Commercial Awareness Update – W/C 26th June 2023

CRH JOINS EXODUS AS GLOBAL GIANTS SHIFT LISTINGS FROM LONDON TO NEW YORK

CRH, the world’s largest building materials group headquartered in Dublin, has announced its decision to relocate its primary listing from London to New York. This move follows similar actions taken by Ferguson, Flutter, and Arm.

Last year, Ferguson, a UK-based plumbing equipment supplier, transferred its primary stock market listing to New York. Flutter, the world’s largest listed gambling company, opted to list in the US to consolidate its position in the growing American market. Arm, a Cambridge-based chip designer currently owned by Softbank, also rejected a London listing in favour of New York, despite lobbying efforts from three successive UK prime ministers.

Why is this happening?

One reason for this is that a listing in the US will lead to an increase in the valuation of the company. For instance, analysts stated that the move by CRH will allow it to boost its valuation, which will help it win more business in the US. Having incurred billions of pounds in losses over the past few years, Softbank was motivated to list Arm in the US because they believed a higher valuation was attainable. This is because the New York Stock Exchange offers higher valuations and trading volumes.

Another reason is that since the US economy is larger than the UK’s, there is a higher pool of capital. This attribute was mentioned by CRH, which stated that the move will make it easier for them to make deals in the US which will help them grow their business.

Similarly, Ferguson noted that the move would allow the company to pitch to a vast collection of capital in the US for a little extra cost. This can be seen in the fact that trading volumes in its shares increased sharply with access to the more liquid US market. Flutter also stated that since the US is the largest country by revenue, a listing will allow the company to access US capital markets and attract local talent.

A third reason is the strict and burdensome rules the UK requires listed companies to comply with. For instance, Arm was deterred by a regulation mandating UK-listed companies to divulge all transactions involving related parties. This could have necessitated reporting any dealings with companies in which SoftBank holds a stake.

In accordance with existing regulations, UK publicly listed companies are required to obtain investor consent for any transactions involving related parties. These transactions refer to the transfer of resources, services, or obligations between the company and other financially affiliated entities. However, in markets such as the US, companies are only obligated to report such transactions without needing approval.

Impact on the legal industry

The migration of UK businesses to US stock exchanges will have varied impacts on different law firms. Law firms with an established presence in the US will see this as a source of work for their capital markets lawyers as they must advise them on US listings.

This will be a perfect opportunity for these law firms as companies looking to list in the US would choose a firm with expertise in London and New York markets rather than a purely American one. However, firms not breaking into the US market may find it difficult. This is because the migration of UK businesses to list in the US would mean they would see reduced demand for their capital market expertise.

The FCA has responded to this news by introducing reforms to the requirements to list in the UK by making the listing process more straightforward and hopefully attracting more companies to list in the UK rather than the US. Introducing these new reforms may increase the need for financial regulatory and capital market lawyers to advise businesses on how they can comply with these new rules if they decide to list in the UK.

It will be intriguing to observe whether these new reforms will effectively encourage companies to list in the UK or if the allure of higher valuation will instead continue the trend of companies shifting their listings to the US.

Article written by Ifeoluwa Bayo-Oluyamo

THE MICROSOFT – ACTIVISION DEAL

On January 18^th 2022, Microsoft Corp. announced its intention to purchase Activision Blizzard Inc. (AB) for $69 billion at $95 per share, eclipsing its previous largest acquisition, LinkedIn, for $26.2 billion in 2016.

As with any significant merger, especially one that’s vertical, approval following national regulatory scrutiny is required to confirm compliance with anti-trust laws and that competition in respective markets and, eventually, the individual national economy is not negatively impacted. Concerning AB’s acquisition, Microsoft has been largely successful in gaining said approvals. Nevertheless, it still faces strong opposition from unexpected foes.

Regarding the acquisition, Goldman Sachs & Co. LLC is Microsoft’s financial advisor, whilst Simpson Thacher & Bartlett LLP serves as its legal counsel. For AB, Allen & Company are the financial advisors, with Skadden, Arps, Slate, Meagher & Flom LLP as its legal advisors.

 Activision Blizzard

Activision was founded on October 1^st 1979, by former Atari game developers David Crane, Alan Miller, and entertainment agent Jim Levy. The company quickly established its position as a competitor in the gaming industry, with notable outputs including Chopper Command, Pitfall and River Raid.

It has partnered with iconic software developers such as Infinity Ward (Call of Duty), RedOctane, and Harmonix Music Systems (Guitar Hero). The company survived market overexpansion, creative talent departures, renaming and rebranding, and changes in management and ownership.

Blizzard Entertainment’s inception as Silicon & Synapse was on February 8^th 1991, by UCLA graduates with a dedicated interest in electronic gaming, namely Frank Pearce, Michael Morhaime and Allen Adham. The developer established its competitive edge by producing The Lost Vikings and Rock n’ Roll Racing. Following its name change to Blizzard Entertainment in 1994, there came the releases of the juggernaut series Warcraft and Overwatch, with the company’s success consistent thanks to further lucrative releases.

