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I've been reading this thread for months but never posted on it. I have thoughts, but first a few disclosures:
My background is that I'm an Attorney in the United States of America, and an investor. During times where I expect the stock market to fall, I typically analyze merger arbitrage plays and look for ones that appear, based on the available information to present an extremely favorable risk/reward payoff, and invest heavily in those. To determine the risk/reward I look at the premium that will be received if the deal goes through, the relevant contracts, the likely application of antitrust laws to the transaction, the fair valuation of the stock if a deal falls through, the public statements of the parties involved, and any other relevant factor specific to that transaction. I sold my broad based investments in early January 2022, in anticipation of the market collapse. I eventually threw that money into Twitter, and held it to the close of that transaction. Soon after that, I dumped the proceeds into Activision/Blizzard/King, where I still sit heavily invested. I don't believe the deal will close because I'm invested there, but I did invest there because I believed the deal would close. Actually, I am more skeptical that the deal will close now than I was when I invested. With those disclosures having been made, I have dedicated substantial thought to this transaction specifically, and to the merger process generally, and want to share some of my thoughts.
This deal will close or not, almost exclusively based on the decision of the CMA in the UK for three reasons, as follows:
1. The FTC's case has no legal merit, and Microsoft appears more than willing to spend the resources necessary to close over their objections, and fully litigate the matter if necessary, unless the issue is rendered moot by another antitrust authority blocking the transaction.
2. The EC is far more open to behavioral remedies than other regulators, and Microsoft appears willing to accept substantial behavioral remedies, which makes it more than likely that a deal will ultimately be reached on that front, if the process clears the CMA.
3. The CMA has unique power. They are not bound by the same flavor of judicial oversight as the other major antitrust agencies. As an attorney this seems incredibly problematic to me, but that doesn't change what it is. In the UK, the CMA's decision will generally only be challengeable on the grounds that they made a decision that was wholly illogical, or a process which was illegal. Even in those cases, it is generally remanded back to the CMA for further consideration. There is legal weight to a decision by the CMA far beyond that of a decision by the FTC or EC, particularly in cases such as this where a party defending the transaction has the funds and the willingness to litigate thoroughly.
It is hard to filter out what news is real, and infer from that the basis thereof. For example, Bloomberg reported that the FTC had filed a request for a preliminary injunction in Federal Court the same day as an earlier phone call with the EC. No news has mentioned what US District Court that request was ultimately filed in. By now, even if it was filed under seal, there should be a publicly available, if somewhat redacted, version of that document. I should be able to see it on PACER (Public Access to Court Electronic Records, a system where, for a small per page fee, one can access pretty much all unsealed court records ). So should any legal reporter. The only conclusion I can draw was that there was no such filing made that day.
Recently it was reported, and much discussed here, that Microsoft expected the CMA to oppose the transaction in Phase 2. There are at least four possible reasons for this, one of which should concern anyone interested in this transaction. One explanation is that it is incorrect reporting. Given the claims of a request for an injunction by the FTC, I can't fully discount that possibility. It is possible that Microsoft is just trying to lower expectations somewhat for some tactical purpose, or that these were just the personal views of a particular person the reporter talked to. It is possible that the thought process was simply that the FTC objected, and the EC objected, so the CMA would probably object too. If I were sure that one of these explanations was the real one, I would accord them zero weight and move on. The fourth possible explanation, however, concerns me, as follows:
Among the many issues that the CMA balances, it balances a concern for keeping trade secrets secret against the importance of revealing information forming the basis of its decision. One way that it balances these things in cases likely to involve trade secrets is sometimes sending its factual findings to parties involved, so that they can look through them and see if they include things that the parties assert are trade secrets which should be withheld from disclosure. The CMA will then look at the arguments for whether these issues are in fact a trade secret, and also see if disclosure is necessary because they are part of the "gist" of the CMA's case. It will then decide on disclosure. This means sometimes, the parties will see a factual background that is being put in a decision before the decision itself comes out.
Cases are about applying the law to the facts. How you describe the facts is very telling as to how you are likely to decide a case. A court or quasi-judicial agency that wants to minimize the risks of losing an embarrassing appeal will typically make factual findings that strongly support the conclusions it intends to draw. It is far more likely to be overturned because the weight of the evidence supports a different factual finding, than because the law was incorrectly applied to the facts that were found. This all means that, in many cases, you can pretty well predict the outcome of a decision from the factual findings, and given that a decision is likely coming soon, Microsoft may already have seen those factual findings. If Microsoft's counsel has read the CMA's factual findings, and on that basis believes that the CMA is poised to block the Merger, then this deal could be on very shaky ground indeed.
It is difficult to predict where this is headed without having a good feel for the veracity of that particular report, and if true, the basis for the belief that the CMA will block it. There is no legal reason, under US or EU antitrust law, why this merger cannot move forward. In the UK, the discretion of the CMA is near absolute.
I would like to address the arguments that the FTC is not abusing their power. They are. In this transaction it is not particularly relevant because, except to the extent that they are persuasive to the CMA, they won't change the outcome. Although this has already been discussed, I think there is some misunderstanding in some of these comments, and I'd like to give my two cents. In the United States, the government is subservient to the law. Administrative agencies are tasked with, to various extents, interpreting, enforcing, and adjudicating issues under specific laws. The FTC is tasked with some amount of work related to Antitrust laws, although they split this authority with the DOJ, in a way that is pretty unique among agencies. Nevertheless, they are tasked with, for some mergers, determining whether a proposal violates antitrust laws.
When the FTC takes cases where there is no cognizable legal theory under which Antitrust laws could be considered violated, and tries to challenge the transaction on the basis of what it believes the law should be, that is an abuse of power. Imagine if the Bureau of Alcohol, Tobacco, and Firearms decided that the law should be that handguns are illegal, so it took away every handgun it could find, and then forced people to go through a time consuming and expensive process to reclaim them. The ATF would know that they would lose any cases that were litigated, but that most people would abandon the process rather than face the time and expense of litigating, and that in pursuing a case with no legal merit, they could put a big dent in activity which is legal, but which they don't like. Regardless of how you feel about handguns, that would be an abuse of power. An agency's responsibility to taxpayers is not to use their enforcement power as a hammer to change the law, or to prevent lawful activity they don't like. Anything that strays from fidelity to the law, as they understand it to actually be, is an abuse of authority. It costs taxpayers money, it undermines faith in the agency itself, and it wastes significant resources (agency resources, private resources, and court resources). Where an administrative agency is doing all this in the hope that they can convince the legislature to change the law, it is the worst sort of example of the tail trying to wag the dog.
My concern with the FTC is not bound to this particular transaction. They are the least dangerous when facing a determined and financially powerful adversary. They will cost Microsoft some money for no good reason, and that's a minor shame. When they do the same thing in smaller transactions, they successfully block entire mergers that should go through, substantially harming consumers and businesses under the auspices of the law, but without any actual basis in law or fact. If that is not abuse of government authority, I struggle to see what is.
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