When Sarah Cardell announced in August that a takeover she had blocked just four months earlier would be investigated afresh, she was at pains to stress that it “was not a green light” for the controversial deal.
The head of the Competition and Markets Authority, the UK’s competition regulator, said the announcement was a response to a new, restructured deal and constituted an entirely new investigation of the proposed takeover of computer game developer Activision Blizzard by Microsoft. It was not, she emphasised, a repudiation of the conclusions of its first probe.
But it was certainly unexpected. Antitrust lawyers have variously described it as “flabbergasting”, “extraordinary” and “a mess”. In April, the watchdog had unequivocally rejected the tie-up, saying it created “the potential to consolidate and reinforce Microsoft’s position in a way that would make it much harder in cloud gaming to be able to compete effectively”.
That initial conclusion contrasted with the thinking of regulators in Brussels, who cleared the deal after reviewing remedies put forward by the companies to allay competition concerns, and the view of US courts, which rejected a Federal Trade Commission attempt to halt the transaction. The FTC’s appeal against the court’s decision remains under way, however.
Lawyers working on deals say the unprecedented series of events in the CMA’s Microsoft/Activision saga speaks to greater uncertainty about the outcomes of its probes — something the regulator denies.
“The CMA said this was a new merger, but it isn’t,” says Ronan Scanlan, who spent four years at the regulator before moving to law firm Arthur Cox. “This is the emperor’s new clothes. It’s a bait and switch.”
The regulator’s critics say it is taking big swings as it works out its place in the world, especially in the contentious arena of big technology mergers, where it must both protect consumers and support the wider aims of a government that wants to attract technology investment to the UK.
But supporters say that the CMA is taking a more resolute stance in its efforts to police large takeovers — at a time when competition authorities in the US are also adopting a more assertive approach.
“The CMA is asserting itself as a highly relevant and decisive player on the world stage,” says Nelson Jung, a former director of mergers at the CMA and now a partner at Clifford Chance in London and Brussels.
“It has shown its unwillingness to compromise with merging parties and other agencies over its firmly held policy preference for divestments over behavioural solutions [promises from companies in the form of licence deals or similar, rather than sell-offs],” he adds.
There are signs that the CMA is diverging from the position of European regulators, in particular on notable deals, and is growing more aligned with the US. Last year it blocked a $5bn tie-up between Finnish crane manufacturers Cargotec and Konecranes, prompting the companies to abandon the deal. The EU had approved the deal, subject to remedies.
“My impression is that [global merger control] has become a bit more unpredictable now and confused,” says Vittorio Colao, who was chief executive of Vodafone when the telecoms group was pursuing the €19bn acquisition of Liberty Global’s European cable assets.
The CMA’s position is important not just because of its enhanced clout on the global regulatory stage. Its decisions are already more difficult to challenge or appeal than those of other regulatory bodies and it is about to gain more statutory power to regulate digital businesses.
Zach Meyers, senior research fellow at the Centre for European Reform, says there is “global uncertainty” now in the merger space. “I’m not sure the CMA is really more unpredictable than others, but [due to the appeals system] it has bigger teeth,” he says.
“It throws up the question as to whether the current system is viable, given the geopolitical blocs that are forming,” says a seasoned Brussels lobbyist, referring to the outsized influence of US, EU, UK and Chinese regulators.
The Activision saga
The Microsoft/Activision case brought many of the tensions inherent in all merger policing to the surface. The CMA’s original decision was highly unpopular with the companies. Activision’s boss, Bobby Kotick, accused the UK of being “closed for business”, while Microsoft president Brad Smith said in a radio interview that April 26 was “the darkest day” in its 40 years of operating in the country.
Then in July, a judge in the US rejected the FTC’s attempt to halt the merger there via a preliminary injunction. Like the CMA, the FTC felt the deal would reduce competition in cloud gaming; Microsoft owns Xbox.
Immediately after that ruling, the CMA issued a statement in which it supported a pause in an ongoing appeal by Microsoft against its initial decision, instead inviting suggestions from both companies about proposals to restructure the tie-up to address its concerns.
Lawyers say that was a striking departure from the normal playbook, whereby companies challenge a prohibition by appealing to a tribunal.
Just over a month later, the authority said it would open a new probe into a revised transaction, a move that Scanlan describes as “absolutely unprecedented”.
