Nascent competition and killer acquisitions in digital markets: a decade of acquisitions by Big Tech

In her PhD thesis, Giulia Aurélie Sonderegger analyses killer acquisitions, which, in short, are acquisitions that aim to pre-empt potential future competition at an early stage. While this phenomenon was originally discovered in pharmaceutical markets, this thesis exclusively discusses killer acquisitions in the context of digital markets, thereby primarily focusing on the current European Merger Control Regulation (EUMR). The main research question is whether the EUMR is appropriate to tackle killer acquisitions occurring in digital markets, and if not, in what ways it needs to be amended to better address the challenges in the future. To tackle this question, the author assesses both the economic and legal effects of killer acquisitions on merger control in digital markets and, based on her findings, suggests amendments to the current European merger control regime. For a more comprehensive analysis, this thesis also includes an assessment of the recently enacted Digital Markets Act (DMA) to ascertain whether this regulation may serve as an additional tool to remedy such transactions.

Start-ups, Killer Acquisitions and Merger Control

Killer Acquisitions? The Debate on Merger Control for Digital Markets

In innovation-driven budding markets, there is a high likelihood of ‘killer acquisitions’. Killer acquisitions stifle potential competition where an established player eliminates an innovative new product or removes the potential competitor entirely in its nascent stage. An established, and often cash-rich, large entity’s fear of an innovative competitor undermining its market position incentivises it to make an acquisition with the intent to eliminate future competition. Many jurisdictions, such as India, lack adequate merger control regulations to restrain such acquisitions. This article highlights jurisdictional and substantive gaps which allows killer acquisitions to escape scrutiny. Jurisdictional gaps emerge when the threshold for scrutiny is based on turnover or asset value of the parties involved.Startups and new companies having negligible turnovers escape the regulatory radar when acquired by a large player. Substantively, merger controls are based on the potential merger’s impact on competition in the relevant market, whichis difficult to assess in the case of early-stage start-ups where products are at a nascent stage. Instances of under-enforcement of competition law in cases of killer acquisitions are common, as the new company’s potential is underestimated. Such under-enforcement may not be systemic in most jurisdictions, but poses a serious concern with consequences bordering on monopolisation in certain markets.

This article examines whether EU merger control rules should be recalibrated to address concerns said to arise from acquisitions of innovative start-ups by established digital platforms – commonly referred to as ‘killer’ or ‘nascent’ acquisitions. It assesses various proposals designed to remedy two failings: a perceived failure to review anti-competitive transactions due to inadequate jurisdictional thresholds and a perceived failure to detect competition problems during the merger review process. It argues that, given the large number of transactions already subject to merger control, any expansion of existing rules should occur only where there is clear evidence of a significant enforcement gap. In the view of the authors, there is no persuasive evidence that a material number of anti-competitive digital acquisitions are escaping antitrust scrutiny, that the analytical framework applied by the European Commission should be significantly changed, or that the methodological tools employed to review concentrations are unfit for purpose. The authors therefore disfavour wide-ranging changes to the EU's rules and instead propose a series of incremental improvements to ensure that EU merger enforcement is tailored to the digital age.

Innovations in biological pest control and digital technologies hold great promise to reduce risks from pesticide use without compromising on agricultural productivity. These innovations are often marketed by small and emerging companies such as the Koppert Group for biological pest control or CropX for digital tools for pest prediction. However, currently these innovative technologies fail to scale effectively. In this article, we investigate whether so-called killer acquisitions contribute to this development, i.e. whether emerging companies for biological pest control and digital technologies are acquired by established pesticide producers with the main goal of avoiding competition by discontinuing the activities of the acquired companies. We analyze merger and acquisition activities of the four largest pesticide producers worldwide (BASF, Bayer, Corteva and Syngenta) in relation to criteria setting out potential killer acquisitions for the period 2000–2020. Our analysis includes 18 eligible acquisitions in the area of biological pest control and digital farm management and decision support tools for pest control, 16 of which (with a total value of nearly $5 B) have characteristics of killer acquisitions. We conclude that increased attention by policy makers and antitrust authorities is needed to enable scaling of innovations in biological pest control and digital technologies. In particular, we argue that the current criteria triggering an investigation of merger and acquisition transactions by competition authorities should be reconsidered, i.e. the minimum size criterion and the criterion of market overlap between acquirer and acquisition target.

The European Union (EU) has assigned competition policy an important role as part of an extensive new agenda to stimulate innovation, including by fostering the growth of small and medium-sized enterprises (SMEs). The ability of EU merger control to be receptive and responsive to innovation harms has therefore come under scrutiny, with some observers doubting its capacity to address innovation-crushing ‘killer acquisitions’ of innovative SMEs. This article reflects on several recent developments that have shaped the EU’s response to these doubts. Substantively, the more central role afforded to innovation considerations in the European Commission’s recent enforcement practice may well demonstrate its willingness to engage with innovation theories of harm in mainstream merger control going forward, although questions remain about the standards and methodology it can adopt under the EU Merger Regulation (EUMR). Jurisdictionally, the recalibrated approach to the Article 22 EUMR referral mechanism—assisted, in certain circumstances, by the new pre-merger information obligation for digital gatekeepers under Article 14 DMA—is capable of bringing an almost boundless range of cases before the Commission. The Towercast judgment casts the net further still, by confirming the potential for below-threshold mergers to face ex post reviews at the national level under the Article 102 TFEU abuse of dominance prohibition. The effect of these developments is that the Commission and national competition authorities may now be better equipped to unleash a killer instinct when faced with innovation concerns arising from killer acquisitions. However, an unwelcome pendulum swing towards over-enforcement risks untold harm to legal certainty, merger activity, and innovation itself.

