It is an age old adage that successful businesses must have a killer instinct. It is what helps them make a dent in the consumer market, be it through disruptive new products or a dynamic organisational structure. But what happens when large corporations’ strategy becomes burying the opposition and competing goods. When adding to the bottom line is so paramount that innovation takes a backseat and acquiring disruptors becomes the logical tactic. The most prominent carcass in such an environment is the spirit of competition and industry itself.
On April 13, 2007 Google announced a deal that they believed would play a pivotal role in transforming it from an in-search advertising heavyweight to one of the world’s preeminent technological behemoths: the acquisition of ad technology company DoubleClick. The deal handed Google a flourishing operation of display and video ads along with DoubleClick’s close contacts within the industry. Even more importantly, by taking over a promising startup in its infancy, Google preemptively choked out a potential competitor.
Such “killer acquisitions” remain all pervasive within the digital ecosystem, accelerated by bulging financial chests of large companies. Over the course of the years, Google has acquired over 168 companies while coming under increasing scrutiny from national and international antitrust regulators. This trend has been generally true for most BigTech companies. According to William Kovacic, former member of the Federal Trade Commission who assented to the Google-DoubleClick merger, nobody had an inkling how much power and influence the nascent Internet companies would swiftly acquire. Today these companies hold sway over countries and governments. And one of the biggest casualties lying in the wake of their rampage is competition.
Killer acquisitions are a form of anticompetitive measure wherein an established and well-connected company acquires a promising start-up in its nascent stage before it turns into a competitor. Large companies often resort to such tactics using their vast financial and technological power – effectively creating an artificial monopoly and abusing their dominant position. The vexatious issue of killer acquisitions is doubly pertinent when technology companies enter the fray. Technology companies thrive on innovation and dynamism. Killer acquisitions reinforces the old guard while barricading against innovation and future growth.
India passed the Competition Act of 2002 to bring its antitrust regulatory mechanism on par with global standards. However, the winds of administrative laissez faire are shifting towards a more active regulatory watchdog. The recent summoning of the GAFA companies (Google, Apple, Facebook, and Amazon) CEOs by the US Congress for a historic antitrust hearing is part of a larger trend of governmental crackdown. Germany and Austria have already taken active steps to widen their regulator’s ability to screen M&A in the technology sector. Other members of the European Union are expected to follow suit by bringing in their own regulations. Closer to home, China has already started reining in recalcitrant tech billionaires. Indian regulatory authorities have also started taking heed of the issue. The question remains, however, whether these will be the right tools in reining in rogue companies from killer acquisitions.
Curbing Killer Acquisitions: Pitfalls and Challenges
BigTech companies have a voracious appetite. Google, Amazon, Facebook, and Apple have made over 400 acquisitions globally in the past decade alone. In 2012, Facebook acquired Instagram – a young, quirky digital sharing app – which secured Facebook’s dominance in the social media industry for years to come. Even as its flagship social media network slowly lost its relevance amidst millennials, the acquisition of Instagram and WhatsApp would cement its position as a tech behemoth earning in billions. The Indian market is also no stranger to the complexities of killer acquisitions. The edtech giant Byju’s has gobbled up potential competitors in the sector. The $350 million acquisition of UberEats by Zomato and the acquisition of Jabong by Myntra is indicative of the financial rewards within the digital economy. In 2012, Amazon bought Kiva Systems, a robotics company that manufactured mobile robotic fulfilment systems. The company’s pioneering automated storage and retrieval system was contracted out to Amazon’s rivals (like the Gap, Staples and Office Depot) before the deal. However, Amazon’s acquisition spelled the end of these contracts, none of which were renegotiated. Kiva was completely turned inwards – towards improving Amazon’s internal storage system. Its commercial units were scrapped and not provided product support. The lead that Kiva gave to Amazon helped marshal its US online sales from 30% to 40% during the time it took to identify a credible alternative.
In order to efficiently recover goods for delivery, Amazon was capable of combining its outstanding operations with an effective robotic technique. This led to an efficiency that was instantly applicable, which may help to account for some of Amazon’s growth at this time. On the contrary, one might contend that Kiva’s cutting-edge technology might have been made available to Amazon and its rivals, bringing about efficiency without giving Amazon an overwhelming benefit.
As mentioned before, killer acquisition or zombie acquisition is the practise of rich companies acquiring smaller innovative start-ups to assuage competitive anxiety and reinforce established dominances. This impedes both consumer welfare as well as disrupts fair competition in the market. However, most of the time killer acquisitions are rarely identified, much less stymied. There are myriad reasons for this but primarily (i) acquired start-ups would not have reached the level of innovation or recognition that the government take note of their takeovers. Bureaucracy is often a poor judge of potentially disruptive products, (ii) the transaction threshold of these acquisitions usually falls short of the minimum regulatory stipulation needed to be reported to antitrust authorities. The total asset/turnover of these transactions usually fly below the radar of regulatory scrutiny.
Killer acquisitions in the digital space take place routinely without invoking an antitrust review from the Competition Commission of India. Stemming from high threshold for transactions, this results in concentration of market power and impedes consumer’s choice.
