UK CMA OKs Microsoft’s Hiring of Inflection Team, But Designates it a Merger

The UK Competition and Markets Authority (CMA) concluded its investigation of Microsoft’s hiring of key staff members from Inflection. And it has good news and bad news for the software giant.

“The Competition and Markets Authority (CMA) has found that the transaction involving the acquisition by Microsoft of certain assets of Inflection AI is a relevant merger situation falling within the merger control jurisdiction of the CMA,” the organization announced. “But the transaction does not give rise to a realistic prospect of a substantial lessening of competition as a result of horizontal unilateral effects.”

As you may recall, Microsoft in March announced the creation of a new Microsoft AI organization that, surprisingly, was to led by DeepMind and Inflection co-founder Mustafa Suleyman and staffed largely with executives and employees who had left that latter company to join Microsoft with him. This announcement was especially surprising to Microsoft employees who were already leading the firm’s AI efforts, including one who infamously refused to take a role in the new organization. Whatever one’s opinion of this shift, it was clearly an “acqui-hire” in which Microsoft effectively acquired Inflection without literally doing so, bypassing regulatory oversight. As such, the UK CMA announced in July that it was investigating the mass hiring to determine whether it would harm competition.

The good news is that the CMA found that it will not harm competition: Inflection had a tiny share of the UK market for chatbots and other conversational AI tools before the transaction took place. But in deeming the acqui-hire a merger, the CMA also opens the door for other regulators to take a closer look at Microsoft’s secretive moves. The CMA also reserved the right to investigate future hiring as end-runs around regulation as well.

“Microsoft announced that it had hired several former Inflection employees,” the CMA writes. But that hiring “amounted to almost all of Inflection’s team, including two of its co-founders: Mustafa Suleyman and Karén Simonyan. In addition to hiring the core team, Microsoft also entered into a series of arrangements with Inflection including, among others, a nonexclusive licensing deal to utilize Inflection IP in a range of ways … The CMA believes that Microsoft has substantively acquired Inflection’s pre-Transaction FM and chatbot development capabilities. Accordingly, the CMA has found that at least part of the activities of pre-transaction Inflection has been brought under the control of Microsoft and, as a result, that two enterprises have ceased to be distinct such that the transaction falls within the CMA’s merger control jurisdiction for review.”

Microsoft has never announced how much it paid for Inflection’s key employees and IP, but a third-party report suggests the price was as high as $650 million.

“The transfer of employees, coupled with other tactical arrangements, mean that two enterprises [Microsoft and Inflection] are no longer distinct,” CMA executive director Joel Bramford noted on LinkedIn. But “the evidence did not show competition concerns requiring a more in-depth review.”