The UK Blocked The Microsoft-Activision Merger, So What Happens Next?

Microsoft is in the process of attempting to complete one of the biggest acquisitions in history, a $68.7 billion buyout of Call of Duty company Activision Blizzard. The deal has been cleared in a number of countries already, but in a major blow to Xbox, the UK's Competition & Markets Authority announced on Wednesday that it would block the deal due to concerns about cloud gaming. The CMA initially held concerns about the console marketplace before reconsidering. However, the cloud gaming market proved to be a sticking point. The decision was a shock to many industry-watchers, who believed the CMA would give it the green light.

Microsoft and Activision Blizzard are already in the process of appealing and pushing to get the deal done. But what if, after all of that, the deal still doesn't go through? Here's what happens next, and how Microsoft could be on the hook to pay billions in a breakup fee.

What Happens Next

In its statement following the CMA's announcement, Activision Blizzard said it will work with Microsoft "aggressively" to reverse the decision on appeal. "Global innovators large and small will take note that--despite all its rhetoric--the UK is clearly closed for business," Activision Blizzard said. Microsoft president Brad Smith said Microsoft continues to be "fully committed" to getting the deal done and will appeal the decision. "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," Smith said.

Wedbush Securities analyst Michael Pachter told GameSpot that "there is a workaround" for Microsoft to get the deal done, and it involves offering remedies.

Pachter said Microsoft might be able to convince regulators to give the go-ahead to the deal by keeping Activision Blizzard content off Game Pass in the UK and agree to keep Game Pass prices stable in the UK.

"The two things Microsoft can do to address the UK’s concerns are (1) carve out Game Pass in the UK and keep all Activision Blizzard content off of the service; and (2) commit that they will keep the price of Game Pass at the current price plus no more than the rate of inflation (2 – 3% per year) for the next ten years. If they commit to that, they can appeal the UK’s inevitable approval with those carve outs, and they will win," Pachter said.

A Huge Payout If The Deal Falls Through

Microsoft would be on the hook for a huge payout if its deal to buy Activision Blizzard ultimately falls apart. There is also a situation where Activision Blizzard would need to hand over multiple billions of dollars.

According to the official terms of the deal, Microsoft will be required to pay Activision Blizzard what is called a "reverse termination" fee of $3 billion if the deal doesn't get done. The payment to Activision Blizzard would have been $2 billion if the termination notice was provided before January 18, 2023, or $2.5 billion if that happened between then and April 18, 2023.. The reverse termination fee is now the highest it could be, $3 billion, because any such termination notice would happen after that date.

Should Activision Blizzard be the party to cause the deal to go south, it would pay Microsoft a termination fee of $2.27 billion. There are various conditions that could trigger this payment to Microsoft, Activision Blizzard "materially" breaching its agreements, or Activision Blizzard stockholders failing to agree to the sale. That last point is moot because Activision Blizzard shareholders have already said yes to the buyout.

Should Microsoft have to pay the $3 billion breakup fee, it wouldn't be game over for the technology giant, of course. After all, Microsoft generated $53 billion in revenue and $18.3 billion in profit in the last quarter alone. As of March 31, Microsoft had a whopping $104.4 billion in cash on hand. Still, the deal closing would be bad news for Microsoft. Some have theorized about what Microsoft could do with the $68 billion it planned to spend on Activision Blizzard if the deal craters, such as more aggressively pursuing timed exclusives for Xbox and Game Pass, but that is all speculation at this point. Activision Blizzard's stock price has fallen by more than 10% today, April 26, following the announcement of the CMA's decision.

The US And EU Cases

The CMA handed down its final decision on April 26, blocking the deal (pending appeal). But in the US and the EU, it could take much longer to find out what happens. The FTC is suing Microsoft to try to block the deal. An evidentiary hearing is set for August 2, 2023. The EU Commission, meanwhile, is expected to hand down its final word by May 22. More recently, it was reported that the EU will indeed approve the deal, and an announcement could come as soon as May 15.

Experts have pointed out that Microsoft could close the deal amid the pending lawsuit with the FTC, though, and that would seemingly complicate matters further. "The deal can close while in litigation with the FTC, but they would have to keep the businesses separate until they win their appeal. That should take no longer than a few more months," Pachter told GameSpot.

"If Microsoft wins on console in UK and EU, the FTC will definitely lose in court, and my guess is they will drop their challenge altogether," Pachter said. "Microsoft is not walking [away] from the deal, and will pursue remedies in court if any of the agencies takes it that far. There is no lessening of competition if Microsoft continues to support competitor consoles, so no issue that any regulator can win on."

Microsoft is no stranger to tussling with the US government. Years ago, in the landmark case of United States v. Microsoft, the government claimed Microsoft operated a monopoly in the PC space and made it challenging for people to use non-Microsoft products on their computers. Microsoft eventually settled with the US and agreed to some remedies.

FTC chair Lina Khan addressed the Microsoft/Activision Blizzard case recently. She said it's true that the FTC considers feedback from "big players," i.e. Sony, but at the end of the day, the FTC tries its cases "based on the law and the facts."

Pachter, the analyst from Wedbush Securities, believes Microsoft will close the Activision Blizzard deal by June 30, which was the anticipated deadline. He also believes 2023's new Call of Duty game will be a day-one launch title for Game Pass. This is an ongoing story and we'll continue to bring you more information as it becomes available.