoo Finance's request for comment to clarify whether it will assume Activision's sexual harassment and discrimination liabilities.
Asked about whether Microsoft would assume its liabilities, Activision Blizzard provided the following statement: “Until transaction close, which we anticipate to be in Microsoft’s fiscal year ending June 2023, it remains business as usual and both companies will continue to operate independently.”
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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