IN THE STARTUP ECOSYSTEM
Are Existing Competition Laws Sufficient?
Author: Manan jhamb
College: Chandigarh University.
LinkedIn Profile- https://www.linkedin.com/in/manan-jhamb-441716288/
ABSTRACT
According to the article, the most hazardous monopolies of the 21st century are not the ones that develop the established competitors out of business; they are those that buy young ones before competition even has a chance to blossom.
One of the most sinister challenges the modern competition law faces is the so-called killer acquisitions, i.e. of the acquiring company acquiring the nascent ones, not to form their technology, but to eliminate the competition. In contrast to more conventional horizontal mergers that have more conventional market-concentration issues, killer acquisitions focus on pre-revenue, pre-product start-ups, the disruptive nature of which is exactly what makes them acquisition targets. This paper explores whether current merger control mechanisms based on market-share limits, turnover tests and substantive dominance tests are technically in a position to detect and correct such deals. Based on empirical literature and comparative regulatory analysis in the European Union, the United States and India, as well as landmark case law, this article concludes that existing frameworks have structural architectural flaws and suggests a paradigmatic recalibration of the competitive harm analysis in digital and innovation markets.
TO THE POINT -THE ANATOMY OF A KILLER ACQUISITION.
Killer acquisition refers to a strategic acquisition in which a dominant player buys a start-up, usually at a premium, and the main aim is to eliminate the competitive threat that it poses to the acquiring company, instead of creating a technology that will be beneficial to the consumer. Cunningham, Ederer, and Ma (2021) are the pioneering scholars who apply the concept of the pharmaceutical sector in their empirical study and eventually discovered that about 6.4% of all drug buying deals led to the intentional shutdown of the pipeline holding the acquired products.
This process works in the following manner:
●An established company discovers a new company with a nascent product roadmap that poses a threat or has a potential of threatening the dominant position of the incumbent in a related or related market segment.
●It will take the incumbent significant investment and time to create organic competitive response, so they buy the start-up, usually at a valuation many times greater than the current revenue or assets of the target.
●After a takeover, the acquired product line, patent portfolio or development pipeline is stymied, offloaded or assimilated so as to avoid its potential harm to the core business of the acquirer.
● The competitive position is therefore maintained to favour the incumbent and there is no consumer visible disadvantage in the short-term.
What makes killer acquisitions and pro-competitive acquisitions different is how the acquirer intends and behavior after the acquisition. Nonetheless, it is incredibly hard to show that there is anticompetitive intent, especially in industry where there exists arguments of true synergy, rationales of talent acquisition and even speculative overlaps of products, which have been structured around current harm arguments in the markets.
HE LEGAL LEXICON – IMPORTANT TERMINOLOGY.
To conceive killer acquisitions, one must be facility with the following terms of art, which have different doctrinal traction depending on jurisdiction:
Substantive Lessening of Competition (SLC): This is the criterion used in the United Kingdom and various Commonwealth jurisdictions to estimate a possible material worsening of competition circumstances as a result of a merger. In comparison with the U.S. standard of substantially lessen competition, as in Section 7 of the Clayton Act, the SLC test can be prospectively applied, but has been largely used in situations where a current competitor-company is at issue, and not against a new one.
Significant Impediment to Effective Competition (SIEC): Article 2 of the EC Merger Regulation (Council Regulation (EC) No 139/2004). The SIEC test was created as a complement to the previously used test of dominance; the SIEC test measures unilateral, coordinated, and (and with growing prominence) innovation-market effects. SIEC standard is more analytically adaptable than SLC and the European Commission has used it to strongly contest transactions in innovation intensive industries.
Market Definition: This is a process of defining the pertinent geographical market and the product that will be found in the market in which competition is measured. Traditional SSNIP (Small but Significant Non-transitory Increase in Price) tests do not apply in digital markets where the products are given at zero monetary price. The notion behind the innovation market – a market described in terms of R&D efforts and the future product pipe-line – is a more appropriate analytical tool to apply to killer acquisition instances.
