Despite UK ruling, Microsoft/Activision merger might not be dead just yet

Wednesday's decision by the UK's Competition and Markets Authority (CMA) to block Microsoft's purchase of Activision may seem to be a fatal blow for the $69 billion deal. But Microsoft and Activision say they still see a path forward for their proposed merger, even if it's now a longer road than anticipated.

An unappealing appeals process

Bloomberg reports that in an all-hands meeting for the gaming division Thursday, Xbox chief Phil Spencer said Microsoft's interest in the deal "hasn't wavered" in the wake of the UK's decision. Spencer reportedly still sees a way forward for the deal despite acknowledging that the UK decision will "slow the approval process."

Though the Competition and Markets Authority's (CMA) release was the regulator's final report on the proposed merger, that doesn't necessarily represent the UK government's absolute final say on the deal. The CMA decision can be appealed to the UK's Competition Appeal Tribunal (CAT), and both Microsoft and Activision instantly signaled their intent to do so in statements following the report's release on Wednesday.

"It was just a flawed ruling in every respect... these regulators really don't understand our business," Activision CEO Bobby Kotick said in an interview with CNBC. "It was so flawed in every way that it is going to create a lessening of competition. We think the tribunal will see that and rule in our favor."

"The ruling was disappointing. When you look at the facts and what the opportunities are for the U.K., this was a transaction that was only going to enhance opportunities for competition," says $ATVI CEO @BobbyKotick. "It was a flawed ruling in every respect." pic.twitter.com/qbE0s6Jhx9

— Squawk Box (@SquawkCNBC) April 27, 2023

“I think the appeals process will work in our favor," Kotick added in a Bloomberg TV interview on Thursday.

Some industry watchers feel the companies shouldn't put too much hope in the UK's regulatory appeals process, though. Sheridans Associate Anna Poulter-Jones told Why Now Gaming that "the CMA tends to come out on top in appeals." And TD Cowen analyst Doug Creutz said in an investor note that the chances of a reversal at the CAT are "no more than 10%" (as reported by Axios).

Even if an appeal eventually goes Activision's way, though, the process timeline may not work in its favor. In an FAQ, the CAT says it generally "aims to complete 'straightforward' cases in less than nine months." Even after that, a successful appeal would mean that the matter would be sent back to the CMA, which could take additional time to approve specific proposed remedies to fix any identified issues.

That would push any merger well past a reported contractual deadline of July 18 for Microsoft and Activision to fully close the deal. Microsoft could technically be on the hook for a $3 billion termination fee after that date, though the parties would more likely simply head back to the table to renegotiate a new contract if they're both still interested.

What about the rest of the world?

Even if a CAT appeal eventually fails, the CMA itself only has jurisdiction over the United Kingdom market. Even if the merger is blocked in the UK, could a merged Microsoft-Activision entity still operate in other countries?

The CMA doesn't seem to think so. "Activision is intertwined through different markets—it can't be separated for the UK," the regulator told the BBC. "So this decision blocks the deal from happening globally."

But industry analysts see a path for a carveout that satisfies the CMA's concerns in the UK while allowing the merger to go forward elsewhere. Such a carveout could be made easier because the CMA's decision is focused solely on cloud gaming competition rather than the overall effects on the rest of the console market.

"If the decision stands and the deal receives approval in other jurisdictions, Microsoft could geofence the Activision games [on its cloud service] out of the UK," Gamma Law Managing Partner David Hoppe told Why Now Gaming. "That would presumably address the CMA’s concerns."

Wedbush Morgan analyst Michael Pachter agreed, telling GameSpot that Microsoft could "carve out Game Pass in the UK and keep all Activision Blizzard content off of the service and commit that they will keep the price of Game Pass at the current price plus no more than the rate of inflation... for the next 10 years. If they commit to that, they can appeal the UK’s inevitable approval with those carveouts, and they will win."

Of course, this kind of carveout depends on the merger deal being approved in other major markets. EU regulators are set to issue their own decision on the merger by May 22 and are widely expected to approve the deal. In the US, meanwhile, a Federal Trade Commission lawsuit attempting to block the deal is set for an evidentiary hearing on August 2.