Microsoft bets on “Nice Guy” strategy to close Activision Megadeal

Earlier this month, Microsoft Chairman Brad Smith met with Federal Trade Commission Chairwoman Lina Khan to seek regulatory approval for Microsoft’s $69 billion acquisition of video game company Activision Blizzard. .

Mr Smith’s gamble – which included the offer to keep Activision’s hit game Call of Duty widely available to address competitive concerns – backfired. A day after they met, Ms Khan’s agency took legal action to prevent the successful deal.

But in an interview this week, Mr Smith was optimistic. “She didn’t accept my offer, but when I said to give peace a chance, she smiled at least a little bit,” he said of Ms Khan. “So whenever someone can end a meeting with even a little smile, there’s always a little hope that we can sit down together in the future.”

Mr. Smith’s peace comments reflect how Microsoft intends to approach the next phase of its deal for Activision. Far from giving up on the acquisition, he said, the company intends to bet that its gentleman strategy might still work.

In one plan, Microsoft hopes to win over regulators in Europe, people familiar with the approach said. European approval of Activision’s deal could force U.S. officials to reach a settlement that allows the acquisition to go ahead or a faster, more favorable court to hear the case, said the sources.

Microsoft plans to file its response to the FTC lawsuit on Thursday, company officials said. In its response, the company plans to argue that the deal would give players more options at lower prices, they said.

The FTC said the deal should be stopped because it would harm consumers. He said Microsoft, which makes the Xbox console, could use Call of Duty and other popular Activision titles to attract gamers from rivals, especially Sony, which makes the PlayStation console.

Microsoft’s seemingly conciliatory approach is part of an almost complete cultural transformation of the company since the 1990s, when it was known as the “evil empire” due to its heavy-handed tactics to block competitors. . But under Satya Nadella, who became chief executive in 2014, and Mr Smith, who is also Microsoft’s top lawyer, the company has bent over backwards in recent years to show it has grown.

Passing Activision’s deal has implications for more than Microsoft. The FTC lawsuit is a milestone in a new era of government scrutiny of the biggest tech companies. Ms Khan has implemented an aggressive scheme of trustbusting the case, which legal experts say could be difficult to win. If Microsoft can’t get the deal approved, other tech giants will be less likely to be able to force a mega deal.

“They’re going to fight it,” said Sid Parakh, portfolio manager at Becker Capital, which invests in Microsoft. “It’s a little more above and beyond this deal. This is also a statement to the FTC”

With Microsoft sitting on over $100 billion to spend, he added, “they don’t want to back down once in a while, see every acquisition rolled back.”

The Activision acquisition must be completed by mid-July or Microsoft will have to pay up to $3 billion in severance pay. Many hurdles remain, including approval from other global regulators, notably in Britain and the European Union. If Microsoft can reach a formal settlement with them, it would leave the FTC at a critical time.

The FTC sued Microsoft in administrative court, which does not have the power to stop the deal from closing while the case is pending. If other regulators approve the deal, the FTC would have to decide whether to file an injunction against the acquisition in federal court to stop it. The injunction process could move quickly, potentially handing Microsoft a quick legal victory.

“There is no sensible and legitimate reason to prevent our transaction from closing,” Activision Chief Executive Bobby Kotick said in a statement Wednesday. “We believe we will prevail on the merits of the case.”

The FTC declined to comment on Microsoft’s strategy or Mr. Smith’s conversation with Ms. Khan. Holly Vedova, director of the FTC’s Competition Bureau, said the agency is always willing to consider proposals from companies seeking to resolve antitrust issues.

Microsoft is trying to strike a balance between, on the one hand, appearing open to a settlement and, on the other hand, preparing to destroy the FTC’s case in court. He hired Beth Wilkinson, who prosecuted the 1995 Oklahoma City bombing case before becoming one of America’s top corporate litigants, to argue on his behalf in the House Court of FTC.

Mr. Smith said he was optimistic the case could avoid a messy trial, in part because of Microsoft’s past experiences with antitrust enforcement.

In the 1990s, the company was known for its scorched earth business tactics, bundling software products to get ahead of competitors. In 1992, as regulators investigated the company, Microsoft co-founder Bill Gates dismissed the review, saying, “The worst that can happen is that I might fall on the steps of the FTC, bang my head and kill me. ”

Two years later, Microsoft agreed to a federal consent degree allowing personal computer manufacturers more freedom to install programs from other companies. It avoided being broken up after an antitrust lawsuit in 1998 and finally settled with the George W. Bush administration in 2001.

“The lawsuit forced Microsoft to grow, especially in terms of relationships with regulators and institutions beyond the tech industry,” said Margaret O’Mara, a University of Washington professor who studies the history of technology companies.

In 2001, Mr. Smith participated in interviews to become Microsoft’s top lawyer with a message: It was time to make peace with regulators and competitors. He got the job. Over the next few years, he entered into legal settlements on competition issues with governments around the world and other industry players.

It hasn’t always been easy. Negotiations between the company and Sun Microsystems, a server company that created the popular Java programming language, broke down and took a year to get back on track. In 2004, then Microsoft chief executive Steve Balmer was on a plane to Brussels to announce a deal with the European Commission when Mr Smith learned that the commission was instead going to sue Microsoft for pre-installing apps in his Windows . operating system. It took five years to reach an agreement.

Since Mr. Nadella took over, Microsoft has taken an even more open stance. Its first acquisition was the studio that creates Minecraft, a game in which children learn and socialize in a vast virtual world. He also spent $7.5 billion to buy GitHub, a software platform supporting open source code.

Microsoft is now the second most valuable public company in the world, thanks in large part to its strong cloud computing offerings. The business at the heart of its growth typically attracts less government attention than social media or other consumer-facing businesses.

Overall, Smith portrayed Microsoft as a friendly giant willing to work with skeptical lawmakers. He has proposed interim rules on contentious issues such as app stores and supported bipartisan interests such as broadband expansion.

Mr. Smith has powerful connections in Washington. A bundler for President Biden’s campaign, he attended a White House state dinner for French President Emmanuel Macron just days before the FTC sued to block the deal with Activision.

After the deal was announced in January, Microsoft went to great lengths to assuage regulators’ fears. Mr. Smith and Mr. Nadella traveled to Washington in February to promote the benefits of the deal. The company also made peace with a restive union, which in turn lobbied the FTC for the deal. And he promised Sony to keep Call of Duty on PlayStation for years and signed a deal to bring the game to Nintendo Switch.

Mr Smith said “things moved quickly” over the past few weeks before Microsoft was sued. When FTC staff met with the Microsoft team, it became clear the agency had serious concerns, he said.

“Our team asked, ‘Can we discuss a settlement proposal? “And the staff said, ‘Not with us,’” he said. Subsequent discussions with the leadership of the agency’s antitrust office did not bear fruit, he added.

On December 6, Microsoft drafted a formal settlement proposal for the agency. Mr Smith declined to say exactly what was in it, but said it dealt with “all issues related to Call of Duty”, referring to fears that Microsoft could pull the title from rival consoles. Mr. Smith spoke virtually with each of the agency’s four commissioners for an hour the following day.

A day after that, the FTC commissioners voted 3 to 1 to sue.

But Mr Smith said he refused to view the situation as an us versus them situation.

“I will always start by asking myself, could I have done more?” he said. “What I do know is that January brings a new year.”

Kellen Browning contributed report.