Notification Thresholds: Jurisdictional notification thresholds in which merging parties have to notify the competition authorities. Majority of regimes use turnover-based or market-share thresholds. Such thresholds are structurally insufficient to killer acquisitions because, in reality, the target start-up generally has low revenue, de-minimal market share, at the acquisition time in spite of its transformative competitive potential.
Nascent Competitor: Speaks of a firm that though not active yet in the market of interest or does not possess a large portion of market share, but is realistic potential in getting competitive in the market in the eyes of the incumbent within an acceptable time span that is foreseeable. Nascent competition has been a growing recognized area of competitive interest that should be safeguarded by the European Court of Justice.
Call-In Powers / Voluntary Referral: Regulatory frameworks that authorize transaction competitions by regulatory bodies to look at transactions of less than the mandatory thresholds of notification either at the discretion of the authority or by self-imposed notification of the parties. An example of such powers are article 22 referrals under the EU Merger Regulation which was just broadened by the Commission.
Predatory Acquisition: An acquisition that is made with the intention of locking out a competitor as opposed to realising actual efficiencies. Although conceptually, predatory pricing is related to the doctrine of predatory acquisition, it is not yet a developed concept in the majority jurisdictions and in such a case is not yet a stand-alone basis of preventing a merger.
Conglomerate Effects: The effects of a merger between two firms in one line of business but a related line of business, where the resultant conglomerate can use its market presence in one line of business to foreclose competition in a different line of business. Platform ecosystem killer acquisitions tend to have conglomerate effects.
IV. THE EVIDENCE- EMPIRICALLY- PROOF AND REGULATIVE FAILURE.
• Empirical Literature
The empirical evidence-based case of prevalence of killer acquisitions lies on an increasing amount of empirical research:
Cunningham, Ederer, and Ma (2021): The authors of this study have analysed 16,000 pharmaceutical acquisitions between 1988 and 2010 and have discovered that there is a statistically significant correlation between high product overlap between the acquirer and the target organisation as well as the probability of discontinuation of the project after the acquisition. Most importantly, the likelihood of project termination also rose with the similarity between the compound acquired and the one in the pipeline of the acquirer – the strategy of hindering competitive development.
Kamepalli, Rajan, and Zingales (2020): The authors discovered that the buyout of start-ups by leading platforms reduced the number of follow-on venture capital investments in companies in proximate product spaces, in a study of the technology sector, which they named the kill zone effect. This observation indicates that killer acquisitions end up producing systemic deterrent effects regarding innovation, much later than the particular transaction.
Argentesi et al. (2021): A retrospective study of the acquisitions that Facebook made of both Instagram (2012) and WhatsApp (2014), which were cleared at the time by the relevant authorities, found that the acquisitions led to competitive harm that could not be forecasted by the current analytical framework. The paper has pointed out flaws of revenue-based detection levels in the digital markets.
Furman Review (UK, 2019): In the independent review commissioned by the UK Government, large digital platforms were found to have acquired hundreds of companies, many of which were below the notification thresholds, and to have had little to no regulatory scrutiny. The review advocated a regime of strategic market status, which would construe increased responsibilities on the identified digital gatekeepers.
• Systemic Regulatory Failures
Several weaknesses of current frameworks in the empirical evidence include:
●Threshold Blind Spots: The application of thresholds of transaction value in Germany and Austria (2017) and proposed in other jurisdictions, is an enhancement but imperfect proxy of the competitive value.
●Static Market Definition: Existing frameworks evaluate competitive harm in current, present-tense markets. Killer acquisitions have a future, hypothetical competitive space that withstands traditional demarcation.
●Burden of Proof Allocation: In the vast majority of jurisdictions it is the authority that has to prove competitive harm. This load is basically unassignable in nascent-competitor cases due to the unpredictably high levels of uncertainty of the start-up product paths.
