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The UK competition regulator’s investigation of Microsoft’s acquisition of Activision put UK merger control firmly in the spotlight in 2023. The Competition and Markets Authority (CMA) initially blocked the deal after an in-depth Phase 2 review, and then cleared a restructured version of the deal in a new Phase 1 review (or a ‘Phase 3’, as some have dubbed it). This unprecedented sequence sparked intense debate about (i) the CMA’s independence from political influence; (ii) its exploration of novel theories of harm; (iii) how to effectively navigate its merger review process; and (iv) how to manage the potential divergence in decisions between the CMA and other competition authorities.

The extensive commentary on the Microsoft / Activision decisions makes it challenging for businesses and their advisors to understand their key implications for carrying out deals with a UK connection. The Fingleton team draws on its expertise in CMA merger reviews — from working within the regulator as well as advising on the majority of CMA Phase 2 cases in the last year — to help achieve more in 2024. In this piece, we draw out three key signals from the CMA’s merger investigations in 2023 (focussing on Microsoft / Activision) and its proposed reforms to the Phase 2 process to help inform strategic decision-making by merging parties in the coming years.

Full disclosure: Fingleton provided strategic advice on CMA engagement to a third party in Microsoft / Activision and to the merging parties in Adobe / Figma.

Signal 1/ Political lobbying can be counterproductive

The noise around Microsoft / Activision is likely to prompt some clients to ask advisors if political lobbying can help achieve more favourable outcomes in merger investigations.

There is no question that the CMA’s approach to Microsoft / Activision attracted political attention, but there is little evidence that political influence determined the CMA’s decision. Claims that the CMA can now be swayed politically across cases are hard to substantiate (without applying ‘no-smoke-without-fire’ logic). So how can advisors convey to their clients that attempts at political lobbying can be counterproductive?

• The CMA is required by law to make decisions on mergers independent of political considerations. Deviating from its statutory duties and merger guidelines could also expose the CMA to judicial review risk by interested third parties, of which there were several in Microsoft / Activision.
• The CMA's approval of Microsoft's restructured transaction — while debated for deviating from usual policies like the quasi-behavioural divestment of Activision IP to Ubisoft — reflected a standard exercise of regulatory judgement within a traditional analytical framework.
• The CMA appears more motivated than ever to publicly demonstrate its decision-making independence. This commitment is clear in statements from CMA leadership. Its CEO, Sarah Cardell, has publicly stated that she is conscious that the only way to address any speculation is to continue to carry out assessments of mergers in a demonstrably independent manner going forward.¹
• There is no indication that incoming senior leaders² will diverge from this firm public stance.
• Political lobbying can antagonise the CMA and may even signal that merging parties are worried about potential competition concerns. Martin Coleman, the chair of the CMA’s independent panel — from which decision makers on individual cases are drawn — said that political lobbying might undermine the parties’ case by suggesting a lack of confidence in substantive arguments.³

In the Fingleton team’s combined regulatory and advisory experience, attempts to politically sway the CMA are consistently rejected and sometimes damage both the advisor-CMA and business-CMA relationship.  We expect the CMA to be even more allergic to political lobbying after Microsoft / Activision.

Signal 2/ Ecosystem mergers are likely to attract scrutiny

The concept of ecosystems has been at the forefront of (mostly theoretical) recent debates — both in mergers and in tech regulation — on how to protect competition in rapidly evolving markets. In 2023, the CMA closely investigated potential concerns in ecosystems in a number of cases.

In this context, from the early stages of deal discussions, businesses and their advisors should ensure they are looking beyond more rigid, traditional approaches to market definition and potential concerns, and understand and anticipate any potential ecosystem issues the CMA may investigate. These will need to be taken into account in both the deal risk assessment and any CMA engagement strategy.

An ecosystem is a group of complementary products and assets that interact with one another and are controlled by the same company. This interaction can have a ‘flywheel effect’: new and improved products attract more users, making it more attractive to third party suppliers, which leads in turn to new and improved products, resulting in further growth of the ecosystem and so on.

Ecosystems can deliver great outcomes for customers, such as products that seamlessly interact with each other or innovative new features that make day-to-day life easier (e.g. working seamlessly across the suite of Microsoft Office products). So why might the CMA be concerned?

Broadly speaking, a deal that strengthens an ecosystem may raise conventional concerns about removing head-to-head competition between the parties or foreclosing rivals. It may also raise novel concerns about hindering the development of dynamic markets by reducing competition between rival ecosystems or making it harder for new entrants without ecosystems to disrupt the market with innovative new products.

So far, the CMA has not blocked a deal based exclusively on an ecosystem concern, but merging parties ignore such concerns at their peril because they increasingly feature in CMA analysis, even if they do not take centre-stage.

• The CMA's scrutiny of the Microsoft / Activision merger marked the first time it had concerns in Phase 1 over ecosystems, posing essential questions for dealmakers about the nature and implications of ecosystems. The CMA's subsequent analysis examined Microsoft's potential to dominate cloud gaming by merging its substantial cloud infrastructure and popular games with Activision's top titles.
• In Adobe / Figma, the CMA assessed the threat to competition in design tools: the parties’ offerings had ecosystem features and this played an important part in the provisional decision, notably how it dismissed smaller competitors offering more specialised ‘point’ tools.
• Ecosystem concerns were even more explicitly explored in the CMA's examination of the Booking.com / eTraveli deal at Phase 1.

This trend of decisions shows momentum in the CMA’s (and other regulators’) approach of taking a close look at how ecosystems may affect competition in a market and feeding this into their approach to theories of harm, potentially in novel ways. What was once a hotly debated theoretical issue is now a very real one for companies considering mergers in dynamic markets.

