Procopé & Hornborg competition blog: Killer acquisitions – Is the transaction value threshold the right way forward?
The issue of digital mergers has been topical for some time. Competition authorities are considering the suitability of competition law tools for the new markets and racing to issue reports on the matter. One of the issues that has been raised in the digital markets are so-called “killer acquisitions” meaning transactions where an established market operator buys a small operator (e.g. start-up) with a potential to become a future challenger on the market.
The Commission keeps an eye on the transaction value threshold experiences
"Competition policy for the digital era" report published in April 2019 and drafted by a panel of advisers appointed by the European Commission considers, inter alia, whether the current jurisdictional turnover-based thresholds set in the EU Merger Regulation (EUMR) are sufficient to catch the “killer acquisitions”. The report notes that such acquisitions may escape the Commission's jurisdiction due to the high probability that the start-ups do not yet generate enough turnover to meet the thresholds set out in the EUMR.
Commissioner Margrethe Vestager in the speech “Dealing with mergers in a digital age” on 18 June 2019 referred to this problem and pointed out that the Commission would need to have a chance to assess “killer acquisitions” in order to inspect modern competition problems. Vestager mentioned that the solution to the issue could be the additional thresholds – transaction value thresholds. Noticeably some EU Member States (Austria and Germany) have already expanded their merger control coverage by introducing alternative thresholds based on the value of the transaction. The idea behind the transaction value threshold is to ensure that companies that are perceived as highly potential market challengers and which purchase price is multifold of their turnover, are caught by the merger control.
However, the Commissioner referring to the advisers’ report notes that the problem might be quite small as the mergers that have fallen outside of the Commission’s jurisdiction have been referred by the Members States under the EUMR (for instance Apple/Shazam, Facebook/WhatsApp). Nevertheless, the Commissioner stated the intention to keep an eye on the experience of the Member States that have already implemented the new thresholds.
Although it is important that all kinds of transactions that potentially have anti-competitive effects, including digital mergers, are properly inspected, the advisers’ report emphasizes the significance of legal certainty and additional administrative burden and costs that the extended jurisdiction would bring.
Transaction value as an excuse for an in-depth analysis of the merger?
On the other hand, the British Competition and Markets Authority published a report drafted by Lear in June 2019 analyzing merger control decisions in the digital sector. In the context of digital mergers, the Lear report characterizes that the transaction volumes by digital giants Amazon, Facebook and Google are significant (on average 5, 6 and 15 acquired companies per year) and in majority of cases acquired targets are four-year-old or younger. Furthermore, most of the transactions are non-horizontal with a few major exceptions.
The Lear report notes for example that a period of assessment of the future development of a market should be extended for the digital mergers as a short-term assessment might be impractical for digital markets. Even in a dynamic digital market, success may require more than two years. As an example, the report mentions Snapchat, a significant social media operator, that was founded in 2011 and that is still operating at a loss in 2019. Similar issue has been noted by Vestager in her speech on 18 June 2019 as she stated that “for many digital startups, success isn’t measured by the scale of their revenues, but by whether they’ve built the right network, collected the right data, to allow them to compete”.
Considering the young age of the target companies on the digital market, competition authorities must try to predict alternative future as they need to figure out what would have happened without the merger. Acquisitions of young companies are relatively hard to analyze as one must predict how the market would have evolved without the merger. It is usual that companies’ evolution is still uncertain, and it is therefore very difficult to determine if the target company will grow to become a significant competitor.
The Lear report emphasizes also the importance of the information availability for the competition authorities. The report suggests that dawn raids during merger investigations may reveal important evidence such as the future plans of the target company and whether the purchasing company perceives the target company as a threat. The Lear report does not suggest transaction value threshold; however, it suggests that competition authority should take the transaction value into consideration during merger control procedure – if turnover thresholds are met – because particularly high purchase price may prove that target company is valuable to the acquirer and justify a more in-depth analysis of the merger. ¹
Will Finland respond to the challenges that killer acquisitions present?
The issue of killer acquisitions on the digital markets may not be the most topical in Finland, but the proper functioning of the merger control system in Finland has been under discussion. The Finnish Competition and Consumer Authority has flaunted that it would prefer to have a right to investigate any concentration which could be adverse to competition – this is understood that it would apply when, for example, buying off a competitor on the market. There has not been any discussion what kind of a threshold, if any, there would be in Finland, but the discussion on killer acquisitions is not limited to digital markets and catching the unicorns. Changes in Finland could follow the Swedish model, where if individual turnovers set forth in merger legislation are not met, the Swedish Competition Authority may still require a party to a concentration to notify where particular grounds exist for doing so, if the aggregate turnover requirement is met.
Concerns over legal certainty
Is the transaction value threshold – or the Swedish model - the right way forward – what about legal certainty, legitimate expectations and how would the new threshold affect the markets? And do digital markets deserve special legal instruments?
Although there are no clear answers to these questions, it is possible that merger control regulations are facing updates in the future in order to tackle modern challenges on the digital markets. Also, as the discussion in Finland proves, the definition of killer acquisitions is not limited solely to the problems on the digital market – killing the competition is not solely a digital phenomenon.
For more information, please contact Lotta Uusitalo or Dima Talja from Procopé & Hornborg Competition Team.
¹ The topic of transaction value threshold is also raised in the report “Unlocking digital competition” drafted by the Digital Competition Expert Panel appointed by HM Treasury and published on March 2019 which recommends that it may be appropriate to introduce transaction value threshold in the United Kingdom.
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