Microsoft Corporation (NASDAQ:MSFT) has committed to try to close its mega $68.7 billion deal for Activision Blizzard Inc (NASDAQ:ATVI) as it faces increased regulatory scrutiny in the U.S. and overseas. The tech titan announced this week that it inked a 10-year deal to bring the flagship game Call of Duty to Nintendo platforms if the tech giant’s acquisition of Activision Blizzard gets approved by global regulators.
The Nintendo deal comes in response to growing antitrust concerns that could ultimately prevent Microsoft from buying one of the biggest game developers in the world. The deal is currently under scrutiny by regulators in the U.S., U.K., and EU.
Microsoft Offers Concessions to Regulators
Through the latest agreement with Nintendo, Microsoft aims to gain regulators’ trust and convince them it will not prevent rival platforms from offering Call of Duty, one of the biggest gaming franchises in the world.
Microsoft, which makes Xbox consoles, has previously offered a similar 10-year deal that would allow Sony (NYSE:SONY) to bring Call of Duty to PlayStation consoles. However, the Japanese conglomerate has refused the proposal, arguing that the buyout of Activision and the limitations of Call of Duty’s availability would harm PlayStation sales.
Phil Spencer, CEO of Microsoft Gaming, said:
“There’s been some question about whether what we’re saying is actually how we’re acting, and I think having two major industry partners kind of show that our intent is real and that we can reach agreements is an important thing in this time.”
Microsoft has argued several times in the past that it would make Call of Duty available on rival consoles and platforms after the acquisition, promising not to turn the game into an exclusive title on Xbox consoles.
“Microsoft is committed to helping bring more games to more people however they choose to play,” Spencer said on Twitter.
But Sony has so far been one of the most vocal disapprovers of the deal. The Tokyo-based tech company has been trying to convince regulators that making Call of Duty exclusive on Xbox could weigh on PlayStation sales due to the game’s widespread popularity.
Earlier this year, Microsoft offered Sony to keep Call of Duty on PlayStation for three years after the companies’ current agreement expires. Jim Ryan, CEO of Sony Interactive Entertainment, has described the offer as “inadequate on many levels.”
Analysts argued that Microsoft has shown it is ready to take significant steps to address the current antitrust concerns, though the tech giant might need to go even further.
“The major concession here is the length of time of these deals rather than Call of Duty being multi-platform,” said Piers Harding-Rolls, research director at Ampere Analysis.
In-depth Investigation Could Force Microsoft to Walk Away
Microsoft’s deal with Nintendo comes a month after the European Commission initiated an in-depth investigation into the proposed buyout of Activision. According to the Commission’s preliminary findings, the deal could “significantly reduce competition on the markets for the distribution of console and PC video games,” as well as subscription and cloud game streaming services.
More specifically, the Commission said that the deal could allow Microsoft to restrict access to Activision’s games, particularly the flagship titles like Call of Duty. As a result, these “foreclosure strategies” could affect the competition in the growing gaming market and lead to higher video game prices, lower quality, as well as less innovation for distributors of console video games.
The Commission added it would conduct a thorough investigation to determine whether its initial market competition concerns are justified. The deadline for the Commission to make a decision is March 23, 2023, it said in the announcement.
Similarly, U.K. regulators have also launched an antitrust probe into the Microsoft-Activision deal, citing competition concerns. The second-stage investigation was launched in September by the U.K.’s Competition and Markets Authority (CMA). In response to CMA’s Phase 1 findings, Microsoft said the regulator has excessively relied on Sony’s “self-serving” arguments.
The tech behemoth argued that PlayStation has been the largest console platform for more than 2 decades, adding it is “not credible” to say “that the incumbent market leader, with clear and enduring market power, could be foreclosed by the third largest provider as a result of losing access to one title.”
To make things even harder for Microsoft, the U.S. antitrust watchdog Federal Trade Commission (FTC), is likely to file an antitrust lawsuit in a bid to block Microsoft’s takeover of Activision, according to a recent report by Politico. When the news first broke, Activision shares declined by 3%.
While it is not certain that the FTC will go through with the lawsuit, the move would mark a potential threat to big tech companies and their planned acquisitions. On the other hand, the lawsuit should not come as a surprise, given that FTC chairwoman Lina Khan has been a loud critic of tech giants in the past.
Final Thoughts
Increased scrutiny is a key reason why Activision stock trades about 20% off the deal price of $95 per share. While merger arbitrage is a popular trading approach, many risk-on traders have decided to stay on the sidelines as regulatory risks associated with the takeover are simply too high to ignore.
Still, those who believe Microsoft will be able to close the deal are in line for a hefty payout, given the arbitrage spread. Net-net, Activision stock is likely to stay volatile in the near term as Microsoft continues to offer concessions to regulators around the globe in a bid to close its largest-ever takeover.