That muffled sound you hear in Silicon Valley and Seattle after the death of Nvidia Corp.’s planned merger with Arm Holdings Ltd. is of gnashing teeth.
The grinding is likely to grow. The residue of Nvidia’s
abortive $66 billion deal in the face of regulatory resistance is a strong harbinger of what’s to come — more aggressive opposition to mega-tech mergers from the Federal Trade Commission and Justice Department, antitrust experts told MarketWatch. That would seem to mean bad news for a deal that would be the biggest the tech sector has ever seen: Microsoft Corp.’s
intention to buy Activision Blizzard Inc.
for $69 billion.
“There’s a growing resistance to any mergers that have the possibility of anticompetitive effects. They are being much more aggressive overall,” antitrust lawyer Valarie Williams told MarketWatch. “It will be more challenging now than it would have been. It seems like it’s a totally different mind-set at the agencies than I’ve ever seen.”
However, Microsoft and others see an opportunity during an indeterminate slice of time in the history of mergers and acquisitions to thread the regulatory needle. Understaffed regulators eager to crack down on Big Tech are hamstrung by the inability of the Biden administration to deliver funding and appoint key nominees. At the same time, legislators have introduced bills that could be months, if not years, away from passing.
The climate is rife for a “seismic shift at a glacial pace,” said Ed Mills, Washington policy analyst at Raymond James. For now, regulators are likely to avoid rubber-stamping mergers as a temporary short-term defense against the expansion of Big Tech until antitrust bills are passed into law, he added. He deemed the merger market rife with uncertainty over how long and if big deals will go through, pointing to a year-long timeline for Intel Corp.’s
$6 billion bid for Israeli chip maker Tower Semiconductor Ltd.
“A lot of companies are in holding patterns,” Mills said, “awaiting more clarity on what the FTC and Justice do once they get funding and more staffing.”
The unpredictability has permeated the tech industry, especially among its most active M&A participants. “There have been winds of change the past 18 to 24 months,” Cisco Systems Inc.
Chief Financial Officer Scott Herren told MarketWatch.
Cisco has long been a frenetic acquirer of other enterprise-tech companies. It bought 13 companies for a total outlay of nearly $7.5 billion in its most recent fiscal year, according to an annual filing. Cisco recently closed its acquisition of replex, a privately-held enterprise-software company based in Germany, and announced its intent to buy Opsani, another enterprise-software company, and The Wall Street Journal reported that the company recently looked into spending $20 billion on Splunk Inc.
Regulatory actions are “always a consideration,” Herren said, “but that has not changed our approach.”
Traversing such uncertain political conditions is likely to keep many tech executives up at night, but Microsoft is different and Activision brings its own set of issues. Microsoft has proved to be deft navigating both regulators and lawmakers with pre-emptive business moves and clear communication, after enduring a decadelong antitrust battle with the Justice Department in the late 1990s and early 2000s that the company eventually settled.
“Microsoft has shown the ability to not only learn from its mistakes but to present itself as a measured voice” in the unfolding clash between Big Tech and regulators, Mills said. “It has done a really good job of focusing attention on others, while knowing what not to say in emails or publicly,” he added. “The company has also put together legal teams that provide clean documentation to regulators and lawmakers.”
Microsoft’s proactive actions ahead of regulatory scrutiny and legislation circulating through Congress show its ability to play different game. Microsoft is already trying to grease the wheels of its intention to buy Activision with an 11-point pledge with a series of new app store commitments that would allow third-party app stores on its platforms, nonpreferential treatment to its own published games on the digital marketplaces the company runs, and the ability of software developers to use whichever payment system they prefer rather than require that they use Microsoft’s proprietary channels.
“Gaming is not a major piece of what Microsoft does,” Mills said. “This would not seem to be a deal that is on a list of attention-grabbing competition overlap, but Microsoft is being proactive with policy makers.”
More important, Mills says, Microsoft is “trying to get ahead of legislation” that targets large app store operators such as Apple Inc.
Google parent Alphabet Inc.
and Amazon.com Inc.
Predicting the fate of Microsoft’s bid for Activision seems foolish when it and other tech and non-tech companies compete in a murky regulatory environment. Nvidia-Arm crumbled under geopolitical and regulatory pressure, but Advanced Micro Devices Inc.
on Monday completed the largest acquisition in semiconductor industry history with its $49 billion purchase of Xilinx Inc., a specialist in programmable chips. European regulators held their noses in approving Meta Platforms Inc.’s
purchase of customer-service platform Kustomer.
While both of those deals closed this week after scrutiny, Lockheed Martin Corp.
called off its proposed $4.4 billion purchase of rocket-engine maker Aerojet Rocketdyne Holdings Inc.
after the FTC voted unanimously last month to sue to block the deal over antitrust concerns. And there have already been doubts about discount carriers Frontier Group Holdings Inc.
and Spirit Airlines Inc.
bidding to become the fifth-largest airline, with executives vowing to maintain affordable pricing without a significant reduction in head count as they hope for approval.
Some of the confusion stems from the ever-evolving guidelines of the Justice Department’s antitrust division and FTC, cautions Herbert Hovenkamp, who teaches law at University of Pennsylvania. He told MarketWatch that regulators were likely to change their calculus from focusing on mergers that raise prices to those that remove potential rivals or suppress employee pay and jobs. Hovenkamp pointed to Facebook parent Meta’s acquisition of Instagram in 2012, as well as deals in the airline and kitchen appliance industries. [The FTC is suing to divest Meta of Instagram and WhatsApp.]
In January, both agencies said they were seeking public comment on how to “modernize enforcement of the antitrust laws regarding mergers,” particularly large tech deals and their impact on the labor market and elements of competition that aren’t tied to prices, like innovation and quality.
To that end, the FTC has brought on economist John Kwoka, whose book, “Mergers, Merger Control, and Remedies: A Retrospective Analysis of U.S. Policy” concluded domestic antitrust agencies are excessively tolerant in their merger enforcement and merger remedies are ineffective at mitigating market power. When contacted by MarketWatch, Kwoka declined to comment, citing his relationship as an adviser with the FTC.
The only question is when the FTC and Justice’s antitrust division will make a big push, as both agencies struggle with staffing issues and future funding with the Build Back Better bill all but dead. In addition, the confirmation of FTC nominee Alvaro Bedoya, who would provide FTC Chair Lina Khan with a key third vote to push back on big tech M&A, is on hold. As of now, the agency is locked in a 2-2 tie along political lines. Sen. Ray Lujan, D-N.M., who is on medical leave from Congress, is a member of the Senate Commerce Committee, which is handling Bedoya’s confirmation.
Opposition or resistance to tech mergers is the most likely path for regulators as lawmakers wrangle over tech antitrust bills this year.
The American Innovation and Online Choice Act — which would prevent Amazon, Meta and other large tech companies from promoting their products and services over their rivals’ — should get a vote on the full Senate floor by the end of the year, says its lead author, Sen. Amy Klobuchar, D-Minn. Bipartisan support is there: 87% of voters want the government to do more to rein in large technology companies’ power, according to a new poll.
Another closely watched bill, the Open App Markets Act, should also go to a full Senate vote in 2022, an aide to Sen. Richard Blumenthal, D-Conn., one of its authors, told MarketWatch. The bill aims to rein in app stores of companies that some lawmakers say exert too much market control, including Apple and Google.