Microsoft Gambles on ‘Nice Guy’ Strategy to Close Activision Megadeal

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

Mr. Smith’s gambit — which included offering to keep Activision’s blockbuster game Call of Duty widely available to satisfy competitive concerns — failed. A day after their meeting, Ms. Khan’s agency sued to prevent the blockbuster deal.

But in an interview this week, Mr. Smith was sanguine. “She did not take me up on my offer, but when I said give peace a chance, she smiled at least a little,” he said of Ms. Khan. “So any time somebody can end a meeting by smiling even a little, there’s always a little hope that we can sit down together in the future.”

Mr. Smith’s peacemaking comments reflect how Microsoft intends to approach the next phase of its deal for Activision. Far from giving up on the acquisition, he said, the company intends to gamble that its “nice guy” strategy could 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 a settlement allowing for the acquisition to move forward or for a faster, more favorable court to hear the case, the people said.

Microsoft filed its response to the F.T.C. lawsuit on Thursday, arguing that the deal would expand access for gamers. “Giving consumers high-quality content in more ways and at lower prices is what the antitrust laws are supposed to promote, not prevent,” the filing said.

John Newman, the deputy director of the F.T.C.’s competition bureau, said in a Thursday night statement that it was “confident in our case and look forward to presenting it at trial.”

The F.T.C. has said the deal should be stopped 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 rivals, especially Sony, which makes the PlayStation console.

Microsoft’s seemingly conciliatory approach is part of a nearly complete cultural transformation by the company since the 1990s, when it was known as the “Evil Empire” because of its strong-arm tactics to block out competitors. But under Satya Nadella, who became chief executive in 2014, and Mr. Smith, who is also Microsoft’s top lawyer, the company has bent over backward in recent years to show it has grown up.

Pushing the Activision deal through has implications for more than just Microsoft. The F.T.C. lawsuit is a landmark in a new era of government scrutiny of the biggest tech companies. Ms. Khan has staked an aggressive trustbusting agenda on the case, which legal experts said might be difficult to win. If Microsoft cannot get the deal approved, other tech behemoths will be less likely to be able to force a megadeal through.

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“They will fight it,” said Sid Parakh, a portfolio manager at Becker Capital, which invests in Microsoft. “It’s a bit more above and beyond this deal. It’s also a statement to the F.T.C.”

With Microsoft sitting on more than $100 billion to spend, he added, “they don’t want to back down now and then have every acquisition shot down.”

The acquisition of Activision must close by mid-July or Microsoft must pay as much as $3 billion in a breakup fee. Many hurdles remain, including approval from other global regulators, notably in Britain and in the European Union. If Microsoft can reach a formal settlement with them, it would leave the F.T.C. at a critical juncture.

The F.T.C. sued Microsoft in administrative court, which does not have the power to stop the deal from closing while the case is pending. If other regulators approved the deal, the F.T.C. would need to decide whether to file an injunction against the acquisition in federal court to stop it. The injunction process could move quickly, potentially handing Microsoft a swift legal victory.

“There is no sensible, legitimate reason for our transaction to be prevented from closing,” the chief executive of Activision, Bobby Kotick, said in a statement on Wednesday. “We believe we will prevail on the merits of the case.”

The F.T.C. declined to comment on Microsoft’s strategy or Mr. Smith’s conversation with Ms. Khan. Holly Vedova, the director of the F.T.C.’s Bureau of Competition, said the agency is always willing to consider proposals from companies looking to settle antitrust concerns.

Microsoft is trying to strike a balance between, on the one hand, seeming open to a settlement and, on the other, preparing to destroy the F.T.C.’s case in court. It has hired Beth Wilkinson, who prosecuted the 1995 Oklahoma City bombing case before becoming one of America’s premier corporate litigators, to argue on its behalf before the F.T.C. in-house court.

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

In the 1990s, the company was known for its scorched-earth business tactics, bundling software products together to edge out competitors. In 1992, as regulators investigated the company, the Microsoft co-founder Bill Gates dismissed the scrutiny, saying, “The worst that could come of this is that I could fall down on the steps of the F.T.C., hit my head and kill myself.”

Two years later, Microsoft agreed to a federal consent degree allowing personal computer makers more freedom to install programs from other companies. It staved off being broken up after a 1998 antitrust trial, and finally settled with the George W. Bush administration in 2001.

“The trial forced Microsoft to grow up, particularly in terms of its relationships with regulators and institutions beyond the tech industry,” said Margaret O’Mara, a professor at the University of Washington who researches the history of tech companies.

In 2001, Mr. Smith walked into interviews to be Microsoft’s top lawyer with a message: It was time to make peace with regulators and competitors. He got the job. Over the next several years, he reached legal settlements over competition concerns with governments around the world and other industry players.

It was not always smooth sailing. Negotiations between the company and Sun Microsystems, a server company that made the popular Java programming language, fell apart and took a year to get back on track. In 2004, Steve Ballmer, Microsoft’s chief executive at the time, was on a plane to Brussels to announce a deal with the European Commission when Mr. Smith got news that the commission instead was going to sue Microsoft for unfair competition. It took five years to secure a deal.

Since Mr. Nadella took over, Microsoft has embraced an even more open stance. His first acquisition was the studio that makes Minecraft, a game in which children 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 world’s second-most valuable public company, largely driven by its strong cloud computing offerings. The enterprise business at the heart of its growth generally attracts less government attention than social media or other consumer-facing ventures.

Globally, Mr. Smith has presented 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 the expansion of broadband.

Mr. Smith maintains powerful relationships in Washington. A bundler for President Biden’s campaign, he attended a White House state dinner for the French president, Emmanuel Macron, just days before the F.T.C. sued to block the Activision deal.

After the deal was announced in January, Microsoft went to great lengths to soothe the fears of regulators. Mr. Smith and Mr. Nadella traveled to Washington in February to promote the deal’s benefits. The company also made peace with an agitating labor union, which in turn lobbied the F.T.C. on the deal. And it promised Sony that it would keep Call of Duty on PlayStation for years, and signed a deal to put the game on Nintendo’s Switch.

Mr. Smith said that “things moved quickly” in the final weeks before Microsoft was sued. When F.T.C. staff met with Microsoft’s team, it became clear that the agency had serious concerns, he said.

“Our team asked, ‘Could we discuss a settlement proposal?’ And the staff said, ‘Not with us,’” he said. Later discussions with the leadership of the agency’s antitrust bureau failed to bear fruit, 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 the issues relating to Call of Duty,” referring to fears that Microsoft could pull the title from rival consoles. Mr. Smith spoke to each of the agency’s four commissioners, virtually, for an hour the next day.

A day after that, the F.T.C. commissioners voted 3 to 1 to sue.

But Mr. Smith said he refused to think of the situation as an us-versus-them situation.

“I will 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.