●Information Asymmetry: The merging parties have more information about the potential risk that the target will become a competitor, the strategic value of the acquirer, and the subsequent post-merger behavior, which information is not easily revealed on the review of a merger.
CASE LAWS- JUDICIAL AND REGULATORY PRECEDENTS.
The development – and continuing restriction – of the competition law in dealing with killer acquisitions can be seen in the following cases:
• Facebook / Instagram (EU Commission, 2012 & Retrospective Assessment 2021)
Facts: Facebook bought Instagram in 2012 at around USD 1 billion. Competition authorities around the world cleared the transaction as Instagram had minimal revenue and did not have an officially-established competing product. A follow-up study commissioned by the UK Competition and Markets Authority (CMA) but conducted by Argentesi et al. (2021) discovered that the acquisition preempted the emergence of a major social media competitor, and the tools available at the time did not adequately forecast emerging competition.
Held / Significance: No ban was granted, but the case has become the reference point in the regulatory reform discourse in digital markets as it spurred regulatory reform in jurisdictions. It proved threshold tests based on revenue do not reflect competitive importance in attention economy platforms.
• Illumina / GRAIL (EU Commission, Case M.10188, 2022)
Facts: Illumina, the market leader in the next-generation DNA sequencing equipment, was interested in acquiring the GRAIL, an upcoming developer of early-detection cancer screening tests, which relied on the technology developed by Illumina. At the time of notification, GRAIL had a very minimal revenue. The Commission claimed jurisdiction under Article 22 referral – at the time when the Court of Justice authorized the Commission as a policy of expanded referral fostering its expanded referral policy in Towercast (Case C-449/21) – and eventually blocked the merger.
Held / Significance: This is one of the most important killer acquisition plans ever. The Commission established that Illumina had the motive and capability to close the downstream competitors of GRAIL by limiting their technologies to do sequencing hence cementing dominance in the related vertically related markets. Article 22 was confirmed as a jurisdictional device of sub-threshold transactions in the case and it was also determined that innovation-market harm could be pursued by invoking the SIEC standard.
• Towercast v. Telecommunications Regulatory Authority (ARCEP) C-449/21 CJEU Case (2023).
Facts: Towercast, a French broadcasting infrastructure firm, objected to Bouygues Telecom taking over TDF (a competitor infrastructure provider) as an abuse of dominance Art 102 TFEU on the basis that the merger was an abuse in itself. The Court of Justice also requested to determine whether or not a merger that had been already cleared by a national authority could also be considered an abuse of dominance.
Held / Significance: The Court affirmed that the court may use Article 102 TFEU in relation to concentrations where the merger control is not applicable, as long as the conduct fulfills the requirements of abuse. Although this is not directly related to a murderous takeover, Towercast extended the intellectual rules of challenging acquisitions by means of Article 102, which provides an additional point of attack in case of failure of merger control does not occur.
CONCLUSION – THE IMPERATIVE OF DOCTRINAL REINVENTION.
The above discussion brings to a blunt conclusion that the current competition law frameworks are flawed in a structural sense to deal with the phenomenon of killer acquisitions in the startup ecosystem. The framework of controlling mergers, including turnover-based notification rates and definition of the present market and consumer harm paradigms that had been tuned to the price impacts, was devised to function in an industrial economy characterised by physical amenity, rigid product markets, and visible competition.
The nature of the economic logic of digital and innovation markets is fundamentally different: winner-takes-all network effects, data-based competitive advantages, zero-price business models, and competitive threats realised (or repressed) over multi-year innovation horizons. Start-ups that threaten incumbent the most are precisely those that by their virtue of being a start-up, should still be under all the conceivable regulators radars.
Existing regulatory changes, such as the Digital Markets Act (Regulation (EU) 2022/1925), Digital Markets, Competition and Consumers Act 2024 in the UK, Section 19a GWB regime in Germany and the deal-value threshold amendment in India are all significant, yet partial progress. Nevertheless, they are still reactive additions to frameworks that require deeper basic reconceptualisation.
