In the first part of this 2-part post, some best governmental practices to support economic growth were listed:  reasonable levels of taxation, regulation to support business competition, freedom from corruption, etc. [1].  These types of policies make a good deal of sense, but surely, some policies must be more important than others.  The question is how to determine which policies are key to growth.

In other words, why do the US Nasdaq, Taiwan, and Indian National and Bombay exchanges appear toward the top of this above diagram?  And, why are the Mexican, US, Indian, and Indonesian economies farther toward the right on the diagram?  Today’s post answers those questions.

Caveat:  DiscussingTerms does not provide formal financial advice, and readers are advised to consult a strategic, legal, or financial advisor prior to making any decision about investing.

Economic and Stock Market Databases

To look at the sources of growth and limitations on it, DiscussingTerms created two databases—one for national economies [2] and one for stock markets [3]:

• The database of national economies includes 146 nations for which economic data was widely available.
• The stock market database consists of 22 stock markets.
• The dependent variables are:
  • For the database of economies, % GDP growth in the most recent year.
  • For the stock market database, stock market % growth over the last 5 years.

The independent variables were chosen to represent a host of national economic factors—they included:

• Government:
  • Taxes as a percent of gross domestic product (GDP).
  • Democracy:  This the Economist’s Democracy Index.
  • Ease 2020:  This is the World Bank’s Ease of Doing Business Index.  This index was controversial due to some nations attempting to inappropriately influence their own ranking, and so it was discontinued in 2020.  DiscussingTerms included it as a point of comparison, cognizant both of its data being somewhat dated, and the methodological problems in the overall database.
  • Economic Freedom:  The Heritage Foundation and The Wall Street Journal’s Index of Economic Freedom which ranks the protections provide by governments for individual free enterprise activity.
  • Military spending as a percent of GDP.
  • Effectiveness Index:  This is the World Bank’s index of nations based on quality of public services, civil service, policy formulation and implementation.
• Economics:
  • GDP.
  • GDP per capita.
  • Immigration:  Net migration rate; if a country is losing population, this index becomes negative.
  • Imports:  Imports in millions of USD.
  • Exports:  Exports in millions of USD.
  • Population.
  • Foreign direct investment (FDI):  Foreign direct investment in millions of USD.
  • Unemployment rate.
  • Inflation rate.
  • Logistics Performance Index:  The World Banks’ index of performance for customs and transportation infrastructure.
• Society:
  • Honesty:  Transparency International’s Corruption Perceptions Index (CPI).  DiscussingTerms will be referring to it has “Honesty” because the highest scores go to countries with little corruption, like Finland with a score of 87—so it’s really an honest index.  (If you name it for what it is, that makes it easier to remember how it works.).
  • Global Competitiveness:  The World Economic Forum’s Global Competitiveness Index.  The index was discontinued in 2020.  It turns out that the index is highly correlated with the Honesty Index (Correlation Coefficient = 85% for the countries surveyed).  After statistical analysis, Honesty was found to be more useful for its ability to predict GDP growth than Global Competitiveness.
  • Women’s Inequality Index:  This is UN’s Gender Inequality Index (GII).
  • Education:  This is the Education Index published by the United Nations Development Program.
  • Gini:  The Gini ratio is a measure of the statistical wealth inequality within a country.
  • Patent Applications:  The number of patent applications by an individual country through the international patent system—a measure of scientific innovation.

Statistical multiple linear regression was used to determine which variables were important to economic growth [4].

GDP Growth Rate

Using multiple linear regression, six independent variables in the database of 146 national economies were found to be statistically significant in determining GDP growth percent [5,6]:

Some points to note about the table are:

