UK Authority Approves Microsoft’s Acquisition of Inflection Talent, Terms It a Merger

Encouraging update for Microsoft: The competition watchdog in the U.K. announces that Microsoft’s notable move to absorb the AI startup Inflection’s team does not raise concerns over competition. Therefore, a comprehensive investigation will not be initiated.

However, the Competition and Markets Authority (CMA) remarks that this transaction is considered a “relevant merger situation” within its oversight, indicating that future analogous transactions might still be subject to scrutiny over competition aspects, even without an outright acquisition.

The ‘Quasi-Merger’ Explained

In March, Microsoft unveiled a novel consumer AI division, led by Inflection’s founders including Mustafa Suleyman from Google DeepMind. The team now includes notable figures such as AI expert Jordan Hoffmann, who leads Microsoft’s AI hub in the U.K.

The CMA initiated a preliminary “phase 1” inquiry into the transaction in July, embarking on evidence collection to determine the necessity of a detailed investigation. A significant aspect of this phase was to evaluate whether the deal constituted a “merger,” despite Microsoft not formally purchasing Inflection AI, and if it did, whether measures needed to be taken to alleviate competition worries.

At the forefront is an emerging tactic by prominent tech entities to evade regulatory examination regarding AI, utilizing a strategy some refer to as the “quasi-merger” — ranging from strategic investments to the recruitment of startup founders and key talents, as demonstrated by Microsoft and Inflection.

According to the CMA, Microsoft’s engagement involved hiring “most of Inflection’s team,” including two co-founders, while forming various commercial deals, like a non-exclusive agreement for Inflection’s intellectual property (IP) usage.

The CMA further observed that before joining Microsoft, Inflection aimed to pioneer AI solutions for a broad audience. With the principal team’s departure to Microsoft, the company managed to harness the collective expertise for its own AI advancements. The CMA’s assessment emphasized:

“The swift obsolescence of technology in this sector without ongoing innovation highlights the critical nature of expertise in the creation and provision of FMs [foundation models] and chatbots. This underscores that the team responsible for development is vital for any entity aiming to innovate in FMs or chatbots, leading to the conclusion that acquiring a team with pertinent expertise – even without additional assets – can be subject to the CMA’s merger control jurisdiction.”

This decision is partly based on the U.K.’s Enterprise Act 2002, which clarifies what constitutes a “relevant merger situation,” including instances where “two or more enterprises cease to be distinct.”

Despite Inflection operating independently, its core now integrates with Microsoft.

“The movement of employees, along with various strategic arrangements, indicates that two enterprises are no longer distinct,” Joel Bamford, CMA’s senior director, indicated in a LinkedIn article today.

Yet, the CMA deduced that this particular transaction does not significantly challenge competitive dynamics, mainly because Inflection was not a direct formidable contender against Microsoft’s existing AI capabilities.

“Given that Inflection AI was not a potent rival to Microsoft’s consumer-oriented chatbots (Copilot) and those developed in collaboration with OpenAI (ChatGPT), the transaction was cleared,” Bamford stated.

On the Radar: Regulatory Supervision

The initial scrutiny involving Microsoft and Inflection was among several inquiries launched by the CMA in April. This included assessing Microsoft’s stake in Mistral AI, a French venture, and quickly concluding that the investment did not meet the criteria for investigation under the existing merger regulations due to the scale of the investment. Concurrently, the CMA announced it was examining Amazon’s investment in Anthropic following a hefty $4 billion infusion into the AI firm, now under formal review.

Additionally, the CMA is welcoming feedback on Google’s engagement with Anthropic following its substantial investment, displaying a vigilant approach towards future technology mergers and acquisitions, particularly those skirting a full acquisition.

The overarching insight here is that Microsoft has momentarily sidestepped regulatory action, but the landscape indicates that the CMA remains vigilant about future interactions between large tech corporations and smaller startups.