Be prepared for heightened scrutiny when investing in tech
Expect to see deals involving digital assets and advanced technology face detailed merger control scrutiny as authorities focus on predicting the impact on competition and innovation in rapidly evolving markets. In addition, as governments increasingly step in to protect the changing face of valuable ‘national assets’ and ‘critical infrastructure’, such multifaceted deals may also require an upfront strategy to navigate dual-track competition and public interest or foreign investment reviews.
Digitisation – the new normal
Technology is transforming the way businesses work and the products and services they offer. Many companies see M&A as the best – or at least the fastest – way to build their digital capabilities. As reported in our recent digital M&A report, digital investment rose to a new high of $258bn in 2017 and the average digital deal value is higher today than its non-digital counterpart. Indeed, technology companies account for the largest proportion of acquisition targets by volume (46.9 per cent), some way ahead of the other sectors making up the top five acquisition targets, ie financial (11 per cent), industrial (8.2 per cent), telecoms (8.1 per cent) and healthcare (6.9 per cent).
And so it is perhaps unsurprising that competition authorities around the world are anxious to ensure that any digital merger-related activity does not go unnoticed. The challenge for businesses seeking to invest in tech is that detailed scrutiny and scepticism is likely. The European Commission’s clearance of the recent Apple/Shazam transaction is a good example of this, also illustrating how EU member states are willing to exercise their jurisdictional referral rights to refer such deals to the Commission for a pan-EU review.
Competition authorities across the globe, including in the US, are looking carefully at mergers involving digital technology and large sets of consumer data. Businesses should prepare to address the competition nuances of these spaces from the outset.
Recalibrating long-applied antitrust concepts for digital deals
The scope and pace of change in the digital economy continue to provide authorities with much food for thought about the adaptability of existing analytical frameworks to these new situations.
- market definition: digitisation is pulling traditional market definition analysis in two directions. On the one hand, there is a growing adoption of narrow market definitions (as seen in Microsoft/LinkedIn) by authorities eager to identify market power and the likelihood of harmful effects on competition – particularly where the products or services involved are generally well known to consumers or involve a prominent technology player. On the other hand, authorities are keen to be forward-looking by adopting a broader approach to deals that could affect potential competition and/or innovation;
It is important to assess, early on, all aspects of multisided markets and the competitive effects of a deal on each customer group. Parties need to be prepared to defend their transactions across the board and on each market that could be scrutinised by competition authorities.
- potential competition: authorities are reviewing whether their traditional approach of assessing whether the threat of entry is ‘timely, likely and sufficient’ to defeat any anti-competitive concerns is fit for purpose in the digital age. In 2019, the UK Competition and Markets Authority (CMA) is expected to publish ex post evaluations of a number of completed mergers involving potential competitors. The Chief Competition Economist of the European Commission is also advocating for a change in approach, suggesting reversing the burden of proof for so-called ‘killer acquisitions’ involving targets that have not yet monetised their ideas and requiring parties to explain the efficiencies arising from their transaction. And the Korea Fair Trade Commission (KFTC) is expected to publish new guidance on its assessment of future competition. However, while merger control analysis is inherently prospective, an assessment of how the market would have operated absent the merger is difficult – and especially so in fast-moving digital markets, many of which did not even exist 10–15 years ago, or even less. An evidence- and economics- based approach remains important, as well as an assessment of relevant counterfactuals – including that a start-up business may perform as well or innovate as effectively without the investment of its acquirer; and
jurisdictional thresholds: when it comes to technology, value is often speculated in a business’s early stages, well before such ideas have been monetised. Acquisitions of start-up businesses with limited turnover may, therefore, fall outside ofthe scope of merger control rules where jurisdiction is based purely on turnover thresholds. Germany and Austria have now introduced additional merger control jurisdictional thresholds, based on transaction value – a long-standing approach inthe US. The European Commission, CMA, Japan Fair Trade Commission (JFTC) and Australian Competition and Consumer Commission (ACCC) are also considering whether they have the right tools and approaches to properly claim jurisdiction over the competitive impact of these deals.
New hurdles – protecting the public interest and critical technology
The impact of public interest/foreign investment rules on digital deals cannot be overstated. While less than 1 per cent of deals that have been withdrawn due to these new reviews have been digital, the 37 digital transactions that were withdrawn – including Broadcom/Qualcomm – were worth more than $250bn in total: more than 22 per cent of total announced deal value.
Countries around the world are now following the trend set by the likes of Germany and the US in wanting to protect their home-grown technology. Small assets, a seemingly small foreign subsidiary or a small minority stake may all seem insignificant, but each individually may be enough to trigger additional notifications. Companies making an acquisition in the tech space need to engage early to determine whether any of these regimes touch on their transactions.
In the global race for technology leadership, further reforms directly affecting digital M&A and minority investments are being introduced. More aggressive enforcement is expected in Germany, where recent foreign investment reforms identified cloud computing software as being particularly sensitive, and France, where the scope of the regime has been expanded to a number of sensitive industries, including artificial intelligence, cybersecurity, robotics, semiconductors and hosting of data. Reforms in the UK (capturing deals involving computing hardware or quantum technology) and Italy (to cover, in addition, data-related industries) are likely to be followed by the new EU Regulation, which provides for co-operation between member states and the Commission in screening investments involving critical technologies (see theme 5).
The US has recently passed a law that will, among other things, expand the Committee on Foreign Investment in the United States’ jurisdiction to cover explicity minority foreign investments in businesses involved in ‘critical infrastructure, critical technologies or sensitive personal data’, alongside changes to US export control rules that will limit outbound transfers of ‘emerging and foundational’ tech (see theme 5).
Looking ahead in 2019:
Deals are seen by many companies as the quickest way to build their digital capabilities. Read our study The world of digital M&A to discover how this dynamic is reshaping global M&A.