Talk of a new European Commission (EC) filing threshold based on transaction value has faced early pushback from industry and lawyers, warning it would muddy today’s bright-line tests and add to today’s web of merger approval processes.
The EU’s antitrust commissioner is mulling the changes to complement today’s turnover threshold, which failed to capture Facebook’s $19 billion takeover of WhatsApp because the target’s European revenue was not high enough.It follows Germany’s move to introduce a value threshold at the national level in light of research suggesting the turnover test is not broad enough to assess M&A involving online markets, because the business model is often based on non-monetised activities.
It’s laid the groundwork for a battle between policy and practicalities, with practitioners quick to point out problems posed by it not being a bright-line rule.
“It would be perverse if companies could, in effect, intentionally or unintentionally determine that a transaction was reportable because of the value they ascribed to it,” said Nick Levy, partner at Cleary Gottlieb Steen & Hamilton in Brussels.
Aside from the fact purchase prices are at parties’ discretion, there are other issues. For example, in global deals, would the value need to be apportioned to attribute a figure to the EU business?
However Dr Thomas Weck, the lead analyst at Germany’s Monopolkommission which compiled the research on digital markets, contends that relying solely on a turnover test is counterintuitive in that it doesn’t look at the target’s earnings potential.
“In these cases the buyer basically acquires the prospect of generating turnover. These aren’t caught by today’s thresholds because they look back, being based on turnover that has been generated already. But merger control doesn’t look back, it looks forward,” he told IFLR.
This isn’t unique to digital markets; it can be a problem when acquiring patent portfolios, too.
- A report by Germany’s Monopolies Commission has sparked its government to consider introducing a filing threshold based on purchase price;
- Comments by EU antitrust commissioner Vestager suggests she is mulling a similar move;
- Today both Germany and the EC rely on turnover thresholds, but critics say the test fails to capture online, platform-based business models which gain their value from non-monetised activities, but tend towards consolidation which reduces consumer choice;
- The best example of the problem is Facebook’s $19 billion merger with WhatsApp in 2014 which didn’t need to be notified to the EC because the target’s European revenue was so small;
- The start-up industry has hit out at the proposals, and lawyers warn a value-based threshold is fraught with difficulties as it’s not a bright-line test.
But principles aside, a subjective filing threshold could undermine the certainty provided by today’s regime. According to Levy, the value of straightforward, certain and bright-line revenue-based thresholds is one of the strengths of the EU Merger Regulation.
“That has, over time, become even more appreciated given the explosion of merger control rules around the world over the past 25 years, and the adoption in many jurisdictions of thresholds based on alternative criteria,” he said.
When working on global deals, an EU value-based test would be another headache on top of duplicative procedures and some countries’ poorly-crafted filing thresholds.
"The value of straightforward, certain and bright-line revenue-based thresholds is one of EU merger control's strengths"
But the alternative to a forward-looking test could be the prospect of a deal being broken-up after the fact. This occurs in the US, and while Germany’s Federal Cartel Office has never followed suit, it’s empowered to do so under market abuse rules.
It’s not clear if the start-up community, which has opposed a value-based test on the grounds that it harms Germany as a start-up hub, is attune to this.
“The alternative wouldn’t be no control, it would be ex-post control under the abuse rules,” said Weck. “We aren’t really sure if everyone in the industry understands that, either way, they can’t evade control altogether.”
Another EC bite at the cherry
A major amendment to Germany’s competition act is underway, and a value-based test is tipped to feature in the first draft which is expected next month.
“The Ministry [of Economy] has hinted that the notification issue will be taken up in this proposal, and that that there will be a proposition in the proposal that will go into parliament for debate,” he said.
The Monopolkommission has recommended two criteria: price of at least €500 million ($570 million), and one or more parties having turnover to-date in Germany of at least €25 million. The €500 million figure mirrors today’s turnover test as, theoretically, the price being paid is based on anticipated future revenues.
In the EU, any proposal could face more of an uphill battle. It would be the second attempt to tinker with the turnover-based rules. And the first – a proposal to expand merger review to certain non-controlling minority shareholdings – has faced serious industry opposition.
“The burden rests on the Commission to show that the EU Merger Regulation’s jurisdictional ambit needs expanding because transactions that should be reviewed are not reportable. And then, to create a test that allows companies to determine in a straightforward way whether or not they meet the applicable thresholds,” said Levy.
The digitalisation dilemma
While Facebook/WhatsApp is the most oft-cited reason why turnover tests are inadequate, it’s just one example of problems posed by businesses with platform features.
"Whenever a transaction is a certain size, it must be possible to assess whether it significantly impedes effective competition"
Many online markets create value by hosting multiple platforms and facilitating exchanges between their different members. However, this usually means one platform offers products or access for free (generally to consumers) while another caters for advertisers, for example, which generates the business’s revenue.
Non-paying platforms form the basis of many internet companies’ success. The more users or consumers, the more advertisers the business is able to attract. Yet under today’s merger control rules, deals are being assessed on arguably the least important sides of the business.
What’s more, the augmenting affect of platforms means digital markets have a tendency towards consolidation.
That’s two reasons why proponents are calling for revisions, all the while stressing the difference between a filing and non-approval.
“Applying the merger control rules does not necessarily mean that transactions involving platforms have to be blocked,” said Weck.
“However, whenever a transaction is a certain size, it must be possible to assess whether that transaction – as such – significantly impedes effective competition,” he said. “Regarding this issue, competition agencies must be able to step in.”
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