Simply buying up rival companies and closing them down is one technique to do away with rivalry in business. Because of this, consumers have fewer options, and occasionally creative and, in the case of the pharmaceutical sector, even life-saving items are lost. However, as a result of a recent increase in the authority of competition authorities, such “killer acquisitions” are expected to be subject to further scrutiny in the US and EU.
The European Commission now has more power to look at a wider variety of mergers and acquisitions thanks to a judgement rendered by the European Court of Justice in July 2022. (M&A). Additionally, the US Federal Trade Commission (FTC) altered its standards for reviewing particular contract types last year.
Historically, these authorities have only had the authority to review specific sizes of corporate transactions, typically those between prospective direct competitors. They will be able to scrutinise practically any transaction thanks to these recent judgements. Regulators must traverse a world of expensive and hazardous expenditures in research and development, however, when using these new powers in fast-moving industries like medicine or technology. Regulators have a very tough time predicting a game-changing merger or acquisition before it occurs, and many M&A transactions can actually help consumers. Therefore, labelling something incorrect might potentially hinder innovation and prevent new goods from entering the market.
Regulators in the US and EU have the same concern: if established companies are permitted to acquire start-ups, this might have an influence on innovation and market concentration, depriving consumers of the advantages of cutting-edge goods and technology. The FTC stated in its introduction of its new strategy that “many decades” of economic consolidation had been accompanied by a “lessening of competition, reflected in increased mark-ups and falling wages.”
This opinion is supported by research. Similar to this, EU authorities want the ability to look at and perhaps stop any deals they think would harm consumers.
Killer acquisitions are one of the main worries of competition authorities when they strive to guarantee that large companies purchasing tiny inventive enterprises don’t hamper or even eliminate innovation. The dominant corporation in such a merger seeks to eliminate a prospective rival to its own business, even if doing so prevents patients from ever benefiting from new medicines, as explained in a significant economic study on the pharmaceutical sector.
The 2020 announcement by US biotech company Illumina of its ambitions to purchase Grail, a provider of early-detection cancer diagnostics, set off the current amendments to US and EU M&A inspection authorities. At the time, it seemed like this was the type of transaction that antitrust regulators would not closely examine.
The acquisition of Grail has no impact on Illumina’s exclusive position in the market because its product is not yet operational. The transaction did not even go above the €5 billion (£4.3 billion) threshold for combined global revenue set by the EU merger rules for the firms concerned.
Regulators in the US and the EU contested the merger, though, almost right away. Both parties made preparations to examine its possible effects on the market for genome-based diagnostics’ competitiveness and innovation.
Regulators are frequently worried about market concentration in circumstances like these. For instance, a powerful business like Illumina may make life tough for a start-up if it develops stronger diagnostic procedures in order to safeguard its most recent purchase.
The most severe example of this sort of purchase agreement, however, is a killer acquisition. According to research, just 6% of pharmaceutical acquisitions involve a big business buying a small one that has a potential new medicine in order to scrap the original initiative.
Dominant companies in digital markets are frequently suspected of using a similar tactic. Giphy is a database of animated GIFs that Facebook purchased in 2020 for US315 million (£262 million). Last year, the UK regulator ordered Facebook to sell Giphy out of concern that it was a killer acquisition designed to eliminate a prospective competition in the advertising industry. Giphy had not yet sold a single ad in the UK when Meta began its appeal against this ruling in April 2022. However, few IT mergers appear to fit the precise definition of a killer acquisition, much like the pharmaceutical industry. In reality, a frequent business model in the digital economy involves powerful corporations purchasing cutting-edge start-ups before they start making money.
2013 saw Waze pose a threat to Google Mapping, the industry leader in the provision of free online maps. But unlike what you might anticipate from a game-changing acquisition, Google did not close Waze when it bought it for US1.1 billion.
Instead, it preserved Waze as a niche product while integrating some of its cutting-edge features into Google Maps. Google was able to maintain its dominance and increase its user data revenue as a result.
In this instance, consumers gained from a superior Google Maps product, but since Waze is no longer in competition, it has less motivation to improve. In 2013, the FTC did not object to the transaction, but it is apparently considering doing so again today.
Big risk taken by regulators
Start-ups will need to function differently if regulators often deny such purchases. They will have to find new methods to make money, maybe by charging customers directly, rather than depending on an acquisition by a dominant competitor to pump resources into the business.
For instance, when Facebook acquired WhatsApp and Instagram for US19 billion and US1 billion, respectively, they had virtually no income. But being purchased by a bigger platform was advantageous for them. Although neither purchase was a game-changer, it did enhance market concentration.
Regulators are placing a significant wager by increasing scrutiny of acquisitions of creative, small businesses. They must show that a purchase genuinely hinders innovation, sometimes in highly technical sectors, in order to prevent it.
While analysts have been able to pinpoint killer deals after the fact, it is considerably more challenging to persuade a court that a deal is detrimental for customers at the time of the transaction. As a result, the stakes are high for regulators since a poor choice might have an impact on both the future of health and our digital lives.