“The CMA said ‘we will pause this litigation’, [and then] did some smoke-and-mirrors dance around [there being] a material change in circumstance which was really playing for time while they negotiated a settlement.”
Scanlan contends that the saga has “done a lot of damage to the reputation of the UK regime and to certainty. Companies can now just turn around and say the final report isn’t the last word.”
Jung agrees, saying the regulator’s actions have “cast doubt over just how ‘final’ its final reports are. This introduced a new layer of uncertainty and possibly [risk of appeals] for its own decisions going forward.”
However, others point out that in agreeing to give the exclusive cloud rights to distribute Activision titles for PCs and consoles outside of the European Economic Area to France’s Ubisoft, Microsoft has made a big concession.
“I think this outcome is not a bad one,” says Meyers, “the CMA has not covered itself in glory with the way it’s handled this . . . But Microsoft has come back with a deal that’s quite substantially different.”
An individual at the CMA with knowledge of the deal said it was a “very unusual case”, adding that while “predictable procedures” were important, they shouldn’t “get in the way of getting the right answer”. The person added Microsoft had made “an undeniably big concession here” and it was unusual for companies to offer such a solution after the conclusion of a merger investigation.
The process has also highlighted some of the peculiarities of the UK’s merger control regime. The companies and their lawyers who go up against the authority have long railed against the opacity and formality of its modus operandi, which offer far less chance for negotiation than in jurisdictions such as the EU.
Investigations are overseen by panels. “Unlike the US or the EU, which tend to speak with one corporate voice and have one policy position on Big Tech and merger control, the CMA’s panel system makes it a bit less predictable,” says Scanlan. “If a panel chair is more hawkish or dovish, you can get outlier positions.”
The panels also have wide autonomy. “They collect the evidence they want to collect, they interpret it the way they want to,” complains one lawyer who has defended technology mergers. “In many cases we don’t get to see the full breadth of the evidence presented against us. The ability to have a real judicial check on the CMA is limited.” The CMA insider notes that confidentiality issues mean there is sometimes evidence that parties can’t see.
The UK authority has historically been much less likely to accept so-called behavioural undertakings offered by companies in return for merger approval. These are regarded more favourably in the EU, but the CMA tends to prefer divestments of subsidiaries or divisions, which are easier to police.
Meyers says “commitments a company made 10 years ago don’t always end up being what consumers want”.
The CMA’s detractors assert that the appeals process in the UK makes it easier for it to veto transactions. Regulators in the US must persuade a court to block a merger, while in the EU companies can mount appeals on both the substance and the law of a ruling.
By contrast, the Competition Appeals Tribunal in the UK assesses only whether the regulator acted unlawfully or irrationally. Very few appellants have succeeded in clearing this high bar and even when they do, there is no guarantee that a decision will be reversed as a result. Both Meta and retailer JD Sports won partial victories against CMA decisions — only for the regulator to uphold its initial verdicts after revisiting the cases.
Comparisons with Europe
While the UK was a member of the EU, its rules obliged the CMA to defer to Brussels on the fate of takeover deals above a certain size. But after Brexit, it pulled up its own seat at the global table of antitrust enforcers, with a say for the first time on the future of the biggest and most complex mergers touching the UK’s shores as well as a beefed-up role in subsidy control and consumer rights enforcement.
According to Linklaters, following the end of the so-called one-stop shop — the regime under which either the UK or the EU investigated, but not both — almost a fifth of in-depth merger cases, classed as “phase 2” investigations, have been reviewed in parallel by the European Commission and the CMA (10 in total). The CMA’s workload increased substantially as a result, and its budget has gone from about £70mn in 2014-15 to more than £130mn in 2022-23.
Linklaters’ research suggests an increase in deal mortality following Brexit, however. The firm found that 59 per cent of mergers that went to CMA phase 2 — a detailed probe into transactions where a reduction in competition is considered likely — between January 2019 and the end of August did not proceed. They were either blocked, unwound or abandoned. From CMA formation in 2013 to the end of 2017, just 30 per cent of mergers met the same fate.
“It’s clear that Europe is trying to take the [position of] fairness while the CMA is a bit more unpredictable,” says Colao, the former Vodafone boss.
In a speech last year, Cardell said that while it was unsurprising that the CMA was “perceived as a more active and visible merger control authority” after Brexit, she did “not agree that we are excessively interventionist or that the UK regime has become unpredictable as a result”.
