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The author is Sourav Paul, a fourth-year student at West Bengal National University of Juridical Sciences, Kolkata.
I. INTRODUCTION
Antitrust regulators rarely intervene in merger and acquisition (“M&A”) transactions unless certain thresholds are triggered. Nonetheless, academicians and practitioners have voiced apprehensions regarding such a permissive approach to merger control regimes. They contend that this lenient approach has facilitated prominent technology-based companies, colloquially referred to as the ‘Big Tech’ (comprising Amazon, Apple, Google, Meta, and Microsoft) to acquire promising start-ups in the digital sector, with the aim of eliminating potential competition. Cunningham et al. termed this phenomenon as ‘killer acquisitions’ in the context of the pharmaceutical industry. They argue that incumbent firms engage in killer acquisitions with the sole purpose “[…] to discontinue the target’s innovation projects and pre-empt future competition.” The antitrust community has expanded the scope of killer acquisitions to include all possible M&A activity that suppresses future competition. Under this new characterisation of killer acquisitions, the product need not be ‘killed’ to be classified as a killer acquisition.
As a part of the broader strategy lately adopted by the antitrust regulators across jurisdictions to curtail Big Tech domination in digital markets, antitrust action has been initiated against them pertaining to killer acquisitions. The antitrust academic community has proposed changes in the existing merger control regime that requires us to revisit the fundamental tenets of the antitrust law.
Recently, the Indian competition regime is undergoing a major overhaul to align with the global best practices, and respond to the dynamic challenges posed by markets. The Competition (Amendment) Act, 2023 (“Amendment”) which received Presidential assent on April 11, 2023 introduces significant changes under the Competition Act, 2002. It introduces broad changes ranging from introducing commitment and settlement schemes to re-framing sanctions under the Competition Act, 2002. Against this backdrop, the purpose of this article is to examine the proposed framework for tackling killer acquisitions in India. It evaluates the framework and comments on whether India has adopted an aggressive and disproportionate strategy towards killer acquisitions.
II. OVERVIEW OF THE ANTITRUST POLICY PROPOSALS TO TACKLE KILLER ACQUISITIONS
The UK Government released the report titled ‘Unlocking Digital Competition’ (“Furman Report”) on reforms to competition law in the digital sector. The Furman Report calls for adopting a ‘balance of harms’ approach while dealing with killer acquisitions. It is a mathematical approach based on probabilities. The antitrust regulator is required to assign an expected value of the combination’s impact. They are also required to assign values to all the possible scenarios and the expected gains or losses from such scenarios. Consider a scenario wherein a combination has 20% chance that it would result in an adverse effect on competition worth INR 25 crores and 80% chance that it would result in efficiency gain worth INR 1 crore. In this case, the combination must be blocked because the expected value would be negative of INR 24 crores. The ‘balance of harms’ approach is derived from the principles of cost-benefit analysis, which governments adopt while taking regulatory actions. This approach places economic analysis at the centre of the combination review process. However, the approach requires the regulator to assign precise values to all probable outcomes of the combination, which remains a difficult task considering the dynamic nature of digital markets.
Another common proposal to tackle killer acquisitions is to reverse the burden of proof, i.e., Big Tech-led acquisition of promising start-ups must be presumed to be anti-competitive unless the transaction “[…] does not raise any significant competitive issue […] or that expected efficiency gains (which include dynamic efficiency gains) are sufficiently strong […].” Shapiro and Hovenkamp call for mandating ‘clear and convincing evidence’ from the parties to rebut the presumption. Fletcher recommends another version of the burden-shifting proposal – the burden of proof must be reversed only and only if the regulator is able to establish a ‘reasonable prospect of harm.’ For instance, if the regulator establishes that the transaction has a 30% possibility of harm, the burden must shift to the parties. The Stigler Report suggests that a shift in the burden of proof would help the antitrust regulators better assess the combinations. Valleti opines that “[i]f we reverse the burden of proof, we would not waste time on endless market definitions. Many mergers would be blocked (or would not even be attempted, vastly reducing regulators’ workload).”
The European Commission published the report titled ‘Competition Policy for Digital Era’ (“Crémer Report”) authored by Jacques Crémer et al. The Crémer Report proposes the ‘significant impact on effective competition’ (“SIEC”) test. As per this test, a transaction would be blocked if it is done with the objective of strengthening a dominant position, and consequently, the competition in the market is significantly distorted. The SIEC has two parts – (a) the Commission is required to assess whether one of the parties to the transaction enjoys a dominant position under Article 102 of the Treaty on the Functioning of the European Union, and (b) whether the transaction would strengthen such dominant position. The motive for the transaction must be to protect a dominant entity’s ecosystem. The Crémer Report suggests that the SIEC test must be applied if three conditions are satisfied – (a) one of the parties must be a dominant entity; (b) the dominant entity must have ‘strong positive network effects’, and (c) the target must have a ‘high future market potential’ with a huge user base.
