Microsoft’s $75 Billion Deal for Activision Blizzard Rejected by U.K.

The Competition and Markets Authority’s ruling, issued Wednesday, said Microsoft had failed to convince it that undertakings it had proposed since announcing the deal would sufficiently ease the regulator’s competition worries. The CMA has said the deal poses a competition threat to the U.K.’s gaming industry and has been reviewing it for months.

The decision in the U.K. casts a long shadow over the deal worldwide. The CMA’s investigation focused on the U.K. market. But the decision could prevent the deal from closing, legal experts say, because the videogame industry is complex and global, and it wouldn’t be practical for a combined Microsoft-Activision to operate completely outside the U.K. market.

The U.S. Federal Trade Commission and European Union regulators are also scrutinizing the deal. The U.K.’s decision wouldn’t have any direct bearing on those other proceedings, but such global deals typically need the endorsement of the world’s biggest regulators to move ahead.

While the U.K. hasn’t typically been a significant factor in blocking deals in the past, its competition authority has become more active on the global stage since Britain’s departure from the EU.

Microsoft said it would appeal the decision and stood by the deal. Antitrust lawyers said appeals can move relatively quickly in the U.K., but the threshold for overturning a CMA ruling is high. The appeals tribunal looks only at whether a decision was legal and rational and whether proper procedure was followed.

The U.K. regulator had signaled skepticism about the deal, but the rejection nonetheless surprised many investors. Microsoft’s stock rose 7% in premarket trading shortly after the CMA’s announcement, while shares of Activision dropped more than 10%. Microsoft beat analysts’ expectations in its earnings report late Tuesday. Investors could also be reacting to the cost savings expected should Microsoft walk away from the Activision deal.

The European Commission, the EU’s antitrust watchdog, has set a deadline of May 22 for its own ruling.

Meanwhile, the FTC, which sued Microsoft to block the deal in December, has scheduled a hearing for the case in its administrative court for August.

All three regulators raised concerns that the transaction could allow Microsoft to control how consumers access Activision games such as “Call of Duty,” potentially reducing competition in the global videogame industry. But in March, the CMA narrowed the focus of its probe to the nascent cloud-gaming market, removing previous concerns that the deal could lessen competition in the established and much larger console-gaming market.

The CMA said in its decision that the deal would alter the fast-growing cloud-gaming market and lead to less innovation and choice for U.K. gamers. It said Microsoft already has advantages in this space because it owns the computer operating system Windows and has a global cloud infrastructure as well as a strong gaming console and collection of games.

“No other cloud gaming operator has this combination of advantages, which partly explains Microsoft’s current U.K. market share of between 60-70%,” the CMA said.

The antitrust watchdog also said an independent inquiry group found that Microsoft would have the incentive to withhold Activision’s games from competitors after the merger and that the commitments Microsoft made to constrain such behavior would have been ineffective.

Further, such a remedy would have required continuous regulatory obligations overseen by the CMA. “Competitive forces in a free market are much better placed to achieve the right outcome for competition and consumers,” the CMA said.

The agency noted that other authorities have raised similar concerns, citing the FTC’s December move to block the deal.

Regulators in other countries such as Brazil, Saudi Arabia and South Africa had previously approved the deal.

Microsoft Vice Chair and President Brad Smith said the company remains fully committed to the acquisition. He said the ruling would discourage technology innovation and investment in the U.K. and is a rejection of what he referred to as a pragmatic path to address the agency’s competition concerns.

“We’re especially disappointed that after lengthy deliberations, this decision appears to reflect a flawed understanding of this market and the way the relevant cloud technology actually works,” Mr. Smith said.

Activision said the CMA’s ruling contradicts the U.K.’s ambitions to become an attractive country to build technology businesses. “The report’s conclusions are a disservice to U.K. citizens, who face increasingly dire economic prospects,” the company said. “Global innovators large and small will take note that—despite all its rhetoric—the U.K. is clearly closed for business.”

The decision is one of the highest-profile for the CMA, which long sat in the shadow of regulators in the EU. After Britain split from the bloc, the agency has increasingly weighed in on big global deals.

The U.K. ranks as the sixth-largest market for consumer spending on videogame software, according to industry tracker Newzoo BV. China is the largest, followed by the U.S.

In a February appearance on CNBC, Activision Chief Executive Bobby Kotick said that the U.K. would fall behind on technological innovation if it were to block the transaction and others like it. “If deals like this can’t get through, they’re not going to be Silicon Valley, they’ll be Death Valley,” he said.

While the CMA approves a majority of the deals it investigates, it has developed a reputation for taking a more heavy-handed approach than its peers in recent years, legal experts said.

In 2021, the CMA ordered Facebook parent Meta Platforms Inc. to sell animated-images company Giphy because it said the acquisition could damage competition among social-media platforms and U.K. advertisers. The CMA also blocked travel-booking company Sabre Corp.’s merger with rival Farelogix Inc. in 2020.

In both cases, the companies gave up on the deals globally because of the CMA decision.

Ahead of Wednesday’s decision, antitrust lawyers had said the CMA could pose one of the highest hurdles for the Microsoft deal. The U.K. agency generally prefers structural changes to resolve concerns. These could include asking companies to sell off business units that are at the center of worries about competition.

In February, the CMA suggested one such change—for Microsoft to divest the Activision unit that makes the hit “Call of Duty” franchise. But the software company said that wasn’t an option it would be willing to consider.

In its decision, the CMA said behavioral commitments offered by Microsoft would have only applied to a subset of videogames that are accessed through particular services and stores, raising a risk of disagreements between Microsoft and cloud-gaming service providers.

The scrutiny the deal has faced on both sides of the Atlantic is a sign of heightened concern from global regulators about the dominance of large tech companies, antitrust lawyers said.

“For a very long time, competition authorities were criticized for being weak on mergers, especially in the digital space,” said Damien Geradin, a Brussels and London-based competition lawyer with Geradin Partners. “The mood has changed.”

Some experts say Microsoft could still complete the deal without U.K. approval, should an appeal fall through. While cutting off the U.K. from accessing Activision games would reduce revenue and raise customer issues, it is possible, said David Hoppe, a mergers-and-acquisitions, tech and media attorney with Gamma Law in San Francisco.

“It is not unusual for publishers to serve different versions of the same game in different countries, or to geofence some games out of certain countries altogether,” he said. “This may result from licensing restrictions, local law or cultural concerns.”