• The confidence levels are high, so it is unlikely that the results occurred by chance.
• GDP per capita has a negative regression coefficient, indicating that as GDP per capita rises, economic growth is limited.  This common observation that developed industrial economies grow more slowly could be because:  1) high wages drive some companies to establish manufacturing operations in low wage countries or 2) workers in high wage economies are making choices to do less work, prioritizing other aspects of their lives such as family and leisure while slowing economic growth.
• Inflation has a negative regression coefficient, indicating that inflation acts as a drag on economic growth.  Economists tell us two contradictory things about inflation:  1) it limits economic growth by driving up interest rates and increasing uncertainty and 2) it increased economic growth by encouraging spending.  The negative regression coefficient shows that overall inflation is damaging to economic growth, and central bankers are correct in attempting to limit it.
• Effectiveness Index looks at quality of public services, civil service, policy formulation and implementation.  Because the coefficient is positive, it indicates that more effective government encourages economic growth.
• Democracy Index:  The Economist’s Democracy index rates governments based on pluralism, civil liberties, and political culture.  This coefficient is negative, so democratic governments have slower growth.  This may indicate that commitment to labor unions, environmental protection, and other regulations slows growth, but presumably those are things that most people want—so this may be the price we pay for democracy.
• Logistic Performance index (LPI):  The World Bank’s LPI has a negative coefficient.  On the surface, one would think that better ports and roads increase growth, but it may be that higher LPI is correlated with variables that slow growth (like high per capita GDP and democracy).  This is a hazard of linear regression—some variables with low P values are merely correlated, rather than causative.  At the very least, this observation is interesting because many would expect a strongly positive coefficient—the negative coefficient could signal that even in economies with low LPI, businesses are skilled at compensating for poor logistics.  Perhaps, strategies such as building dedicated private roads when national road networks are filled with potholes allow businesses to continue to grow.
• Unemployment has a negative regression coefficient, indicating that full employment is a useful goal in maximizing economic growth—it is difficult to build a vibrant economy in which there are two populations (the “haves” and the “have-nots”).  This economic observation undergirds the rationalization of investment in education, public health, and infrastructure—to bring up the entire nation and avoid the haves supporting the have-nots in perpetuity.

The model predictions and residuals (i.e., model prediction minus actual value) appear below.  As can be seen from the figure, the residuals are quite small with a few exceptions—on average the residuals have a magnitude of 19% of the model prediction.  A small number of countries (for example, India and Niger) are what could be called “positive” deviations, with growth increases significantly greater than the regression model predicts.  Others (for example, Argentina, Ecuador, and Haiti) are what could be called “negative” deviations, with growth increases significantly less than the regression model predicts.

Stock Market Growth Rate

In suggesting that democracy may not always be compatible with the highest levels of economic growth, the last section was a little disappointing.  This next section is more encouraging for democracy.  Applying multivariable regression to stock market growth [3, 8], two separate independent variables were shown to be statistically significant:

Some points to note about the table are:

• The confidence levels are statistically significant, so it is unlikely that the results occur by chance.  Also, the coefficients are high (as high as the highest coefficients in the 146-nation economic database statistical analysis), so these are strong effects.
• Democracy Index has a positive coefficient which presumably shows that innovators, entrepreneurs, and investors like to create new companies in nations with a degree of transparency and rule of law.
• Military Spending has a positive coefficient, indicating that stock market companies benefit from military spending.  It’s not an effect measurable in increased growth of the overall economy in the 146-nation database.  Perhaps, stock market listed companies are better able to position themselves to benefit from military contracts for logistics and civilian support services to the military.  An important caveat is that actual military conflict is a huge waste of national resources—having a bunch of shiny tanks may help a country’s stock market, it is generally a terrible mistake to employ the tanks in battle because wars quickly spin out of control destroying lives and national economies.

The model prediction and residuals (i.e., model prediction minus actual value) appear below:

Some points to note about the figure are:

• The model captures the general trends for the market growth rates, though residuals are relatively higher compared to the model of 146 national economies.  The magnitude of the residuals is on average 55% of the model prediction.  Still, the model is quite good for a two-variable model, attempting to capture a complex behavior across stock markets.
• India, Taiwan, and the US Nasdaq markets represent significant “positive” deviations due to factors that are not captured by the model.  Stock markets like Philippines, Thailand, and the UK are significant “negative” deviations.  Comparison of governmental actions supporting competitive markets in the positive and negative deviation countries would likely be enlightening.  Undoubtably, the Indian, Taiwan, and US Nasdaq markets benefit from such legislation and regulations.  If these features are quantifiable, an improved model could be generated which reduced the residuals.
• “Delisting” is a complex issue that undoubtably has an effect on stock market returns [9].  In delisting, high performing companies are sold to private equity, either before or after becoming public companies.  It is noted here as being relevant and maybe the subject of a future post on DiscussingTerms.

So, What About All Those Other Variables?

