February 22, 2024

Earlier this month, Microsoft President Brad Smith met with FTC Chairman Lena Khan to push regulators to approve Microsoft’s $69 billion acquisition of video game company Activision Blizzard.

Mr Smith’s strategy — including offering to satisfy competition concerns by making Activision’s blockbuster Call of Duty widely available — failed. The day after their meeting, Ms. Khan’s agency filed a lawsuit seeking to block the blockbuster deal.

But in an interview this week, Mr Smith was optimistic. “She didn’t take my offer, but she at least smiled when I said give peace a chance,” he said of Ms Khan. “So anytime someone can end a meeting with a smile, there’s always a little bit of hope that we can sit together in the future.”

Mr. Smith’s peaceful comments reflect how Microsoft intends to approach the next phase of its deal with Activision. Far from giving up on acquisitions, the company intends to gamble that its good-guy strategy will still work, he said.

In one plan, Microsoft hopes to win the support of European regulators, the people said. European approval for the Activision deal could force U.S. officials to reach a settlement that would allow the takeover to move forward or allow a court to hear the case faster and more favorably, the people said.

Microsoft is expected to file its response to the FTC lawsuit on Thursday, company officials said. In response, the company plans to argue that the deal will give gamers more choice at lower prices, they said.

The FTC said the deal should stop because it harms consumers. It said Microsoft, which makes the Xbox console, could use Call of Duty and other popular Activision titles to lure gamers from rivals, notably Sony, which makes the PlayStation console.

Microsoft’s seemingly conciliatory approach is part of a cultural transformation the company has nearly completed since the 1990s, when it was dubbed the “evil empire” for its hard-line tactics to keep rivals at bay. But under the leadership of Satya Nadella, who became chief executive in 2014, and Mr. Smith, who is also Microsoft’s top lawyer, the company has gone out of its way in recent years to show that it has grown.

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

“They’re going to fight it,” said Sid Parakh, a portfolio manager at Becker Capital, which invests in Microsoft. “That’s beyond the scope of this deal. It’s also a statement to the FTC”

He added that with Microsoft sitting on more than $100 billion in payouts, “they don’t want to back off now and then have every acquisition rejected.”

The Activision acquisition must be completed by mid-July, or Microsoft will have to pay a breakup fee of up to $3 billion. Many hurdles remain, including approval from other global regulators, notably in the UK and EU. If Microsoft can reach a formal settlement with them, it will put the FTC in a tight spot.

The FTC sued Microsoft in administrative court, which has no power to block the deal while the case is pending. If other regulators approve the deal, the FTC will need to decide whether to file an injunction against the takeover in federal court to block it. The injunction proceedings could move quickly, potentially giving Microsoft a quick legal victory.

“There is no reasonable, legal reason to prevent our transaction from completing,” Activision Chief Executive 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. FTC Competition Director Holly Vedova said the agency is always willing to consider proposals from companies seeking to resolve antitrust concerns.

Microsoft is trying to strike a balance between, on the one hand, appearing to be open to a solution, and on the other, preparing to wreck the FTC case in court. It hired Beth Wilkinson, who sued the 1995 Oklahoma City bombing.

Mr. Smith said he was optimistic the case could avoid a chaotic trial, in part because of Microsoft’s previous experience in antitrust enforcement.

In the 1990s, the company was known for its scorched-earth business strategy, bundling software products together to beat competitors. In 1992, when regulators were investigating the company, Microsoft co-founder Bill Gates dismissed the scrutiny, saying, “The worst that could happen is that I could fall on the steps of the FTC and bang my head on my head.”

Two years later, Microsoft agreed to a federal consent form that would allow PC makers to install other companies’ programs more freely. It avoided being broken up after an antitrust trial in 1998 and eventually settled with the George W. Bush administration in 2001.

“The trial forced Microsoft to grow, especially in its relationship with regulators and agencies outside the tech industry,” said Margaret O’Mara, a professor at the University of Washington who studies the history of tech companies.

In 2001, Mr. Smith interviewed to become Microsoft’s top lawyer with a message: It was time to settle with regulators and competitors. He got the job. Over the next few years, he reached legal settlements with governments around the world and other industry players on competition issues.

It hasn’t always been smooth sailing. Talks between the company and Sun Microsystems, the server company that makes the popular Java programming language, broke down and took a year to get back on track. When Steve Balmer, then Microsoft’s chief executive, announced the deal with the European Commission on a flight to Brussels in 2004, Mr Smith learned the commission would sue Microsoft for preinstalling apps in its Windows program news. operating system. It took five years to reach an agreement.

Since Mr. Nadella took over, Microsoft has taken a more open stance. His first acquisition was the studio that made Minecraft, a game that lets kids learn and socialize in a vast virtual world. He also spent $7.5 billion to acquire GitHub, a software platform that supports open source code.

Microsoft is now the second most valuable public company in the world, thanks in large part to its strong cloud computing offerings. Businesses that are at the heart of their growth typically receive less government attention than social media or other consumer-facing businesses.

Globally, Mr. Smith described Microsoft as a friendly giant willing to work with skeptical lawmakers. He has proposed middle-ground rules on contentious issues like app stores and supported bipartisan interests like broadband expansion.

Mr. Smith maintains strong connections in Washington. A tie-in to Biden’s presidential campaign, he attended a White House state dinner for French President Emmanuel Macron, just days before the FTC sued to block the Activision-Blizzard deal.

After announcing the deal in January, Microsoft went to great lengths to reassure regulators. Mr Smith and Mr Nadella traveled to Washington in February to tout the benefits of the deal. The company also settled with an agitating union, which in turn lobbied the FTC to handle the deal.It promised Sony that it would keep Call of Duty on PlayStation for many years, and signed one game deal on Nintendo Switch.

In the final weeks before Microsoft was sued, “things moved very quickly,” Mr Smith said. When FTC staffers met with the Microsoft team, it was clear the agency had serious concerns, he said.

“Our team asked, ‘Can we discuss the settlement?’ and the staff said, ‘Not with us,'” he said. Later discussions with the leadership of the agency’s antitrust division failed to produce results, he added.

On December 6, Microsoft drafted a formal settlement for the agency. Mr Smith declined to say exactly what it contained, but said it addressed “everything related to Call of Duty”, referring to concerns that Microsoft might pull the title from rival consoles. The next day, Mr. Smith spoke for almost an hour each with each of the agency’s four commissioners.

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

But Mr Smith said he refused to view the situation as ours against them.

“I always start by asking myself, can I do more?” he said. “All I know is that January brings a new year.”

Karen Browning Contribution report.

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