This paper explores the extent to which nascent acquisitions can be investigated and challenged when necessary under existing merger control frameworks. It identifies the need to conduct an in-depth counterfactual analysis, to consider new investigative tools, and to ensure that any claimed efficiencies are tied to the specific transaction in question. It was prepared as a background note for a discussion held at the OECD in June 2020 on start-ups, killer acquisitions and merger control.

Merger and acquisition practices in China’s digital market are evolving from simple horizontal mergers to more complex vertical and conglomerate forms that increase the likelihood of market power. ‘Killer acquisitions’ and use of variable interest entities (VIE) have led to a more stringent regulatory approach. Since 2020, China has actively enforced the law against unnotified mergers in its digital economy. China’s regulatory framework has also been tightened, with the introduction of the new AML, Guidelines, the Provisions on the Review of Mergers, and local implementation documents. The introduction of the ‘Stop-the-clock’ mechanism gives competition authorities more time for complex cases and empowers them to scrutinize mergers more closely. Inclusion of VIEs under merger control also closes loopholes that previously allowed firms to avoid scrutiny. Future merger control in China’s digital market is under debate, with discussions focusing on replacing the outdated turnover test with supplemental tests, while also considering non-price factors.

"Killer" acquisition is those where the acquirer simply closes down the target without keeping any significant assets. In an ex-post view, this is a clear sign that the transaction was likely to be anti-competitive. Unfortunately, such "killing" of the target is not directly helpful for ex ante merger control. Moreover, in terms of theories of harm, killer acquisition is simply a special case of the traditional opposition between increased market power and efficiency. By contrast "early" acquisitions raise two major specific issues: the traditional threshold for notification tends not to be met and the relationship between the activities of the two parties (substitutes or complements) can be hard to determine. I review the theories of harms that can be pursued in such a context and explain how the EU is getting around the notification threshold issue. I also review the empirical literature on killer acquisitions and complement it with an overview of acquisition by large platforms and large pharma firms. The main conclusion is that killer acquisitions are a serious issue in pharma, while they seem less frequent in the world of digital platforms."

Big Tech, Antitrust and the Financial Markets Blind Spot

Large digital technology companies are suspected of engaging in a ‘killer acquisitions’ strategy whereby they acquire promising start-ups to eliminate potential future rivals or to integrate them into their own offerings, thereby cementing their dominance. Many of these transactions escape the scrutiny of competition authorities as they do not meet the notification thresholds. This has generated a growing sense of urgency about the need to amend the European Commission’s merger ‘toolbox’. However, an increasing reliance on non-traditional theories of harm may prevent consideration of the transaction’s substantial benefits for innovation and competition. This short contribution takes a critical look at current merger control and discusses the possibility of a more open approach to reviewing acquisitions in the digital space. Keywords: mergers, European Union, reform, online platforms, competition policy

This research theorizes and documents for the first time a cyber risk that may arise from strategic alliances with Big Tech, a grouping of the most dominant companies in the information technology industry. This research proposes that alliances with Big Tech tend to involve leveraging and integrating Big Tech’s innovative technological capabilities into a focal firm’s data management, operations, products, or services. This process can be understood as an inter-organizational system of systems integration and is presented as a mechanism that makes focal firms vulnerable to external cyberattacks. In addition, this research theorizes and shows that the effect of strategic alliances with Big Tech on the risk of cyberattacks is not linear; instead, it increases up to a certain point and then starts decreasing. Finally, this research suggests that intangible asset intensity strengthens the relationship between strategic alliances with Big Tech and the risk of cyberattacks. The findings of this research provide timely and important insights into cyber risks arising from strategic alliances centered on integrating systems and technologies across partner firms’ boundaries.

The pursuit of the consumer welfare goal has not achieved competitive markets but instead resulted in highly concentrated markets in the digital economy with one or two market leaders. Markets that should be dynamic and innovative are controlled by powerful online platforms that thwart innovation and eliminate potential rivals through killer acquisitions. This article argues that safeguarding innovation and in particular disruptive innovation should play a much more explicit part in the European Commission’s merger control especially in digital economy markets, where innovation is key to a healthy dynamic market. This could be achieved by adopting a stricter merger review process that places emphasis on whether innovation and potential competitors are negatively affected by the merger also in the long-run. The article argues that to achieve this a move away from the traditional price-based focus in merger reviews in line with the consumer welfare framework is required towards a structural approach that considers the impact on the market in the long-run and the dynamic aspects of the mergers under review, but this will occasionally require the Commission to say ‘no’ to mergers. The result however, would be the safeguarding of innovation, the key to a healthy economy in the EU.

This paper addresses the potential for conflict between antitrust authorities in the arena of merger control in the new economy. By “new economy” we mean two related developments. First, the internationalization of the economy, i.e. the ability to sell and produce products world-wide, and secondly, markets with certain characteristics such as network effects and other aspects of natural monopoly. We focus on three types of substantive issues in merger control – market definition, assessment of competitive effects, and the role of remedies. We argue that the scope for conflict varies significantly across these three arenas. In particular, conflict over market definition is less likely. By contrast, the assessment of competitive effects and the role of remedies are areas where conflict between antitrust authorities may be more likely in “new economy-type” markets.