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 push for regulatory approval of Microsoft’s $69 billion acquisition of the company of Activision Blizzard video games.

Mr. Smith’s tactic, which included offering to keep Activision’s massive Call of Duty game available to satisfy competitive concerns, failed. A day after their meeting, Ms. Khan’s agency sued to avoid the big deal.

But in an interview this week, Mr. Smith was optimistic. “She didn’t take me up on my offer, but when I said give peace a chance, she smiled at least a little,” said Ms. Khan. “So any time someone can end a meeting smiling even just a little bit, there’s always a little bit of hope that we can sit 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 “nice guy” strategy could still work.

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

Microsoft filed its response to the FTC’s lawsuit on Thursday, arguing that the deal would expand access for gamers.

“Providing consumers with high-quality content in more ways and at lower prices is what antitrust laws are supposed to promote, not prevent,” the filing said.

The FTC has 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 lure gamers away from rivals, particularly Sony, which makes the PlayStation console.

Microsoft’s apparently conciliatory approach is part of a near-complete cultural transformation of the company since the 1990s, when it was known as the “Evil Empire” for its strong-arm tactics to lock out competitors. But under Satya Nadella, who became chief executive in 2014, and Mr. Smith, who is also Microsoft’s top lawyer, said the company has bent over backwards in recent years to show it has grown.

Pushing the Activision deal has implications for more than just Microsoft. The FTC’s lawsuit is a milestone in a new era of government scrutiny of the biggest tech companies. Ms. Khan has staked out an aggressive antitrust agenda in the case, which legal experts said could be difficult to win. If Microsoft can’t get the deal approved, other tech giants will be less likely to force a mega-deal.

“They’re going to fight it,” said Sid Parakh, a portfolio manager at Becker Capital, which invests in Microsoft. “It’s a little bit more on top of that agreement. It’s also a statement to the FTC.”

With Microsoft sitting on more than $100 billion to spend, he added, “they don’t want to back down now and after all the acquisitions fall through.”

The Activision acquisition must close by mid-July or Microsoft will have to pay up to $3 billion in a breakup fee. Many hurdles remain, including approval from other global regulators, particularly in the UK and the European Union. If Microsoft could reach a formal settlement with them, it would leave the FTC at a critical juncture.

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 takeover in federal court to stop it. The enforcement process could move quickly, giving Microsoft a quick legal victory.

“There is no reasonable and legitimate reason to prevent our transaction from closing,” Activision CEO 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, the director of the FTC’s Office of Competition, said the agency is always willing to consider proposals from companies seeking to resolve antitrust issues.

Microsoft is trying to find 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 has hired Beth Wilkinson, who prosecuted the 1995 Oklahoma City bombing case before becoming one of America’s top corporate litigators, to argue on his behalf before the FTC’s internal court.

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 together to outperform competitors. In 1992, as regulators investigated the company, Microsoft co-founder Bill Gates dismissed the scrutiny, saying, “The worst thing that could come out of this is that it could land on the steps of the FTC, hit the me in the head and kill me.”

Two years later, Microsoft agreed to a degree of federal consent that allowed PC manufacturers more freedom to install software 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 trial forced Microsoft to grow up, particularly in terms of its relationships with regulators and institutions beyond the technology industry,” said Margaret O’Mara, a University of Washington professor who researches corporate history. technological

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

It wasn’t always smooth sailing. 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, Steve Ballmer, Microsoft’s chief executive at the time, was on a plane to Brussels to announce a deal with the European Commission when Mr. Smith received word that the commission was going to sue Microsoft for unfair competition. 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 makes Minecraft, a game in which children learn and socialize in an expansive virtual world. It also spent $7.5 billion to buy GitHub, a software platform that supports open source code.

Microsoft is now the second most valuable public company in the world, driven largely by its strong cloud computing offerings. The enterprise business at the heart of its growth generally attracts less government attention than social media or other consumer-oriented businesses.

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

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

After the deal was announced in January, Microsoft did everything it could to calm regulators’ fears. Mr. Smith and Mr. Nadella traveled to Washington in February to tout the deal’s benefits. The company also made peace with an agitating union, which in turn lobbied the FTC for the settlement. And he promised Sony that he would keep Call of Duty on PlayStation for years and signed a deal to put the game on the Nintendo Switch.

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

“Our team asked, ‘Could we discuss a proposed settlement?’ And the staff said, “Not with us,” he said.Subsequent discussions with the agency’s antitrust office leadership were fruitless, he added.

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

A day later, FTC commissioners voted 3 to 1 to sue.

But Mr. Smith said he refused to think of the situation as an between-us situation.

“I’ll 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 provide reports

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