Microsoft uses “Nice Guy” strategy to close Activision Megadeal

Earlier this month, Microsoft President Brad Smith met with Federal Trade Commission Chair Lina Khan to push for regulatory approval of Microsoft’s $69 billion acquisition of video game company Activision Blizzard.

Mr. Smith’s move – which included an offer to keep Activision’s blockbuster game Call of Duty widely available to address competition concerns – fell through. A day after their meeting, Ms. Khan’s agency said it was suing to prevent the blockbuster deal.

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

Mr. Smith’s peacemaking comments reflect how Microsoft intends to move on to the next phase of its Activision deal. Far from giving up on the takeover, the company wants to bet that its nice-guy strategy can 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 an agreement that allows the acquisition to move forward or for a faster, cheaper court to hear the case, the people said.

Microsoft expects to file its response to the FTC lawsuit Thursday, company officials said. In its response, the company plans to argue that the deal would give players more options at lower prices, they said.

The FTC has said the deal should be halted because it would harm consumers. It said Microsoft, which makes the Xbox console, could use Call of Duty and other popular Activision titles to lure gamers from competitors, particularly Sony, which makes the PlayStation console.

Microsoft’s seemingly forgiving approach is part of an almost complete cultural shift at the company since the 1990s, when it was known as the “evil empire” for its powerful competitor-blocking tactics. But under Satya Nadella, who became chief executive in 2014, and Mr. Smith, who is also Microsoft’s top attorney, the company has bent over backwards in recent years to show it’s come of age.

Going through the Activision deal impacts more than just Microsoft. The FTC lawsuit is a milestone in a new era of government control of the largest technology companies. Woman. Khan has set an aggressive trustbusting agenda in the case that legal experts said could be difficult to win. If Microsoft can’t approve the deal, other tech giants will likely be less able to push through a mega deal.

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

With Microsoft sitting on more than $100 billion, he added, “They don’t want to back down now and then let every acquisition go through.”

The Activision acquisition must be completed 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 European Union. If Microsoft can reach a formal settlement with them, it would leave the FTC at a critical juncture.

The FTC sued Microsoft in an administrative court that does not have the authority to prevent 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 injunction proceedings could move quickly, possibly giving Microsoft a quick legal victory.

“There is no reasonable, legitimate reason why our transaction should be prevented from closing,” Activision CEO Bobby Kotick said in a statement Wednesday. “We believe that in the main we will prevail.”

The FTC declined to comment on Microsoft’s strategy or Mr. Smith’s conversation with Ms. Khan. Holly Vedova, director of the FTC’s competition bureau, said the agency is always ready to review proposals from companies seeking to resolve antitrust concerns.

Microsoft is trying to strike a balance between appearing open to a settlement and preparing to destroy the FTC’s case in court. She hired Beth Wilkinson, who prosecuted the Oklahoma City bombing of 1995 before becoming one of America’s top corporate litigators, to argue on her behalf in the FTC’s internal court.

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

In the 1990s, the company was known for its scorched-earth business tactics, which involved bundling software products to crowd out competitors. In 1992, when regulators were investigating the company, Microsoft co-founder Bill Gates dismissed the investigation, saying, “The worst that could come of this is that I fall on the steps of the FTC, hit my head and hit me.” could kill. “

Two years later, Microsoft agreed to a federal level of approval that gave personal computer makers more freedom to install programs from other companies. It was dissolved after a 1998 antitrust suit and finally settled with the George W. Bush administration in 2001.

“The process forced Microsoft to grow up, particularly in terms of its relationships with regulators and institutions outside of the technology industry,” said Margaret O’Mara, a University of Washington professor who studies the history of technology companies.

In 2001 Mr. Smith entered interviews as Microsoft’s top attorney with a message: It was time to make peace 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 over competition concerns.

Things weren’t always smooth. Negotiations between the company and Sun Microsystems, a server company that developed the popular Java programming language, broke down and it took a year for it to get back on track. In 2004, Steve Balmer, Microsoft’s CEO at the time, was on a plane bound for Brussels to announce a deal with the European Commission when Mr. Smith received word that the Commission was instead charging Microsoft for pre-installing applications on its Windows operating system would sue. It took five years to secure a deal.

Since Mr. Nadella took over, Microsoft has taken an even more open stance. Its first acquisition was the studio that develops Minecraft, a game where kids learn and socialize in an expansive virtual world. He also spent $7.5 billion to buy GitHub, a software platform that supports open-source code.

Microsoft is now the second most valuable stock company in the world, largely due to its strong cloud computing offerings. The corporate business, which is at the heart of its growth, generally attracts less governmental attention than social media or other consumer-facing ventures.

Worldwide Mr. Smith has presented Microsoft as a friendly giant willing to work with skeptical lawmakers. He has proposed middle ground rules on contentious issues such as app stores and supported bipartisan interests such as broadband expansion.

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

After the deal was announced in January, Microsoft went to great lengths to allay regulators’ fears. Mr. Schmied and Mr. Nadella traveled to Washington in February to promote the benefits of the deal. The company also made peace with a riotous union, which in turn lobbied the FTC for the deal. And it promised Sony it would keep Call of Duty on PlayStation for years, signing a deal to bring the game to Nintendo’s Switch.

Mr. Smith said things “moved fast” in the last few weeks before Microsoft was sued. When FTC officials met with Microsoft’s team, it became clear that the agency had serious concerns, he said.

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

On Dec. 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,” citing fears that Microsoft might remove the title from competing consoles. Mr. Smith spoke virtually for an hour with each of the agency’s four commissioners the next day.

A day later, FTC officials voted 3 to 1 to file a lawsuit.

But Mr. Smith said he refuses to view the situation as an us versus them situation.

“I 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 contributed reporting.

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