Both companies were heavyweights in their own right; however, AB was formed following the merger between Activision and Vivendi Games, Blizzard’s parent company, in July 2008. This partnership has flourished, with wildly successful franchises such as Tony Hawk, Call of Duty, Crash Bandicoot and the revamped World of Warcraft, Guitar Hero and Candy Crush experiences, to name a few.

Being part of Big Tech (the five most dominant tech companies), Microsoft needs little introduction as the better-known of the two gaming giants. To that effect, Microsoft generates more gaming revenue, just under $16 billion in 2022, compared to AB’s $7.5 billion. The latter’s gaming income suggests that AB is no slouch in the gaming market.

Therefore, why the mutual agreement to the merger?

Reasons behind intent

Despite being the world’s largest software manufacturer, Microsoft has the dominance of the gaming world in its sights. Regarding gaming revenue generation, Microsoft trails Tencent Holdings, Sony Interactive Entertainment and Nintendo Co. Ltd.

Significant acquisitions appear critical and preferred by Microsoft in accomplishing this goal. For instance, there was the purchase of Mojang, the creator of Minecraft, in 2014 for $2.5 billion, of ZeniMax Studios, the parent company of Bethesda Softworks (Fallout series, Elder Scrolls and Doom), for $7.5 billion in 2021, and of Obsidian Entertainment (Pillars of Eternity, South Park) in 2018 for a seemingly undisclosed, but no doubt, hefty price tag.

For Microsoft, unfettered ownership of and access to the intellectual rights of AB’s covetable and highly successful game franchises means access to AB’s customer base and the potential to attract new customers intrigued by the deal. Customer retention and attraction mean higher income generation and profits. Following the acquisition, Microsoft looks set to leapfrog Nintendo and Sony regarding console sales, also potentially for gaming income generated.

For AB, it means access to a previously unaccustomed level of resources, especially capital, which will help facilitate innovation leading to a more substantial product output. Should the deal be finalised, AB’s shareholders, employees or otherwise, are set to reap profits at the share price agreed, even more so should they resist the temptation to dispose of their shares immediately.

Competition concerns and legal impact

Notwithstanding Microsoft’s claims that consumers will have ‘access to more games on more devices including Xbox, PlayStation, phones and online’, that game developers will realise improved access to consumers and thus more significant revenue, and that the deal will heighten competition in the market, leading to wide-ranging and heterogeneous choices for consumers, the UK’s Competition and Markets Authority (CMA) blocked the purchase April 26^th, stating it would ‘alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for UK gamers over the years to come’. Microsoft will appeal this decision, with the hearing likely in late July.

The US Federal Trade Commission (FTC) echoes the CMA’s concerns. It applied for and was granted a preliminary injunction against the deal on June 13^th, pending the outcome of an evidentiary hearing on June 22^nd and 23^rd. In support of its filing, the FTC asserted that Microsoft has ‘the increased incentive to withhold or degrade Activision’s content in ways that substantially lessen competition – including competition on product quality, price and innovation’.

Sony PlayStation CEO Jim Ryan vowed to block the acquisition as he feared the restriction of Sony’s access to intellectual property rights for Call of Duty, currently owned by AB and fully operable on Sony’s consoles. To abate Sony’s and the FTC’s concerns, Microsoft offered Sony a ten-year legally binding consent decree, ensuring that all new Call of Duty releases be made available on the same day for both Xbox and PlayStation. The deal offered made little difference to the FTC’s push for the injunction, with Sony refusing assent.

Contrarily, the merger has garnered strong support from other regulators. Notably, the European Commission rendered its approval on May 12^th, less than a month after the CMA blocked the deal, contingent on Microsoft fully addressing competition concerns raised by the Commission. China was the latest to voice its (unconditional) approval on May 18^th, bringing the total to thirty-seven countries supposedly representative of over 2 billion agreeable patrons.

However, Microsoft need not rest on its laurels should it overcome its commercial litigation troubles. Private lawsuits filed by consumers are also a threat. In the US and in December 2022, a group of ten gamers filed a lawsuit against the company, citing competition and the creation of monopoly concerns (DeMartini et al. v. Microsoft Corporation). It is envisaged that others, and not just in the US, will follow suit.

There is a generation of teachable commercial and civil case law being generated concerning this matter which will be referenced for many years to come. It is also probable that M&A transaction rules will be amended following the endpoint of this deal, be that what it may be.

That said, irrespective of what Microsoft faces, the company seems well prepared with countermands, and even if the deal stalls, it would be a manageable loss. The company has immense financial capabilities and commercial attributes that other companies want to engage with, and Microsoft will doubtlessly move on elsewhere.

In short, Microsoft will do just fine, with or without approvals.

For context on cloud gaming, click here

For insights on vertical mergers, click here

Article written by Aqua Koroma