[Vishnu Bandarupalli is a third-year BA. LLB (Hons.) student at NALSAR University of Law, Hyderabad]
Zomato’s acquisition of Uber Eats, Ola Cabs’ acquisition of TaxiForSure, Myntra’s acquisition of Jabong.com and, more recently, the merger of PVR and Inox—what is common between these corporate deals? They have arguably resulted in the consolidation of market power without triggering an antitrust review by the Competition Commission of India (CCI).
The mergers mentioned above are examples of killer acquisitions in India. Killer acquisitions refer to the practice of large established firms acquiring potential competitors, usually start-ups and nascent firms. It is termed a killer because, after the merger, the target’s activities and resources will be used only for the benefit of the acquiring entity. Thus, in most cases, a killer acquisition results in the discontinuation of the target’s innovation projects and, consequently, leads to pre-emption of competition. Consumer welfare is adversely affected, first, by the strengthening of the dominant position of the incumbent firm in the market and, second, by the prevention of innovative activities of the target firm.
Competition authorities find killer acquisitions difficult to rein in for two primary reasons. First, the acquisitions do not meet the statutory notification threshold of the antitrust laws and, hence, do not fall under the scrutiny of the authorities. Second, these acquisitions are often not seen as anti-competitive at the time of transaction as they are carried out in a different class of products or services. For instance, Google acquired flights search engine software ITA in 2011, and only after the merger it became dominant in search engines showing flight schedules.
The bulk of literature surrounding killer acquisitions suggests reforms primarily within the context of the threshold requirements to increase ex-ante scrutiny by the authorities. However, the recent OECD (Organization of Economic Cooperation and Development) Secretarial Note on “Startups, Killer Acquisitions and Merger Control” went further to suggest ex-post assessment as a valuable complementary tool to curb killer acquisitions.
The first section of this post shall explain the issue with exclusive reliance by authorities on ex-ante measures to tackle killer acquisitions. The second section will analyse the important aspects of ex-post assessment that deal with killer acquisitions. The final section will highlight the need for further research and legislative amendment in India to adopt an efficient ex-post assessment framework.
What is the Issue with Thresholds (i.e. Existing Criteria to Curb Anti-Competitive Arrangements)?
The traditional merger control approach examines mergers and acquisitions where the assets or turnovers have breached certain thresholds. When a transaction does not meet the set turnover thresholds, the regulatory authority will usually lack jurisdiction to scrutinise the transaction, and the parties can proceed freely with the acquisition. The assets/turnover values in killer acquisitions usually fall beneath the set thresholds and, hence, are not subject to scrutiny by the authorities. In this regard, it has been suggested that the existing turnover thresholds be reduced. However, in the context of a compulsory notification system, doing so would result in a heavy volume of low turnover transactions being notified. Hence, this suggestion has not been implemented.
A subsequent proposal was to introduce additional thresholds based on more effective criteria, such as transaction value. Unlike asset/turnover thresholds, transaction value can reflect future strength. For instance, in 2014, when Facebook acquired WhatsApp, WhatsApp had a low turnover but had more than 600 million users around the world. The future strength of WhatsApp at the time of the merger was reflected by the acquisition’s transaction value, which was USD 19 billion. Consequently, countries like Germany and Austria have introduced transaction value thresholds in their merger control regimes.
The EU evaluated the scope of transaction value-based thresholds, but decided not to adopt them. The European Commission’s consultation on the “Evaluation of procedural and jurisdictional aspects of EU merger control” noted the risk that transaction value-based thresholds would create an additional administrative burden. Moreover, it would be rather costly to place an extraneous burden on developing businesses. Another issue with transaction value thresholds is that they could incentivise firms to acquire start-ups earlier in their development phase.
In India, the Competition Law Review Committee (CRLC) recommended introducing an enabling provision that empowers the government to introduce transaction value-based thresholds. This recommendation found its way into the Competition (Amendment) Bill, 2020. However, the issue with introducing the new thresholds is that it will increase scrutiny on investment buyouts and consequently delay transaction timelines. Moreover, the OECD report noted that the number of notified transactions has not substantially changed in Germany and Austria where transaction value thresholds have been introduced. Therefore, without conclusive evidence of efficiency, it is not worth implementing transaction value-based thresholds.
