[Siddharth is a practicing advocate in Delhi.]
From the last few years, killer acquisitions are the topical issues across industries as such mergers / combinations evade the radar of anti-trust scrutiny that could have potential anti-competitive effects in future impacting innovation and inflicting consumer harm. Killer acquisitions are those acquisitions wherein a bigger market player acquires a smaller firm / start-up pre-empting it to be a future potential competitor that could harm the economic interests of the incumbent. Accordingly, in most cases, the prime reason to acquire the targets is to kill the competition. Such mergers are not reported to the regulatory authorities because their threshold value is mostly less than what is prescribed under the regulations for due notification. Economically, an existing market player does not have a strong incentive to upgrade or continue the development of its product/service when the new project introduced by the entrant has substitutes from the portfolio of the incumbent.
Reaction from Regulatory Authorities
In the wake of such a spree of acquisitions which could be tagged as killer, various anti-trust authorities are scrambling to check such mergers which are technically very hard to detect during initial phases. Various jurisdictions across the world are handicapped when it comes to tackling such acquisitions as they remain under the threshold limit which is never notified to the authorities and such authorities lack the jurisdiction to investigate it ex-post.
However, of late, developments in Europe are aiming to curb this menace. European Commission’s Guidance Note of 2021 on referral mechanism as set out in Article 22 of the Merger Regulation states that there has been a gradual increase in the concentration of firms playing a significant competitive role in the market with very little or no turnover at the moment of concentration. Accordingly, the European Commission (also referred as the Commission) intends and encourages to accept the referrals from the member states in case they lack jurisdiction over the case. It would enable the Commission to scrutinise such mergers which are beyond the reach of members in essence plugging the killer acquisitions. Article 22 of the EC Merger Regulation 2004 grants power to the Commission to examine the concentration (merger/acquisition), if requested by the member state(s) where concentration does not trigger the regulatory threshold limits but affects trade between the member states or significantly threatens competition within the territory of member state(s) making request.
Furthermore, German and Austrian authorities adopted this approach back in 2017 by introducing transaction value thresholds coupled with entity having significant activities in Germany and Austria against the traditional turnover thresholds. It is a step closer to detecting and investigating killer acquisitions which remained undetected. Moreover in Norway, the competition authority pursuant to Section 24 of the Competition Act may impose mandatory disclosure requirements on specific market operators for all the mergers and acquisitions in which they get involved in even if the thresholds are not triggered. The reasoning behind the instant approach is that there are some sectors where even the acquisition of a minor player might adversely impact the competition and inflict consumer harm for example, electricity generation sector.
These are some of the measures adopted by the European Commission and a few member states in a bid to stop alleged killer acquisitions. It is also important to note that it may be an uphill task to prove killer acquisitions and establish their anti-competitive effects ex-ante. However, such acquisitions could still be censured in the United States under the traditional rule of reason review. For instance, the Federal Trade Commission (FTC) challenged the acquisition by Questcor (now a subsidiary of Mallinckrodt) of US development rights to Synacthen Depot. The rule of reason is one of the cornerstone of the antitrust laws used to interpret the Sherman Antitrust Act 1890. Contrary to the per se illegality rule, the rule of reason requires the courts to examine both the positive and the negative effects of the alleged anti-competitive agreement. Several factors are considered including inter alia market power of the entities, relevant product and geographic market, existing competition within the market etc. before concluding whether the agreement is in violation of antitrust laws.
In the United States, the FTC and the Antirust Division of the Department of Justice have the power to review the proposed merger as provided in the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). The HSR Act stipulates the requirement of pre-merger notification, waiting time before such merger be consummated, and empowers the above-mentioned enforcement agencies to seek further information from the companies including staying the waiting period.
Looming Uncertainties
There are various jurisdictions which are still devoid of any concrete regulations to address this issue and there are some countries that are en-route to propose measures to remedy this harm. For example, recently India has introduced the Competition (Amendment) Act 2023 which incorporates the deal value threshold.
Not all acquisition target at the nascent stage are killer acquisitions in pure sense, and in fact, in the digital sector, large companies could acquire a few innovative small or big target firms not with an intention to shut their operations but rather to integrate them into the ensuing goods and services in their growth.
Even with the introduction of transaction thresholds, it would be very hard to predict such acquisitions as the target product/service would still be in the initial phase and simulating the merger and assessing its outcomes seems a mammoth task. Furthermore, this measure is marred by some limits; for example, transaction values are complicated and there could be more than one method to ascertain the same, and such values could swiftly change in response to some events unrelated to underlying assets.
Another measure widely talked about is the power of anti-trust authorities to review any merger or acquisition under the HSR Act ex-post in the United States without any limitation period. Such a measure could be used effectively against killer acquisitions as the regulatory authorities would be better placed to assess the outcome that was not possible ex-ante. However, the regulators can face the challenge of reversing the transaction especially in know-how-based acquisitions or where the targets are data sets or user bases which are mixed post-merger as witnessed in the Facebook-WhatsApp case.
Economic analysis of mergers underpins the theory of harm. For a merger to be approved, the economic benefits ought to outweigh the economic harm. Accordingly, it would be hard to assess the killer acquisition’s potential harm or benefit with an ex-ante approach. In an unfortunate event where a regulator ex-ante disapproves the merger that could have positive outcomes, in that scenario not only would the innovation be impeded but irreparable consumer harm ensues. Against this backdrop, the ex-post investigation seems a more prudent option for the regulators combating the killer acquisitions.
Opportunity for Target Company
Looking at such acquisitions from the perspective of target companies, it could also be said that this mechanism provides a good exit opportunity for the new founders as they could not always effectively compete against the incumbents and the only prudent option is to be acquired, thereby making money out of their product and monetizing their innovations. Accordingly, some argue that such potential acquisitions in fact promote the competition to innovate with an incentive to exit by being acquired lowering the cost of capital for the new entrants and without opportunity cost failure.
Conclusion
Not all acquisitions could be tagged as killer; neither do all pave way for a content exit opportunity for targets. Adoption of transaction value thresholds is a welcome step empowering the regulatory authorities to uncover the potential acquisitions that could adversely impact the competition. However, as it is hard to detect such acquisitions ex-ante or with limited ex-post assessment period, a broader post-merger/acquisition review timeframe would be useful to regulators to effectively discern the after-effects of the combination and take action more judiciously.