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The U.K. Competition and Markets Authority has stunned Wall Street by issuing a ruling that blocks Microsoft’s proposed $68.7 billion merger with video game publisher Activision Blizzard on grounds the megadeal would enable the U.S. software giant to unduly dominate the nascent cloud gaming space.
One thing’s certain, say media analysts: The U.S. tech giant’s proposed takeover has received a near-fatal blow in an essential gaming market. “For Microsoft and Activision, we suspect the CMA decision is a deal-killer,” SVB Securities Research analyst Clay Griffin argued in an April 26 investor note.
Despite the U.K. roadblock, shares in Microsoft ended Wednesday up $19.95, or just over 7 percent, at $295.37 after the tech giant beat revenue and earnings estimates for its first-quarter results on Tuesday, while Activision Blizzard saw its share price tumble by $9.93, or 11.5 percent, to $76.81.
The surprise British regulatory ruling comes over a year after Microsoft, which owns the Xbox game platform and Xbox Game Studios, first unveiled a deal to merge with Activision, maker of the Call of Duty, Warcraft and Tony Hawk franchises, among others.
At best, Griffin sees the Competition Appeal Tribunal in the U.K., to whom Microsoft will now scramble to overturn the ruling, confirming the CMA’s concerns for the takeover deal on competition grounds. “We won’t spill much more ink on the faulty logic throughout the CMA’s analysis. Or why ‘cloud gaming’ isn’t ready for prime time and is almost certainly going to be a vector of competition between Sony-Microsoft-Nintendo and not a distinct market. What’s the point?” Griffin wrote.
Other analysts, also seeming to throw up their hands, agree Microsoft has little chance of successfully appealing the U.K. ruling to revive the megadeal. “The CMA said that its primary concern was a lessening of competition and innovation in the cloud gaming market. While Microsoft and Activision indicated they would appeal, we think the chances of success are no more than 10 percent,” Doug Creutz, an analyst at TD Cowen, wrote in an investor note.
In its report, the CMA said it found the proposed merger may be expected to result in a “substantial lessening of competition” in cloud gaming services in the U.K., and Microsoft would find it “commercially beneficial to make Activision’s titles exclusive to its own cloud gaming service.”
With Microsoft already having an estimated 70-80 percent market share in that market, it claimed that “even a moderate increment to Microsoft’s strength may be expected to substantially reduce competition,” which would be to the “detriment of current and future cloud gaming users.”
Wedbush analysts Nick McKay and Michael Pachter see some wiggle room for negotiation and concessions to resurrect the Activision deal after the U.K. regulator turned thumbs down. They argued in their own investor note that Microsoft could agree to keep all Activision titles off of Game Pass in the British market.
“While successfully appealing a CMA decision is a difficult task for several reasons, we think the CMA is on the wrong side of the law on this ruling, and believe its concerns can be addressed,” McKay and Pachter argued, as Microsoft has sought to acquire Activision to play catch-up in the gaming space with Tencent and Sony.
But Stifel analyst Drew Crum argued “it would seem impractical to operate outside an important market such as the UK,” if Microsoft failed to overturn the CMA ruling. Crum also notes opposition from U.S. regulators, as the Federal Trade Commission has sued to block the gaming deal, a case that is expected to be heard this summer.
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