She says that only a handful of deals are actually blocked. Out of the thousands of deals agreed each year, “we probably consider whether or not to review something like 700 to 800”. Fewer than 100 will be formally investigated and 12-14 taken to a phase 2 investigation, she adds.
“At the upper end, maybe around five of those might end up in prohibition.”
The CMA’s own statistics show the regulator blocked three deals in the 2022-23 financial year following a phase 2 probe, two the year before and only two the year before that.
In some cases — such as the combination of Veolia and Suez — the CMA has reached very similar conclusions to EU regulators. In others, it has been more liberal; the commission demanded concessions before approving Facebook’s acquisition of software start-up Kustomer, while the CMA waved it through without resorting to a phase 2 inquiry.
The commission has also launched in-depth probes into Booking.com’s proposed €1.6bn acquisition of Etraveli and Amazon’s $1.7bn purchase of iRobot, both of which the CMA cleared without detailed scrutiny.
“I think this [Microsoft/Activision] is a bad deal to treat [as] indicative of any future direction,” Meyers says, “because it is so large, and was always going to attract a lot of scrutiny.”
The political dimension
Although the CMA is an independent agency, the UK government sets the wider tone for competition policy. Under then prime minister Theresa May, the CMA blocked the £7bn takeover of supermarket group Asda by larger rival J Sainsbury in 2019.
But Prime Minister Rishi Sunak’s government has publicly acknowledged anxieties about how regulatory decisions could have an impact on innovation and growth. Asked about the original decision to block the Activision takeover during a conference this year, chancellor Jeremy Hunt stressed that while he “would not want to undermine” the independence of the CMA, “it’s important all our regulators understand their wider responsibilities for economic growth”.
In the same month ministers outlined a draft “strategic steer”, setting out expectations for how the CMA should approach its work that included prioritising “outcomes that promote competition, investment, innovation and boost economic growth”.
Those close to Hunt and Sunak insist that no pressure was placed on the CMA to change its stance over the Activision deal. Hunt’s allies also say that the chancellor was explicit at his meeting with Brad Smith in June that he would not interfere with the CMA’s decision.
The same government is about to widen the CMA’s influence over digital and tech companies courtesy of the digital markets, competition and consumers bill currently passing through parliament. This legislation — similar in scope to the EU’s Digital Markets Act — will empower the regulator’s new digital markets unit with sweeping powers to set rules for technology companies with particularly large influence over certain sectors like search or social media.
Companies designated as having “strategic market status” will be forced to adhere to codes of conduct that dictate how, for example, they share data with rivals. Transgressions could result in fines of up to 10 per cent of revenue.
The extra powers are part of a wider trend towards greater scrutiny of large digital business, a shift that started under Cardell’s predecessor, Andrea Coscelli, who felt the sector had in the past enjoyed too much of a free pass from antitrust investigators. This view was shared by top officials in both the European Commission and the US authorities, which under President Joe Biden had also shifted towards a more interventionist stance.
Regulators across the world — from Washington to Brussels — have admitted that they were “asleep at the wheel” when it came to scrutinising big tech mergers. This led to transformational deals, such as Facebook’s acquisitions of Instagram and WhatsApp and Google’s purchase of YouTube, being waved through with few objections.
Last year, top US antitrust enforcer Jonathan Kanter told the FT that under-enforcement in the past had “allowed the law to calcify around bad precedents”, adding there was a “need to update and adapt our antitrust enforcement to address new market realities”.
“I think there’s a clear and pretty widely acknowledged recognition that we’ve had historic under-enforcement when it comes to tech mergers,” Cardell says.
But the creation of the DMU looks set to create more anxiety among technology deal makers and may result in potentially more divergence between London and Brussels.
An early test will be the proposed acquisition of Figma, a screen design software specialist, by Adobe. This $20bn deal is being scrutinised by both the CMA and the EU, while the US Department of Justice reportedly plans to challenge it in court.
In the UK, the authority is also likely to investigate Vodafone’s agreed merger with mobile phone rival Three. The outcome will be closely watched because in 2016 the CMA blocked a proposed tie-up between O2 and the parent company of Three because it would reduce the number of network operators.
For all his criticism of the CMA’s conduct of the Activision process, Scanlan does not believe the evidence suggests a new era of ultra-hawkish merger policing. “I think it would be wrong to think this will result in a slew of blocks and renegotiations,” he says.
Additional reporting by George Parker in London