Microsoft's success in fighting the US Federal Trade Commission’s challenge to its $69 billion Activision Blizzard acquisition could ease the path to more deals at a time when Wall Street has been confronting a severe merger drought.
Stiffer enforcement by the FTC and US Justice Department under the Biden administration has deterred a number of deals in recent years, but those regulators’ losing record in the courtroom will likely weaken that effect, experts said.
“Deterrence is less effective if you don’t win your cases,” said Washington antitrust lawyer Deborah Garza.
Krishna Veeraraghavan, a mergers and acquisitions partner at New York’s Paul Weiss Rifkind Wharton & Garrison, also said the Microsoft-Activision ruling could remove obstacles to dealmaking.
“I’m expecting this will give people more certainty in evaluating deals,” he said. “And when you have certainty, it makes it easier for deals to happen.”
A rise in merger activity would be welcome news on Wall Street, where the major banks all reported drops in merger advisory revenue for the second quarter. Goldman Sachs said its revenue from merger work fell 35 per cent from the same period last year.
To be sure, stepped-up antitrust enforcement is far from the only drag on M&A activity. Higher interest rates that make acquisitions more costly to finance are widely seen as the main brake on deal flow.
And many expect antitrust enforcement to remain an obstacle. On JP Morgan Chase’s July 14 earnings call, chief financial officer Jeremy Barnum said he expected “regulatory headwinds” to continue to cloud the M&A picture.
The Microsoft-Activision deal is the latest defeat for FTC chair Lina Khan, who has yet to successfully challenge a merger in court. In February, a federal judge rejected her bid to block Meta Platforms’ acquisition of virtual-reality start-up Within Unlimited.
Ms Khan’s counterpart at the Justice Department, Jonathan Kanter, has only succeeded in convincing a court to block one merger – Penguin Random House’s proposed takeover of rival publishing house Simon & Schuster.
Lawyers say companies may now feel emboldened to move ahead with deals even in the face of regulatory challenges.
“The government has a poor track record,” said James Fishkin, an antitrust lawyer with Dechert in Washington. “And when it fails to win cases, parties are typically more inclined to litigate because they may win.”
There are a number of deals pending that will continue to test the power of US regulators, including Amazon’s proposed acquisition of vacuum cleaner maker iRobot and Kroger’s $25 billion deal for rival supermarket chain Albertsons. The FTC is also appealing the Microsoft-Activision decision but on Thursday suspended its in-house trial, potentially paving the way for settlement talks.
Kroger chief executive Rodney McMullen told Bloomberg News the company is prepared to fight if the FTC moves to block the deal, and others may increasingly take a similar view.
If companies “have the stomach and readiness to fight their case in court, there is a pathway to clear deals”, said Daniel Wolf, a partner at law firm Kirkland & Ellis.
Ms Garza cautions that fighting regulators is still a tough – and expensive – proposition, and not every company has the resources of Microsoft or Activision. Legal experts said such a fight would cost anywhere from $20 million to $100 million in lawyers’ bills.
“For some parties and some deals, that price tag may be too high,” she said.
Microsoft was mainly represented on the corporate side by New York’s Weil Gotshal & Manges and in litigation by star Washington lawyer Beth Wilkinson. Activision turned to New York’s Skadden, Arps, Slate, Meagher & Flom.
The government’s record has been particularly poor in cases involving so-called vertical mergers, which involve companies that operate in the same supply chain but don’t compete directly. That’s the category in which the Microsoft-Activision deal fell.
Ms Garza said those cases are harder for the government to win at trial because they often rely on speculation that a deal will worsen competition in the future, rather than present market conditions.
US courts have shown themselves open to companies’ proposals to “fix” issues with vertical mergers, such as Microsoft’s promise to keep Activision’s popular Call of Duty franchise available on Sony PlayStation consoles rather than make it exclusive to its own Xbox.
Openness to fixes has also begun distinguishing US from EU and UK antitrust regulators. The British Competition and Markets Authority on Wednesday granted preliminary approval to Broadcom’s proposed $61 billion takeover of cloud-computing company VMware.
The European Commission approved the deal last week, citing Broadcom’s pledge to ensure access and interoperability with its main competitor.
Ms Khan’s FTC is still weighing a legal challenge to the Broadcom-VMware deal.
Steven Salop, an emeritus professor of law and economics at Georgetown University, said companies were increasingly willing to “litigate the fix” when antitrust regulators turn down their proposed remedies.
“The agency’s turned them down, so the parties then said, 'well, we’ll ask the judge to permit it',” he said.