A frequently-raised policy counterargument to ecosystems theories is that — given how rapidly the markets in which these concerns arise tend to evolve — outcomes are uncertain and so authorities should exercise caution in blocking deals on novel theories. How can the CMA be expected to respond to these arguments? While it is true that the development of dynamic markets is inherently uncertain, the CMA’s approach to the above cases showed that it does not shy away from forming an evidence-based view on how this development is likely to play out just because the market evolution may be uncertain.

The CMA’s merger assessment guidelines,⁴ buttressed by the Competition Appeals Tribunal,⁵ also clearly set out this policy position. And recent statements by CMA leadership confirm it:

• CEO Sarah Cardell said at a conference in early 2023 that ‘A fundamental learning that we have absorbed as an agency over the last few years is that we cannot allow the lack of complete knowledge and complete certainty to prevent us from taking effective merger control decisions’.⁶
• Chief Economist Mike Walker reiterated this sentiment at a conference towards the end of the year: ‘You have to accept we are taking decisions under uncertainty, but that does not mean there is no evidence’.⁷

Looking ahead, the CMA has the tools to investigate a range of concerns through, for example, requesting huge volumes of data and internal documents. This enables it to take decisions under uncertainty about how fast evolving digital markets where ecosystems are prevalent will develop. Against the backdrop of the Digital Markets, Competition & Consumers Bill expected to come into force, and the CMA identifying digital markets as a priority, the CMA is set to continue scrutinising deals that may impact ecosystem competition in 2024.⁸

Signal 3/ New opportunities for CMA engagement

The CMA merger review process presents opportunities for advisors and their clients to engage constructively with the decision-makers. In 2024, scope for engaging with the CMA is likely to increase as proposed reforms to the Phase 2 process will likely be implemented.⁹

The following week-by-week timeline of Phase 2 shows what the reformed process could look like (with important changes highlighted blue):

The proposed changes include (i) an initial substantive meeting in which the parties can respond to the Phase 1 decision before the panel; (ii) an update call with the panel of decision-makers; (iii) early stage remedy discussions; (iv) an interim report being published before main party hearing; and (v) a main party hearing reformed to allow for more dialogue.

Together, these developments could unlock new ways of interacting with the CMA and the reforms generally make it even more important to have a well-considered CMA strategy and ensure executives are thoroughly prepared in order to secure the best chance of clearance. For example, earlier substantive engagement after the interim report can allow the parties to develop targeted remedies alongside a narrowing of the CMA’s range of concerns.

By contrast, the ‘Phase 3’ route followed in the Microsoft / Activision deal does not set a good template for engaging with the CMA, particularly on remedies. The CMA criticised Microsoft for not putting forward a remedy at Phase 2 that resembled the revised transaction eventually put forward.¹⁰ And Microsoft’s CEO confessed to learning the value of constructive early engagement the hard way after the CMA cleared the revised transaction: “I think we at Microsoft, quite rightly, should accept a level of accountability ourselves. We do, I do, for the fact that we didn’t figure out earlier how to unlock this problem and solve it…I accept the CMA criticism of Microsoft that we should have figured this out sooner. I wish we had. I think that is our responsibility.”¹¹

It is highly unlikely that Microsoft’s strategy will offer a feasible path to clearance for most other deals; or that Microsoft would adopt such a strategy again, having acknowledged the missed opportunity to ‘unlock [the] problem’ earlier. Given the financial and administrative burden, and drain on senior management time, only deals involving parties with the strongest appetites and deepest pockets to get the deal done would be able to make it through a Phase 3, assuming they are capable of revising the transaction to remedy concerns without wholly undermining the deal rationale¹² (and one wonders — if such a remedy were in fact available — why parties would not want to offer it upfront instead of in ‘Phase 3’).

Even if resorting to ‘Phase 3’ could be a feasible strategy in the rarest of circumstances, it is far from the optimal strategy, particularly as the CMA is reforming the Phase 2 process to offer more formal mechanisms for productive engagement.

So, how can advisors prepare their clients for UK merger control in 2024?

In January 2024, Microsoft's CEO told BBC Radio 4 that “The CMA held [Microsoft] to a tough standard and I respect that. In my view it was tough and fair".¹³ That is the right perspective — learnt the hard way — for businesses aiming for transformational mergers this year. They should not expect a less rigorous or independent CMA following Microsoft / Activision. If anything, the CMA may be spurred by a desire to demonstrate political independence and may engage even more intensely with executives — who are closer to the evidence — in its reformed Phase 2 process.

In this context, businesses and their advisors should consider the following takeaways from 2023:

• Businesses engaging in political lobbying are likely to see their efforts (at best) ignored or (at worst) looked at unfavourably by the CMA staff and/or the decision-making panel as a signal of a substantively weak case or an advisor team that is not sticking to the established playbook.
• Businesses need to consider whether there may be an ecosystem angle when making deals. Where there may be ecosystem issues, early anticipation of potential concerns and a credible pro-competitive narrative that is robust to uncertainty are crucial to engage effectively with the CMA. Not doing this can lead to unexpected and costly in-depth merger investigations that delay completion or result in prohibition or an unanticipated and costly remedy.
• It is important that businesses make the most of new opportunities under the reformed Phase 2 process to engage directly with CMA decision-makers, particularly where remedies need to be offered.
• By having a consistent narrative in global deals, and facilitating inter-agency communication at the staff level, businesses can mitigate the impact that the CMA’s distinctive procedural rules and policy may have on deal timings.