This article argues that an adequate reaction to killer acquisitions involves at least the following doctrinal rebalances:
●Innovation market forward-looking test is adopted to be the main, instead of an auxiliary, analytical framework applied when assessing mergers that are technology intensive.
●A presumption of guilt-setting mechanism in which takeovers by the company with a strategic position in the market would lead to a retractable presumption of anticompetitive impact, compelling the acquirer to show pro-competitive reasons.
●Generalizing transaction-value impediments, overlaid with extensive call-in authorities of authorities to examine transactions of strategic importance regardless of the target’s revenue.
●Obligations to make available post-purchase behavioural reporting conditions on acquisitions by specified digital gatekeepers, so that ex post examination of product discontinuation behaviour can be carried out.
●Co-ordination of jurisdictions to avert regulatory arbitrage in cross-border transactions.
The second option, keeping the status quo, is dangerous in keeping alive dominance structures to such areas most important to economic dynamism and social innovation. The graveyard of murdered start-ups should not be the cost of the conceptual inertia of the competition law.
VII. ACADEMIC/POLICY DISCOURSE FURHTER ASKEDQUESTIONS.
The questions below continue to be debated on the edge of jurisprudence and should be the subjects of long-term interdisciplinary investigations:
1. Is intent a leading condition of the determinacy of mergers? And since killer acquisitions are characterized by an objective rationale of the acquirer to eliminate competition, is it dogmaticalish – and judicial manageable – to render intent a cornerstone of merger blocking? What will be the fate of such intent even when the possibilities of synergy reasons are unavoidably probable?
2. How does the concept of nascent competition research respond to the question of what the correct counterfactual is? In evaluating the fact that an acquisition has killed a potential competitor in the future, authorities have to build a counterfactual case: is the start-up a plausible success as a stand-alone competitor? What are the standards of evidence, procedures, and professional frameworks that would such a truly speculative question?
3. Can ex post competition law (abuse of dominance) be used as an acceptable alternative to ex ante merger control? In the aftermath of Towercast, national competition authorities can make use of Article 102 TFEU (or similar provisions) to consummated acquisitions. Does this make ex ante reform irrelevant or does the challenge of structural remedies after the integration make ex ante control unreplaceable?
4. What are the ways to define data and innovation markets to be controlled by mergers? The illegitimacy of classical market definition in zero-price, multi-sided and data-driven markets has been amply recorded. Are attention markets, data markets and innovation markets to be formally recognised as cognisable categories of market? What could be used in place of the SSNIP test?
5. Do deal-value barriers create self-distortions? Directionally correct, transaction-value thresholds can overvalue acquisitions by introducing regulatory risk premia, de facto deter early exit markets by venture capitalists, or even provide incentives to structure acquisitions so as to avoid notification. What is the best way that regulators align innovation finance with competition harm avoidance?
6. What should is venture capital ecosystems in control of mergers? The effect of killer acquisitions, described as the kill zone effect, i.e. such acquisitions cause VC to avoid investing in the surrounding spaces implies that the negative competitive impact of acquisitions is not limited to those involved. Do systemic investment-deterrence effects merit cognisable harm status in the process of reviewing mergers by regulators?
7. Can industrial policy play a role in the response to killer acquisitions by competition law? A number of jurisdictions have expressed national champion concerns into the merger review process, allowing acquisition of domestic innovators by large domestic companies in the national interest. What to do with this industrial policy rationale in the face of the competition law imperative of protecting nascent competitors?
8. What is the best way to solve international jurisdiction issues in cross-border killer acquisitions? In case an American incumbent obtains a start-up of a European or Indian company, and there are no jurisdiction requirements in either country, and which country has the competence to scrutinize the deal? What would be an effective international legal architecture to deal with this co-ordination failure?
