President Biden’s top antitrust officials have used novel arguments in recent years to block tech giants and other big companies from closing deals, a strategy that has had mixed success.
But on Friday, when Microsoft closed its blockbuster $69 billion acquisition of video game publisher Activision Blizzard after overcoming a challenge from the federal government, the message sent by the completion of the merger was incontrovertible: Big tech can still grow.
“Big tech companies will certainly read the tea leaves,” said Daniel Crane, a law professor at the University of Michigan. “The smart money says to merge now, while the merger is good.”
Microsoft’s purchase of Activision was the latest deal to move forward after a series of failed merger challenges by the Federal Trade Commission and the Justice Department, which are also confronting big tech companies through lawsuits arguing that they violated antitrust laws. Leaders of the two agencies had tried to block at least 10 other deals in the past two years, vowing to dislodge long-standing ideas from antitrust law that they said had protected giants like Microsoft, Google and Amazon.
But their efforts were met with skeptical courts, leaving those fundamental assumptions largely intact. In the case of Microsoft’s Activision deal, the idea the FTC questioned was a “vertical” transaction, which refers to mergers between companies that are not primarily direct competitors. Regulators have rarely sued to block such deals, believing they generally do not create monopolies.
However, “vertical” deals have been especially common in the tech industry, where companies like Meta, Apple and Amazon have sought to grow and protect their empires by expanding into new lines of business.
In 2017, for example, Amazon bought the high-end supermarket chain Whole Foods for $13.4 billion. In 2012, Goal acquired photo-sharing app Instagram for $1 billion and then shelled out nearly $19 billion for messaging service WhatsApp in 2014. Of the 24 deals worth more than $1 billion completed by the tech giants from 2013 through mid-August this year, 20 were vertical transactions , according to data provided by Dealogic. .
The closing of the Microsoft-Activision deal has reinforced the notion that vertical deals are generally not anti-competitive and can still emerge relatively unscathed.
“There remains a presumption that vertical integration can be a healthy phenomenon,” said William Kovacic, former chairman of the FTC.
The FTC is continuing its challenge to the deal between Microsoft and Activision even after it has closed, said agency spokeswoman Victoria Graham, adding that the acquisition was a “threat to competition.” The Justice Department declined to comment. The White House had no immediate comment.
The idea that vertical transactions were less likely to harm competition than combinations of direct rivals has been entrenched since the late 1970s. In the decades that followed, the Justice Department and the FTC did not challenge vertical agreements in court, but instead reached agreements that allowed the companies to continue their agreements if they changed their practices or divested parts of their business.
Then in 2017, the Justice Department sued to block the $85.4 billion merger between phone giant AT&T and media company Time Warner, in the agency’s first attempt to stop a vertical deal in decades. A judge ruled against the challenge in 2018, saying he did not see sufficient evidence of anti-competitive harm by companies from different industries joining together.
Biden’s top antitrust officials — Lina Khan, chair of the FTC, and Jonathan Kanter, the Justice Department’s top antitrust official — have been even more aggressive in challenging vertical mergers since they were appointed in 2021.
That year, the FTC sued to block chipmaker Nvidia from buying Arm, which licenses chip technology, and the companies abandoned the deal. In January 2022, the FTC announced it would block Lockheed Martin’s $4.4 billion acquisition of Aerojet Rocketdyne Holdings, a missile propulsion systems manufacturer. The companies abandoned their merger.
But judges rejected many of their efforts for lack of evidence and denied Khan and Kanter a courtroom victory that would have set a new precedent. In 2022, after the Department of Justice sued to block UnitedHealth Group’s acquisition of Change Healthcare, a judge ruled against the agency.
The FTC’s decision to block Microsoft’s purchase of Activision last year was a bold effort by Ms. Khan, given that the two companies do not primarily compete with each other. The agency argued that Microsoft, which makes the Xbox gaming console, could harm consumers and competition by withholding Activision games from rival consoles and would also use the deal to dominate the young game streaming market.
To prove that wouldn’t be the case, Microsoft offered to make one of Activision’s major game franchises, Call of Duty, available for other consoles for 10 years. The company also reached a deal with the European Union, promising to make Activision titles available to competitors in the nascent game streaming market, allowing the deal to come to fruition.
In July, a federal judge finally ruled that the FTC did not provide sufficient evidence that Microsoft intended to impede competition through the deal and that the software giant’s concession eliminated concerns about competition.
The agencies “are facing judges who have said that 40 years of economics show that vertical mergers are good,” said Nancy Rose, a professor of applied economics at MIT with a background in antitrust, who is part of a group of academics who say that vertical agreements can be detrimental to competition. She said agencies should not back down from challenging vertical mergers, but that regulators should be careful about choosing cases they can prove with plenty of evidence.
Khan and Kanter have said they are willing to take risks and lose lawsuits to push the limits of the law and provoke action in Congress to change antitrust rules. Ms. Khan has noted that the FTC has successfully stopped more than a dozen mergers.
Kanter has said that challenges to mergers by the Justice Department and the FTC have deterred problematic deals.
“First of all, we are getting fewer problematic mergers,” he said in a speech to the American Economic Liberties Project, a left-leaning think tank, in August.
Still, larger companies that have the resources to defend themselves will likely feel more confident challenging regulators after the Microsoft-Activision deal, antitrust lawyers said. Regulators’ aggressive stance has simply become the cost of doing business, said Ryan Shores, who led technology antitrust investigations at the Justice Department during the Trump administration and is now a partner at the law firm Cleary Gottlieb.
“Many companies have realized that if they have a deal they want to make, they have to be prepared to litigate,” he said.