The variables which strongly affect growth were the focus of the discussion above, but what about all the other variables that did not rise to statistical significance?  Here are some thoughts:

• GDP growth is not the only motivation to undertake a national program.  Democracy, economic freedom, improved roads and ports, reduced corruption, and increased numbers of useful inventions are ends in themselves that do not need to be justified based on economic arguments.  They can be justified based on:  1) how democracy increases a population’s experience of human rights and equality, 2) how economic rights increase individuals’ ability to provide for their families and communities, 3) how functioning transportation networks offer citizens a greater variety of goods and services, 4) how corruption destroys people’s sense of solidarity and faith in justice, and 5) how investment in higher education leads to not only increased numbers of patents, but to improvements in society by application of science, engineering, and medicine to the problems that confront a nation.  Not everything can be measured out in dollars—though economic measures are important.
• Taxes are a topic that receives frequent attention in the context of economic growth.  The fact that taxes did not reach statistical significance is likely an indication of the limited efficiency of taxation as a mechanism of national investment.  Investment in education, ports and roads, and other sensible national investments undoubtably boosts the GDP, but other uses of taxes can be a drag on the economy (such as continued spending on programs that the government has already terminated [10] and spending on military conflict).

Conclusions

Some of the key variables to support economic and stock market growth include:  low inflation, government effectiveness, low unemployment, and democracy.  These are all values that can be included in national legislative and regulatory priorities.  Other variables undoubtably have a positive effect, though one that is harder to measure.  These include:  support for education, public health, and support for infrastructure, as well as engagement with the world economy and encouragement of investment.

[1] Gallant, S.R.  “Economic Development and Stock Markets (1 of 2),” June 27 (2024).  discussingterms.com/2024/06/27/economic-development-and-stock-market-growth-part-1/

[2] Table of 146 economies:

[3] Table of stock markets:

[4] Orlov, Michael L.  “Multiple Linear Regression Analysis Using Microsoft Excel,” Chemistry Department, Oregon State University (1986).

[5] GDP Growth model statistics for 146 economies:

[6] The data was scaled to values between 0.0 and 1.0 prior to regression.  This allows the coefficients to be more easily compared.  Scaling was performed using the formula:

Scaled data = (Original data – Min value)/(Max value – Min value)

[7] Gupta, S., Davoodi, H., and Alonso-Terme, R.  “Does Corruption Affect Income Inequality and Poverty,” IMF Working Paper, May (1998).

[8] Stock market model statistics:

[9] Ljungqvist, A., Persson, L., and Tåg, J.  The Incredible Shrinking Stock Market: On the Political Economy Consequences of Excessive Delistings,” European Corporate Governance Institute (ECGI) – Finance Working Paper No. 458/2016, IFN Working Paper No. 1115

[10] Congressional Budget Office.  “Expired and Expiring Authorizations of Appropriations for Fiscal Year 2022,” August 2022.  (www.cbo.gov/system/files/2022-08/57760-EEAA.pdf)

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

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DiscussingTerms has been thinking about economic growth as economies expand in the post-Covid-19 world.  Clearly, some things are the same:  people still need homes, durable goods, and food.  Other things are changed, perhaps forever:  remote work has become more common, and the role of city centers in the economy is being questioned.

In today’s post, DiscussingTerms takes a step back to look at economic metrics and consider what they mean for national economies and for individual investors. This is the first of a 2-part series.

Caveat:  DiscussingTerms does not provide formal financial advice, and readers are advised to consult a strategic, legal, or financial advisor prior to making any decision about investing.

Background

Economic development and stock market growth both constitute the outcomes of negotiation processes.  In the case of national economic development, gross domestic product (GDP) growth is supported by four types of activities:

• Government and society:
  • Reasonable levels of taxation, regulation to support business competition, freedom from corruption
  • Maintenance of utilities, highways, ports, and transportation services
  • Support of an advanced education system, participation of women in the economy
• Regional diplomacy:  Low military spending, absence of military conflict
• Investment:  Private sector investment from local investors and/or international investors
• Markets:  Engagement in the world economy

In the case of business growth of public and private companies, increased enterprise value is supported by the sensible national policies listed above, as well as by three additional factors:

• Entrepreneurs:  A community of business founders and leaders who can develop and execute business strategies to deliver products and services their clients want and to deliver returns to their investors.
• Access to Capital:  Banks and investors (international investors, private equity, angel investors, retirement funds, brokers, and individuals) provide the funds for businesses to establish themselves and expand.
• Workers:  Businesses need managers, scientists and engineers, financial specialists, regulatory staff, logistics personnel, manufacturing and maintenance staff, and others with the training and experience to allow companies to achieve their strategic goals.