It is essential to acknowledge the uncertainties inherent in killer acquisitions and accordingly take a permissive and cautious ex-post assessment. An ex-post assessment is essentially the examination of an acquisition after its consummation. It is particularly useful against killer acquisitions, as their effects become demonstrable only after a certain period of time. One fundamental concern with ex-post assessment of killer acquisitions pertains to the necessity of adding to the CCI’s pre-existing ex-post review powers in cases that involve the abuse of dominance and an appreciable adverse effect on competition (AAEC). It is important that deals are categorically recognised as killer acquisitions, as they involve newer theories of harm such as the nascent competitor theory. The effects of a killer acquisition unravel insidiously and consumer welfare will be adversely affected if the authorities do not identify and investigate it until there is clear proof of an AAEC.
The framework for scrutinizing the effects of a nascent acquisition need not be substantively different from any other horizontal acquisition. The most crucial aspect to consider is the incumbent’s ability and incentive to raise prices and/or reduce the innovation or quality. Consequently, the focus of the assessment should be on the current and future substitutability of the existing products of the acquired entity. If the acquired entity’s current or potential products are not substitutable in the market, or they overlap with those of the acquiring entity, then the probability of the transaction being a killer acquisition is considerably higher. Particular attention must be paid to the acquisition of disruptive competitors and potentially disruptive entities. According to the Furman review (pages 96-97), the likelihood of a killer acquisition is inversely proportional to the existing degree of competition in the relevant markets. Therefore, ex-post assessment must be given more importance in already uncompetitive markets.
Besides the above framework, it would also be relevant to consider the Norwegian model wherein the competition authorities maintain a list of large companies that are required to inform the authorities of their acquisitions and activities. This is an efficient model as it reduces the burden on the agencies to identify killer acquisitions. However, it is essential to ensure that it is not a vexatious process for the firms.
Need for Legislative Reform in India
Section 20(1) of the Competition Act, 2002 empowers the CCI to evaluate ‘combinations’ within one year after they have been effectuated. ‘Combinations’ have been defined in section 5 of the Act. Section 5 exempts agreements in which the target entity’s assets/turnovers are below certain thresholds from being notified to the CCI. Thus, the CCI is rendered toothless against killer acquisitions, as they fall within the threshold limits.
To address this issue, section 20(1) ought to be widened to include non-notifiable and exempt combinations. This can be done by adding a proviso to the exemption clause under section 5, stating it to be inapplicable if the CCI reasonably suspects a killer acquisition to have taken place. However, what constitutes a reasonable suspicion must be clearly defined by the authorities to prevent arbitrariness. Reasonable suspicion can be based on the factors such as the incumbent’s ability and incentive to raise prices and/or reduce the innovation or quality.
Section 20(1) states that the ex-post assessment must be carried out within one year. However, such a time period may not be enough to gauge the effects of a killer acquisition. If the time frame is too short, there may not be adequate data to estimate the market effects of the acquisition. On the other hand, in case of a longer time frame, the impact of the merger on the market and consumer welfare can be more challenging to identify because other events, independent of the acquisition, could have taken place that may have significantly altered the market conditions. Moreover, substantive damage would already have been done owing to the killer acquisition.
It is worth noting that different jurisdictions across the world use varying time limits for ex-post assessment. The US is the only jurisdiction where there is no statutory time limit. In the UK, the intervention must be within four months, while in Canada and Mexico the review or request for notification must be made within one year of the merger.
A flexible timeframe may create uncertainties for businesses as they face the threat of being scrutinised at any point of time after the merger. However, the authorities may provide a comprehensive framework explaining circumstances under which the need for ex-post assessment will arise and the relevant procedure for effecting the same. Business entities can factor that into their decision-making, thereby reducing any uncertainty. Thus, it would be beneficial to increase the one-year timeframe under section 20(1), provided that the CCI formulates an efficient framework for an ex-post assessment.
This post does not suggest that ex-post assessments should replace threshold requirements. In fact, the threshold requirements are pivotal in addressing acquisitions that are prima facie anti-competitive. An efficient threshold notification system will facilitate ex-post assessments by reducing the number of acquisitions that require ex-post review, making it easier for CCI to focus on assessing fewer acquisitions.
The post, instead, suggests that competition authorities must acknowledge the evasive nature of killer acquisitions in the context of threshold requirements and conscientiously employ ex-post assessment to identify and regulate them. However, there is an imminent need for further research on the nature of ex-post assessment and legislative reforms to the Competition Act, 2002, in order to adopt an efficient and streamlined ex-post assessment framework.
– Vishnu Bandarupalli