Acqui-hire: The Microsoft/­Inflection case and its implications for legal practice and legislation

On 29 November 2024, the German Federal Cartel Office published the results of its merger control review of Microsoft Corporation’s (“Microsoft”) hiring of almost all of Inflection AI, Inc.’s (“Inflection”) employees (“Microsoft/Inflection Transaction”). The review revealed that the Microsoft/Inflection Transaction was in principle covered by the German merger control regime. However, the transaction was ultimately held not to be notifiable because Inflection was not engaging in substantial activities within Germany at the time of acquisition. This case illustrates the increasing importance of new types of transactions in the digital sector, particularly “acqui-hire transactions”, i.e. transactions primarily aimed at acquiring qualified personnel. The German Federal Cartel Office’s position is notable and has inspired its president, Andreas Mundt, to consider extensive reforms.

Background: What happened?

In March 2024, Microsoft hired almost all of the employees of Inflection, a technology start-up from the USA, which had been founded in 2022. Inflection is known for developing foundational models for machine learning and the chatbot “Pi”. Agreements on the financing and use of IP rights were concluded at the same time as the hiring of the employees.

Transactions of this kind have increased significantly in recent times. In 2017, the German Federal Cartel Office prohibited the merger between the ticket platform Eventim and the artist agency Four Artists Booking. In 2019, the managing director and 27 of the 45 employees left Four Artists Booking and joined a newly founded subsidiary of Eventim. At the time, Mundt described the process as “annoying”, but noted that the establishment of the new subsidiary was not subject to notification and therefore not subject to review by the German Federal Cartel Office.

In acqui-hire transactions, highly qualified employees of the target company regularly transfer to the acquiror, resulting in the competitive potential of the target company being transferred to the acquiror. Young, innovative companies in the digital sector are particularly affected, especially those working on developing artificial intelligence.

Worldwide merger control proceedings

Microsoft had already argued before the UK Competition and Markets Authority (“CMA”) that the Microsoft/Inflection Transaction did not constitute a concentration. According to Microsoft, first, there was no transfer of employees, but employees had chosen to resign and enter individual employment contracts with Microsoft. Second, the assets acquired by Microsoft were merely “factors of production” that were not covered by merger control.

The CMA did not share this view. It assessed the Microsoft/Inflection Transaction as a concentration. Despite this classification, the transaction was ultimately approved because there were no significant competition concerns due to the low usage of Inflection’s AI tool and chatbot.

In September 2024, the European Commission (“Commission”) also declared that it viewed the transaction as a concentration under Article 3 of the EU Merger Regulation (“EUMR”). However, the turnover thresholds of European merger control had not been reached so that the Commission had no jurisdiction. At the request of the Commission, seven Member States subsequently submitted a referral request pursuant to Article 22 of the EUMR. However, following the judgment of the ECJ in the Illumina/GRAIL case, which held that the extensive practice of referring transactions to the Commission under Article 22 of the EUMR was impermissible, the Member States withdrew their requests for referral to the Commission, and the proceedings were discontinued.

It remains to be seen whether the US Federal Trade Commission (FTC), which has been scrutinising the Microsoft/Inflection Transaction since June 2024, will also assess it as a concentration.

Investigation by the German Federal Cartel Office

The German Federal Cartel Office’s review of the Microsoft/Inflection Transaction also led to the proceedings being discontinued, despite the German Federal Cartel Office having classified the hiring of the employees as a concentration.

The German Federal Cartel Office initially clarified, in line with the assessments of the Commission and the CMA, that the hiring of the employees, combined with arrangements for the financing and use of IP rights, should be assessed as a de facto merger and, in principle, notified.

Furthermore, the transaction threshold was generally exceeded as the value of the consideration was above the threshold of EUR 400 million. The rationale for introducing this transaction threshold was that, particularly in digital markets, a company’s value is not necessarily reflected in turnover, but rather in user numbers and network effects. Despite Inflection being a start-up and not yet having a high turnover, its competitive potential was evident in the high purchase price that Microsoft was willing to pay to acquire it.

However, another essential requirement for the notification obligation ‒ the substantial economic activity of the target company in Germany at the time of the transaction ‒ was not fulfilled because the number of users of the chatbot “Pi” in Germany was still too low. This ultimately led to the proceedings being discontinued.

Significance of the case

The assessment of the Microsoft/Inflection Transaction as a concentration is to be welcomed. Acqui-hire transactions are often an advanced form of “killer acquisitions” by large technology companies and are frequently aimed at circumventing merger notification obligations.

Nevertheless, the German Federal Cartel Office was ultimately unable to review the case. Against this backdrop, the question arises again as to whether novel forms of cooperation and transactions, especially in the rapidly growing digital sector, are adequately covered by the existing merger control rules with their clear threshold-based notification obligations.

Future reforms and developments

Italy and Sweden have now issued “call-in” regulations, enabling competition authorities to retrospectively review a transaction after its closing, regardless of whether clear, predefined thresholds were reached. Mundt is sceptical about this retrospective call-in approach as he believes that it tends to result in consequences that merger control normally tries to avoid, namely legal uncertainty and a lack of predictability.

Instead, he views the German-Austrian transaction threshold model as the right tool for the future. Since the introduction of the transaction threshold, around 130 cases, mainly in the technology and pharmaceutical sectors, have been recorded. To further increase its effectiveness in the future, he proposes lowering the transaction threshold from the current EUR 400 million to EUR 300 million. In addition, a reform of the requirement for substantial domestic activities is being discussed, which was the reason for the failure of a merger control review in the Microsoft/Inflection Transaction. Mundt proposes including the potential or future operations of a company in Germany when assessing domestic activities, which, without further context, could initially be a certain softening of clearly foreseeable thresholds.

Conclusion

The German Federal Cartel Office’s decision is positive news as it illustrates that German competition law can effectively cover newer and unconventional acquisition models in the digital economy. It remains to be seen how the 12th Amendment to the German Act against Restraints of Competition will further accommodate such current and expected future developments. Contrary to the original schedule, a draft bill has not yet been published and due to early elections in Germany, a draft is not expected until some time in 2025.

Irrespective of this, other similar cases could attract the attention of the competition authorities in the future. Companies should closely monitor future developments, particularly in key technology sectors and the pharmaceutical industry.