The UK Competition and Markets Authority (CMA) conducted a review of Microsoft's acquisition of assets and employees of Inflection, determining that the transaction constituted a merger under UK law. The transaction involved Microsoft hiring almost all of Inflection’s team including co-founders and entering non-exclusive licensing deals to use Inflection’s intellectual property. Since Microsoft effectively gained control over a significant portion of Inflections pre-transaction business activities the CMA saw this as a merger rather than just a simple personnel transfer.
As set out in the CMA’s guidance, a merger may include transfer of a group of employees and their know-how where this enables a particular business activity to be continued.[1] In this context, the CMA considered that acquiring a team with relevant know-how may fall within the CMA’s merger control jurisdiction. In addition to hiring the core former Inflection team, the CMA found that Microsoft also acquired additional assets, including access to Inflection IP. According to the CMA, the combination of acquiring the core team together with these assets was key to the value of the transaction as it allowed the former Inflection team to continue developing consumer-facing AI products within Microsoft.
The CMA assessed whether the transaction would result in a substantial reduction in competition in two areas: (i) the development and supply of consumer chatbots globally and (ii) the development and supply of foundational models (FMs) globally. The overlap in AI activities between Microsoft and Inflection, particularly in the development of FMs and chatbots was a major factor prompting the CMA's investigation due to potential competition concerns. However, after a detailed investigation the CMA found that Inflection was a minor player in the consumer chatbot market and had not gained significant traction. According to the CMA, even though Inflection’s AI chatbot Pi had features comparable to those of its competitors, it did not pose a serious challenge to Microsoft’s ChatGPT, Copilot or other rival products. The CMA found that competitors could easily replicate Inflection’s innovations such as its focus on emotional intelligence. Similarly, the CMA found that Inflection did not pose a significant threat to Microsoft or other established players in the FM market as Inflection’s plans to offer FMs to enterprise clients were still in the early stages.
Based on its findings, the CMA concluded that the transaction posed no risk of significantly reducing competition in the FM or consumer chatbot markets and allowed the transaction.
(CMA – 04.09.2024)
NAZALI TAX & LEGAL