III. EXAMINING EMPIRICAL STUDIES ON KILLER ACQUISITIONS
In this section, I analyse the empirical studies conducted by researchers on killer acquisitions led by Big Tech. The idea is to understand whether there exists market-specific evidence to categorise the majority of the Big Tech-led transactions as killer acquisitions.
Bagaria et al. conducted an empirical study on 409 GAFA–led acquisitions (Google, Amazon, Facebook and Apple) between 2009 and 2020 to assess how many of these transactions fit the ‘killer’ narrative. They apply the ‘core-business’ filter i.e., the start-up “[…] (a) had a direct horizontal overlap with the acquirer’s “core” business, or (b) were vertically-related to that core business and could plausibly grow into a competitive threat, for example by commanding a large user base or acting as a ‘gatekeeper’” to the dataset. The study reveals that only 8% of the transactions are potentially killer. Only 11 out of 117 transactions met the ‘core business’ filter and deal value above USD 100 million. Almost 1/3rd of the transactions were valued at less than USD 50 million. The authors argue that the primary motivation for acquiring these promising start-ups was to foray into newer markets, for instance, artificial intelligence, music or video streaming, speech recognition technology, and robotics.
Gautier and Lamesch examine 175 transactions by Google, Amazon, Facebook, Apple, and Microsoft (‘GAFAM’) between 2015 and 2017. The study reveals that most of the acquisitions were consummated in order to strengthen GAFAM’s core business models. Approximately 82% of the transactions were related to segments wherein the GAFAM was already active. They argue that the primary motivation for acquiring these firms was to buy “[…] valuable innovations, functionalities or R&D to strengthen their main segments.”
In essence, the above studies highlight that Big Tech-led killer acquisitions are rare even though an over-inclusive approach is adopted. Collectively, I term these approaches as an ‘aggressive and disproportionate enforcement strategy’ on killer acquisitions. It is imperative to clarify that it does not translate to no-enforcement action against Big Tech-led acquisitions. Nevertheless, such stringent enforcement actions and alteration of the fundamentals of the antitrust regime must occur only for high-impact events such as killer acquisitions. The policy proposals should be proportionate, and equitable. The findings of these studies do not support the drastic overhaul of the existing merger control regime, rather specific amendments may be introduced to widen the net of antitrust regulators.
IV. IMPACT OF AN AGGRESSIVE AND DISPROPORTIONATE ENFORCEMENT STRATEGY ON KILLER ACQUISITIONS
It is argued that the antitrust regulators and scholars calling for adopting an aggressive strategy on killer acquisition turn a blind eye to the dynamics of the venture capital and private equity (‘PE/VC’) business models. PE/VC investment into start-ups is critical for their growth. If the investors were not given an exit option (by way of selling their stake to a Big Tech company), they would not have invested in the first place. The Crémer Report notes, “[…] the chance for start-ups to be acquired by larger companies is an important element of venture capital markets: it is among the main exit routes for investors and it provides an incentive for the private financing of high-risk innovation.”
Therefore, the antitrust regulators must realise that promotion of entrepreneurship and an aggressive and disproportionate enforcement strategy on killer acquisitions are inherently contradictory. This has the potential to create a chilling effect on investments in start-ups and would reduce the risk appetite of the PE/VC funds.
The killer narrative often characterises the acquisitions as bad for innovation. On the contrary, the acquisitions have the potential to foster innovation by adding complementary technologies. It is imperative to note that when Big Tech invests in these start-ups, they are also taking a huge bet. Considering the failure rate of products at Big Tech, these bets in the future may be costly. The newly acquired technology can be ‘bolted-on’ to the existing products of the acquirer in order to enhance the value for an end-user. Big Tech has the capacity to scale the acquired products at an efficient cost. Furthermore, the end consumers would also benefit since they will have access to new products at a lower cost. A combination assessment weighs potential efficiency gains and foreclosure in competition. An aggressive enforcement policy on killer acquisitions ignores the efficiency aspects of the acquisitions.
V. PROPOSED MERGER CONTROL REGIME IN INDIA: A BALANCED APPROACH TO KILLER ACQUISITIONS
The Competition Commission of India (“CCI”) has always been perplexed with policy framing with respect to killer acquisition considering the nuances of the Indian markets. A hint of this can be observed in the CCI’s market study on e-commerce in India. It noted that the consumer goods market, accommodation services market, and the food services market are dominated by very few players. Scholars have argued that such observations were a direct reference to Flipkart and Amazon, MakeMyTrip, and Swiggy and Zomato respectively. These entities have also been accused of potential killer acquisition in the Indian markets. For instance, the Zomato/Uber Eats acquisition had a deal value of INR 2500 crore approximately but it escaped the radar of CCI’s jurisdiction. This is primarily because the Competition Act, 2002 did not have deal value thresholds, thereby limiting CCI’s jurisdiction over these transactions.
