Champagne corks may have been popping in Redmond, Washington, last week after Microsoft closed its $69 billion acquisition of video game maker Activision Blizzard but the tech giant's fight with U.S. antitrust regulators isn't over yet.
Although the Federal Trade Commission to date has lost every attempt to halt the merger, the antitrust enforcer isn't stepping down.
Agency lawyers are set to appear before a federal appeals court in December to argue the deal is anticompetitive, while also prepping for an in-house administrative trial further down the road.
In 2008, the FTC scored a narrow appellate win in challenging Whole Foods' $565 million acquisition of rival grocer Wild Oats --
a decision that came nearly a year after the two supermarket chains had consummated their merger,
and one that forced Whole Foods into a costly settlement.
Could something similar happen to Microsoft and Activision?
Probably not, said now-retired Dechert partner Paul Denis, who was Whole Foods' lead lawyer.
To be sure, the FTC litigates just a handful of merger cases each year, and each one plays out differently.
The Whole Foods case also had unique appellate quirks that are unlikely to be duplicated --
but procedurally, the Microsoft case has been unfolding in a strikingly similar way.
The Microsoft challenge "feels very familiar," Denis told me. "The FTC is clearly trying to plow some new ground -- as they attempted with Whole Foods and now with Microsoft" in pursuing aggressive theories of antitrust enforcement.
A Microsoft spokesperson declined to comment directly on the litigation, but President Brad Smith in a
blog post noted the company has garnered friend-of-the-court support from antitrust scholars, economists and former government officials, as well as business and labor groups – "an almost unprecedented range of diverse parties," Smith wrote.
The agency is undeterred.
"The FTC continues to believe this deal is a threat to competition," spokesperson Victoria Graham said via email.
"We remain focused on the federal appeal process despite Microsoft and Activision closing their deal."
The FTC asserts that Microsoft's acquisition of Activision, which makes the wildly popular "Call of Duty" series, would enable the combined company "to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription and cloud-gaming business."
As it did with Whole Foods 16 years ago, the FTC filed what's known as a Part 3 administrative complaint to block the merger, arguing the tie-up would stifle competition and harm consumers.
Agency lawyers in both cases also sued the companies in federal court, seeking a preliminary injunction to stop the deals from being consummated pending resolution of the slower-moving administrative action.
And in both cases, the FTC was soundly defeated in district court.
In the Whole Foods case, the FTC unsuccessfully argued that the grocer, which at the time had 194 stores, would gain a near-monopoly in the "premium, natural and organic supermarket" category by acquiring 110 stores from Wild Oats.
The FTC in each instance appealed its losses, but failed to win emergency injunctions from higher courts that would freeze the mergers while litigation was pending.
Both Microsoft and Whole Foods then went on to close their deals, apparently gambling the FTC was a paper tiger and they'd live happily ever after in post-merger bliss.
For Whole Foods, it didn't quite work out that way.
The original trio of D.C. Circuit judges that rebuked the FTC's bid for an emergency stay had changed, with Judge Janice Rogers Brown replacing Judge David Sentelle.
The substitution proved fateful, Denis said. In a surprise move, the court in a
2-1 decision remanded the case for further consideration, with Brown writing that the lower court judge didn't focus enough on how the merger might affect Whole Foods' "core" customers.
At that point, it made little business sense for Whole Foods to keep fighting, not with the threat of drawn-out a Part 3 trial hanging over its head – a process which by statute is only available to the FTC, not the Justice Department. The two agencies share responsibility for antitrust enforcement, but DOJ is confined to litigating in federal court -- but that's another column.
"Whole Foods ended up having to settle," Denis said, agreeing in 2009 to divest 32 stores and the Wild Oats brand name.
It was a possibility the company had "war-gamed out" ahead of time, he said. As a horizontal merger between direct competitors, such divestitures are the usual fix to mollify regulators.
The Microsoft-Activision case is a vertical merger, however, where the companies operate in the same industry but provide different services. That can make it harder to predict what concessions would satisfy regulators, Denis said.
As my Reuters colleagues
reported, Microsoft agreed to sell the non-European streaming rights to Activision's games to Ubisoft Entertainment to assuage concerns by Britain's Competition and Markets Authority, which approved the merger on Oct. 13.
The FTC said it's still weighing these concessions.
The new
Ubisoft agreement, agency spokesperson Graham said, "
presents a whole new facet to the merger that will affect American consumers, which the FTC will assess as part of its ongoing administrative proceeding."
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