Data on Economic Growth

DiscussingTerms was reviewing the data on stock market growth and comparing it with national GDP growth—some interesting trends popped out [1].  Here is a graphical presentation of the data:

Some points to note about the graph:

• On the vertical axis, appears stock market index growth percent for 24 major stock markets.  The specific stock market indices are noted in the table which appears as a note [1].
• On the horizontal axis, appears GDP growth percent for the specific nation in which the stock market is located.  For instance, Toronto Stock Exchange is located in Canada and seen on the plot near Switzerland and Saudi Arabia.  Most countries have a single stock exchange, but a few have more than one.
• The red diagonal dashed line is the line of equal stock market and GDP growth.  So, markets which appear above the line are growing faster than the GDP of their country, and the markets which appear under the line are growing slower than the GDP of their country.
• The two red sold lines are at the 100% growth limits.  Economies to the left of the vertical red line (Japan, South Africa, and South Korea) shrank over the last 5 years.  Stock markets below the horizontal red line (Hong Kong, Thailand, Philippines, Malaysia, and China (SSE)) lost value over the last 5 years.

One way of thinking about this plot is that stock markets and overall economies do not necessarily move in synchrony.  Stock markets which appear above the diagonal dashed line are pulling up overall economic performance, while stock markets appear below the dashed line hold back economic growth.

Stocks Which Promote Growth

Let’s consider some of the stocks that drive growth in markets:

• Nasdaq is an exchange that has had tremendous growth (221%) over the last 5 years.  Leading Nasdaq stocks include:  Microsoft, Apple, NVIDIA, and Amazon are key stocks in e-commerce and technology with strategies to enter AI and other growth areas of the economy.
• Important companies in both the Bombay and National stock exchanges are:  Reliance Industries (a conglomerate with interests in petrochemicals, as well as telecommunications), Tata Consultancy Services (a major IT services company), HDFC Bank (a major Indian bank), and ICICI Bank (another major Indian bank).

These companies are dynamic—seeking to expand and develop new business strategies to allow long term growth.  This type of company contrasts with companies that are typically thought of as low growth companies—companies caught in older stagnant areas of the economy, without strategies for competing beyond national borders, engaging in “rent seeking behavior” to maintain revenue.

Middle Class Investment

Wealthy families will always have options for what to do with their capital—including investing overseas.  But, middle class families often have fewer options.  Let’s contrast two national economies, one with rapid growth in its stock market and one without rapid growth in its stock market.  In both cases, middle class families may be able to earn more than their daily requirements for food, lodging, clothing, healthcare, education, and other immediate needs.  But, what they do with their surplus capital differs markedly:

In the case of a rapidly growing stock market, a virtuous circle results with middle class investments helping to power economic growth.  In the case of a slow growing stock market, assets of middle-class families may be trapped in dodgy low growth investment schemes.  Certainly, some investments outside the stock market can provide growth—family businesses undoubtably power dynamic local economies in low and high per capital GDP countries—but, the investment options are significantly narrower.

Conclusions

In countries like the United States, Taiwan, India, Japan, South Africa, Germany, and others, the stock markets are lifting up the overall economy.  This is an important dynamic to nurture which governments can encourage through best practices in legislation and regulation, intelligent diplomacy, and economic policy.

[1] Table of stock market data:

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

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On January 18, 2022, Microsoft announced a $68.7B purchase of the video gaming firm Activision Blizzard.  This is a very interesting tale of negotiation for two reasons.  First, in its SEC filing, Activision Blizzard gives us a peak into the negotiation that led to the sale.  Second, as of the writing of this post, the purchase is not completed because it has not yet received regulatory approval.  As a result, the deal could still be altered or even vetoed.  In today’s post, DiscussingTerms looks at the Activision Blizzard acquisition.

Acquisition as a Negotiation

Acquisition is a two-party negotiation (buyer and seller).  In the case of the Activision Blizzard, there are a number of parties not present at the negotiation table (stock holders, customers (users), and government regulators) who have the ability to affect the outcome of the deal.  Most acquisitions are adversarial or competitive negotiations.  Over time a zone of possible agreement is explored and, ultimately, a sale price established.  Representation is common with one or both sides represented by firms specialized in mergers and acquisitions.  (In the Activision Blizzard deal, Goldman Sachs provided financial advice to Microsoft, Allen & Company provided financial advice to Activision Blizzard, and Skadden provided legal advice to Microsoft.)

Activision Blizzard

Activision Blizzard is a company with many positive attributes.  Leading characteristics making the company an attractive takeover target include:

• Intellectual property:  Activision Blizzard’s stable of products includes some of the most well-known video games in the world:  Call of Duty, Guitar Hero, World of Warcraft, Overwatch, Candy Crush Saga, and others.
• Worldwide appeal:  Many cultural products have limited appeal around the world.  Activision Blizzard video games have transcended their point of origin, capturing 370 million users in hundreds of countries.