The Indian merger control regime is primarily governed by the Competition Act, 2002, and the Competition Commission of India (Procedure in Regard to the Transaction of Business relating to Combinations) Regulations, 2011. However, in recent times, the competition law framework is being revamped to align with the global best practices, and live up to the dynamic nature of markets.
The Amendment introduces the concept of deal value thresholds in the Indian competition regime for the first time. It amends Section 5 of the Competition Act, 2002, to state that CCI approval will be required provided:
Any transaction pertaining to acquisition of control, shares, voting rights or assets of an enterprise, merger of amalgamation, the deal value which exceeds INR 2000 crore, and
If the enterprise has a substantial business operation in India.
It has also been clarified that such enterprise cannot avail the benefits of the de minimis exemption provided the deal value thresholds have been breached.
In addition to the deal value thresholds, on September 5, 2023, the CCI released the Draft Competition Commission of India (Combinations) Regulations, 2023 (“Draft Combination Regulations”), which brings clarity to the Amendment. It provides further explanation on the meaning of the terms ‘value of transaction’ and ‘substantial business operations in India.’ The term transaction value includes:
Non-compete fees,
Consideration attributable to inter-connected transactions,
Consideration for transactional or incidental commercial arrangements entered within two years of the closing of the notifiable transaction,
Consideration for options and securities on an as converted basis,
Consideration payable contingencies.
The enterprises’ substantial business operation is to be decided based on the number of users, subscribers, visitors, or customers, the gross merchandise value, and the turnover. In essence, the deal value thresholds along with the Draft Combination Regulations overhaul the merger control regime under the Competition Act, 2002 to keep pace with the regulatory developments.
On February 27, 2024, the Committee on Digital Competition Law (“CDCL”) released the Report of the Committee on Digital Competition Law 2024 to frame an ex-ante regulatory mechanism for digital markets in India. The CDCL, inter-alia, has recommended a standalone Digital Competition Bill (“DCB”) to tackle the unique challenges of antitrust violations in the dynamic digital markets. Interestingly, the CDCL refrained from providing any recommendation with respect to the merger control regime under the DCB. It notes that the deal value thresholds under the Amendment, and the Draft Combination Regulations are targeted towards killer acquisitions, and there is no specific need for ex-ante obligations under the DCB.
In sum, there have been no specific changes in the merger control regime for killer acquisitions in the digital markets. Nevertheless, the introduction of the deal value thresholds in the Indian merger control regime is a significant milestone as it aims to widen the net to include killer acquisitions under its jurisdiction.
It is imperative to recognise that the CCI has undertaken a balanced view with respect to introducing measures to tackle killer acquisitions. The proposed changes in the Indian merger control regime cannot be classified as an aggressive and disproportionate strategy to killer acquisitions. The burden of proof has not been reversed under the Amendment. Further, no probabilities-based approach has been reflected. This is a positive step for the industry, considering the funding winter prevalent in the private markets in India. There has been a 71% drop in deal value from 2023 in the startup ecosystem. An aggressive strategy to killer acquisitions would have further increased the hardships for the startups, thereby negatively impacting innovation in upcoming sectors such as deep-tech and generative artificial intelligence. Nevertheless, the true impact of the deal value thresholds in curbing killer acquisition can be adequately assessed after a few enforcement actions are concluded by the CCI.
VI. CONCLUSION
The concerns raised by the antitrust community regarding the current antitrust practice of promising start-ups being acquired by Big Tech are justified. The antitrust regulators and governments across jurisdictions have recognised the entrenched position of the Big Tech platforms in the digital markets and have initiated strict enforcement action against them. However, such antitrust action must be based on market-specific evidence.
Through this article, I have attempted to highlight that the current policy proposals to fundamentally change the existing merger control regime are disproportionate and arbitrary. There hardly exists any empirical evidence that suggests that the Big Tech-led killer acquisitions are rampant and are per se anti-competitive. A fundamental shift in the merger control regime to tackle killer acquisitions may raise the risk of judicial errors, thereby inevitably leading to consumer harm.
The article examined the proposed framework in India to tackle killer acquisitions to assess if the measures are aggressive and disproportionate. The article suggests that the government has taken a balanced approach by broadening the net of the CCI to capture the killer acquisitions without altering the fundamentals of the merger control regime. There have been no specific interventions with respect to killer acquisitions in the digital markets. Nevertheless, we have to wait for a few enforcement actions under the new regime to assess the impact of the introduction of deal value thresholds in mitigating kill