The recent guidelines by the European Union on the application of Article 22 of the European Union Merger Regulation (EUMR) is poised to allow member states, third parties and domestic antitrust authorities to refer low value transactions for review to the EU Commission. Low value transactions, which routinely involved the transfer of precious intangible resources, should not provide a blanket cover for zombie mergers. Transactions that would usually pass below the radar of regulatory watchdogs would be covered under this proposed regime. This will significantly help to curtail killer acquisitions of young start-ups by large corporations whose turnover value falls under the existing threshold limit. There are hundreds of thousands of low value mergers and acquisitions taking place in the dynamic digital market. Thus, it is very easy for a zombie acquisition to pass unnoticed when it falls below the threshold value. By creating a provision to refer these low-value transactions for review, the guideline seeks to update the regulators’ power to catch up with the modern age.
Similarly, the United States antitrust watchdog, the Federal Trade Commission, has also modified its scrutiny over M&A transactions. The FTC’s decision to crackdown would include taking into account the market structure, assessing the potential harm and withdrawing the 2021 Vertical Merger Guidelines (VMG), which describes how the agencies dealt with vertical mergers. The FTC has also gone to the extent of ex post assessment of some technology acquisitions. The regulatory watchdog was particularly critical of the VMG’s recognition of efficiencies justifying an anticompetitive merger. The FTC has also decided to strictly enforce its restrictive powers and derail any transaction that might have an adverse effect on competition. The 2020-released guideline documents contain flawed economic ideas that are not substantiated by law or economic considerations. The FTC’s statement points out that the 2020 Vertical Merger Guidelines’ approach to efficiencies—which the statute does not recognise as a defence to an unlawful merger—had thus violated the Clayton Antitrust Act. The guidelines employed a particularly faulty economic theory on the alleged pro-competitive merits of mergers, according to the FTC’s statement, despite the fact that it had no legal or economic rationale.
The Indian regulatory bodies have also recognised the need to rein in rogue zombie transactions. The Competition (Amendment) Bill, 2022 which is pending before a Parliamentary Standing Committee, envisages an overhaul of the entire antitrust ecosystem by lowering the transaction threshold required for compulsory notification. The Competition Commission of India (CCI) will have a wider ambit of reviewing acquisitions and search for any anomalies that may be indicative of anticompetitive behaviour. Similar to the EU guidelines, the government has focused on lowering the “deal value” threshold to include transactions that have a value above Rs. 2,000 crores, where either party has “substantial business operations in India”. The CCI would issue guidelines to determine what would qualify a company as having “substantial business operations” in India. This is keeping in line with the global standards and the CCI’s own recommendations that certain transactions exempt from their review could have an impact on competition.
Focusing on lowering the transactional value was also one of the key proposals suggested by Jacques Crémer in the Competition Policy for the Digital Era Report to the EU Commission. In order to bring “killer acquisitions” in the digital industry inside their respective jurisdictional purview, the European countries of Germany and Austria both enacted transaction value tests in 2017. Overall this effort has only added a small number of mergers that are subject to the required merger filing requirements of Germany and Austria while the increased thresholds have drawn a variety of deals beyond the digital industry. The assertion that lowering the threshold value would significantly alter the prevailing swamp of zombie acquisitions is contentious and as demonstrated by the German and Austrian experience, it could overburden the regulatory system.
A Gordian Knot
Widening the ambit of regulatory authorities by lowering transaction thresholds has been the most popular legal reform in the competition law mechanism. As mentioned before, killer acquisitions often fly under the radar of regulatory bodies due to low deal values and de minimis target exemptions which absolves entities from reporting transactions to CCI if it falls below a certain threshold. The proposed revision of lowering the threshold to Rs. 2,000 crores would have a strong impact on M&A in India. Since it is a fairly lower amount, it will widen the net of CCI’s ambit and bring in more deals that must be notified.
However, it is important to realize that lowering threshold is not a quick solution to such a complicated problem. Around the world, regulators have focused on lowering thresholds to widen the regulatory jurisdiction. This can lead to two issues:
- Overburden an already exhausted regulatory system. CCI would have to deal with the torrential number of deals now covered under its administrative shadow. This, coupled with the fact that the Amendment Bill proposes a decreased review period, would strain the due diligence capabilities of the Commission.
- Delay legitimate deals and strangle innovation. For the tech sector especially, strategic partnerships and tie-ups may be pivotal for innovation and growth. The acquisition of Beats Electronics by Apple helped it grow from a small-time consumer audio brand to an electronic behemoth. This was not a killer acquisition but would have been a collateral in the zeal of governmental crackdown.
Regulators have been mulling over the adoption of a wary ex post assessment of killer acquisition. Ex post assessment basically means the examination of acquisitions after the deal has gone through. This is particularly useful in the digital sector where the effects of the transaction can only be gauged after some time. For ex: the Google-DoubleClick deal nestles on the territory of antitrust behaviour only when Google transformed into an all-pervasive ad powerhouse with influence cutting across categories.
Killer acquisitions are a threat to the entire innovation edifice on which the technological revolution is built. It is strangling potential competitors and suppressing products that can threaten established market players. Protecting such nascent competitors is a crucial function of antitrust regulators. Outsiders have traditionally played the most important role in innovation while established have been flailing with obsolete technology.
Lowering threshold of “deal value” and ex post assessment of technology acquisitions are some of the methods by which regulators have attempted to rein in zombie transactions. Despite the potential disruptiveness, killer transactions in the tech space fly under the radar of antitrust authorities due to low revenue values. This signals a need for legislative reform. It is important, however, that regulatory zeal to stymie killer acquisitions does not spill over into strangling technological innovation.