But, the company has had two significant problems:

• Corporate culture:  In July, 2021, the California Department of Fair Employment and Housing filed suit against the company, alleging sexual harassment and employment discrimination.  The scandal acted as a drag on the company’s stock price as investors manifested concern whether the company’s management could navigate past the legal crisis.
• Competition:  Activision Blizzard’s net revenue has grown in a steady linear fashion for more than 15 years, starting at about $1B in 2006 and reaching almost $9B in 2021.  However, the video game market is tremendously competitive.  As the third largest gaming company behind Tencent and Sony, Activision Blizzard faced major challenges, particularly in the areas of data analytics and machine learning.

Every corporation has two plans.  Plan A is to grow the business.  Plan B is to sell the business.  The five common motivations for a sale of a business unit or a company are:

1. To sell off non-core businesses
2. To flip an asset (in the case of private equity)
3. Insufficient capital to compete
4. Business (particularly small or medium) in which some faction of the owners do not wish to continue to own the business—the classic family business sale
5. Any business in which the current management team is not perceived to be able to maximize the value of the asset

Given the challenges faced by Activision Blizzard in the fall of 2021, the company fell into category 5).  We will see how this situation developed into a negotiation for sale in the discussion below.

Microsoft

Since 2012, Microsoft has experienced exponential growth, a remarkable decade-long record of success:

Microsoft’s cloud services business Azure has played an important role in this growth.  Though the tech sector, and the overall economy took a hit in 2022, growth is expected to continue once anxiety around inflation and concern about the situation in Eastern Europe subside.

The strategic question for Microsoft management is how can the company continue to fuel growth in the coming years?  Management’s answer was the $68.7B acquisition of Activision Blizzard.  The deal represents slightly less than 4% of Microsoft’s 2022 market capitalization.  There are several strategic motivations behind the acquisition:

• Stock price:  Activision Blizzard had led the 2022 fall off in tech stock prices by two quarters, making it an attractive acquisition target.
• Strategic technologies:  Activision Blizzard intellectual property has driven consistent high revenue.
• Synergy and growth:  Microsoft receives significant revenue from gaming.  Addition of Activision Blizzard’s $9B net revenue from 190 countries will increase Microsoft in both breadth and depth.  There is the possibility that the Activision Blizzard acquisition, coming on the heels of Microsoft’s acquisition of Bethesda Softworks, could lead to advances for Microsoft in the so-far ill-defined “metaverse,” allowing Microsoft to better compete versus Meta.
• Spoiling:  By completing this acquisition, Microsoft prevents any of its competitors from obtaining this value for themselves.

This purchase does come with some significant risks:

• Large acquisition risk:  Often large acquisitions underperform due to many complex and some poorly understood factors.  Strategic fit and employee retention are two major factors that if not present can tank a large deal.
• Regulatory risk:  Large corporate mergers and acquisitions are the subject of international regulatory interest.  Regulators could demand that Microsoft alter some aspects of the deal or even scotch the entire acquisition.

Negotiation for the Sale

Negotiation of a sale is a highly ritualized activity.  It begins with a Board of Directors decision to seek a sale, and proceeds through selection of an investment bank, preparation of supporting documentation, and development of a list of possible purchasers.  This leads to an approach to possible purchasers, provision of an information memorandum, an offer expressed in a letter of intent (LOI), due diligence, contract negotiations, a purchase agreement, and closing.

Fortunately for us, some of the important details of the negotiation for the sale are included in a filing with the Securities and Exchange Commission supporting the sale [1].  It is worth noting that Activision Blizzard and Microsoft have worked together for decades on gaming, so it is not unusual that senior executives would be meeting at the time the story in the SEC filing begins:

• On November 19, 2021, Bobby Kotick, chief executive officer of Activision Blizzard, and Phil Spencer, the chief executive officer of Microsoft Gaming, were meeting (following a Wall Street Journal article three days earlier which had alleged that Kotick had known for years about sexual misconduct at his company—the WSJ article is not mentioned in the SEC filing, of course).  One can imagine that the discussion between the two companies was probably tense following the WSJ article, given that the public scandal which had started over the summer of 2021 did not seem to be abating.  In that meeting “Spencer raised that Microsoft was interested in discussing strategic opportunities between Activision Blizzard and Microsoft and asked whether it would be possible to have a call with Mr. Nadella the following day.”  In this version of the story, Microsoft made the approach.
• On November 26, 2021, Microsoft made an all-cash offer of $80 per share.  ATVI had opened the week at $60.62 which meant that the Microsoft offer contained a $20 premium.  Activision Blizzard refused the offer, pointing out that the company had traded above $90 before the California DFEH suit.  Activision Blizzard was essentially arguing that its pre-scandal stock price should be used as a comparable for its current valuation.
• On November 28, 2021, Activision Blizzard countered with a range of $90 to $105.  I have always shied away from offering a range—it seems to me that by offering a range you are actually offering one number at the high or low end (depending on whether you are acting as buyer or seller).  Initially, Microsoft attempted to apply this interpretation, accepting the range on November 29 while noting that it would be more comfortable at the low end.
• However, the range seems to have been a good negotiation strategy on the part of Activision Blizzard.  Over the next two weeks, offers and counter offers at the ends of the range were exchanged.  Just prior to December 16, 2021, Kotick informed Nadella that Activision’s floor was now $95, an offer which was ultimately accepted by Microsoft.  In the end, the range became a device that allowed Activision to move the offer up from $90 to $95.

Looking through the SEC filing, it is fascinating to see the negotiation proceeding, almost as if one was a fly on the wall.  But, the bargaining between Activision Blizzard and Microsoft was not the only action going on.  In the SEC filing, it becomes clear that Activision Blizzard did have other suitors (referred to as “Company A,” “Company B,” up to “Company E” in the filing).  It may have been the discussions with the other possible purchasers that gave Kotick the confidence to establish at $95 floor in mid-December.

Applying cash flow analysis, rather than comparables, the sale price of $68.7B seems reasonable.  At $9B of net revenue annually (assuming that Microsoft only maintains revenue, rather than growing it) pays off the purchase price in a little over 7 years.  Of course, Microsoft expects synergies to significantly grow the value of this purchase.  Given that IT companies have historically been traded at valuations that cannot be justified by cash flow, this case is reassuring.

Regulatory Concerns

The Microsoft/Activision Blizzard deal is scheduled to close in 2023, provided that regulatory review proceeds successfully.  The result of the acquisition would be a new Microsoft division Activision Blizzard to go with Microsoft’s Xbox Game Studios, both divisions to be housed inside Microsoft Gaming and headed by Phil Spencer.

For regulators, there is a significant amount of grist for their mill:

• Wages:  Consolidation in the gaming industry represents fewer distinct workplaces and can depress wages for workers.  Microsoft has attempted to be out front on this issue by promising not to interrupt unionization efforts at Activision Blizzard.
• Vertical Integration:  Following Microsoft’s recent Bethesda Softworks acquisition, the games Starfield and Redfall were made exclusive to Xbox.  Regulators have traditionally opposed this type of vertical integration in which an advantage in one area is used as a lever in another related area.  These types of concerns harken back to the “bundling” of Internet Explorer with the Microsoft operating system which occurred in the 1990s and led to United States Justice Department Action

Numerous regulatory agencies around the world are looking at the acquisition, but it is the US Federal Trade Commission, along with the European Commission and the UK Competition and Markets Authority, that have the most power to block the deal.  It was this combination of three agencies that prevented the $40B sale of the chip maker ARM from the Japanese SoftBank Group to the US software and chip maker Nvidia in 2022.

On December 8, 2022, the US Federal Trade Commission filed suit to stop the Activision Blizzard acquisition, citing the anti-competitive nature of the transaction.  However, the suit is not a slam dunk.  In the case of Nvidia, both ARM and Nvidia do business in the small area of chip manufacture.  ARM intellectual property is used in Google, Microsoft, and Qualcomm chips.  In contrast, Microsoft and Activision Blizzard operate in different business areas of gaming (hardware versus software)—so making charges of monopolization stick may be more difficult.

Microsoft began making moves in December to blunt some of the criticism of the deal—signing a deal to ensure that Call of Duty will be on Nintendo consoles for the next decade.  At the current moment, it is unclear if the FTC has filed suit in order to go the distance in court or perhaps to increase its bargaining power and force concessions from Microsoft.

[1] Activision Blizzard, Inc.  Schedule 14a filed with the United States Securities and Exchange Commission.

Disclaimer:  DiscussingTerms^TM provides commentary on topics related to negotiation.  The content on this website does not constitute strategic, legal, or financial advice.  Consult an appropriately skilled professional, such as a corporate board member, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on DiscussingTerms.com.

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