How does competition law work?
The Competition and Markets Authority (CMA), which was
formed in 2013 from the merger of the Office of Fair Trading
and the Competition Commission, is the body in charge of UK
competition law enforcement. It is tasked with ensuring that a
merger doesn’t substantially lessen competition
(the SLC test): its evaluation looks at the consequences of a
merger and if actual and potential competition is reduced if it
"Determining the likely future impact of
merging two centres of innovation is a bit of a crystal
ball exercise," said Ashurst partner Nigel Parr. "You have to look at what kind of
evidence the regulator is using to intervene on the
basis of what might happen in the future."
The EU Merger Regulation sets out a test for concentrations
that have an 'EU dimension’ which is applied in a
broadly similar way – it relies on a test establishing
a significant impediment to effective competition.
Competition law enforcement is sector neutral although under
the UK’s merger control rules contained in the
Enterprise Act 2002, public interest can directly or indirectly
play a part. Considerations arising from national security,
media plurality and accuracy, and financial system stability
can be used to determine if a merger goes through or not.
Why are we talking about the technology sector
Last year saw $613 billion in technology M&A globally,
slightly down on 2015 which hosted $691 billion worth of deals.
This year so far looks set to continue the dynamic trend.
Some of the largest deals in value are in the technology
sector, as incumbent players use M&A as a tool to scale
operations, buy new expertise (cloud, data analytics, mobile or
fintech for instance) or to grow market share.
"EU and US rules
haven’t come up with a precise definition
of innovation, which complicates matters further"
As such, the sector has attracted increased scrutiny because
of the level of consolidation taking place, both in the UK and
globally. This has not translated into a special technology
merger statute but the SLC test will take into account some
elements specific to these types of takeovers, as they can more
often than not involve new or fast-growing markets.
"There are issues that are particularly
important to technology deals that need to be addressed,"
said Linklaters partner Christian Ahlborn. "But
these call for a different methodology when reviewing deals,
not for a rule change."
What does this mean in practice?
There are certain things that regulators will pay close
attention to when reviewing proposed technology
These are, for example:
- The ownership of data: even if a company is data rich but
has not monetised it yet, this resource could be important
for competition going forward.
- The effect of the proposed merger on future innovation:
even if the product isn’t on the market today,
what’s its pipeline of products/services like?
Will access to and distribution of it be affected? Will the
combination reduce competition and innovation in the market
"The fundamental problem is how to
approach innovation competition," says Ahlborn.
"Economists are good at assessing static competition
and the impact of a transaction on prices, but not so good
at evaluating the impact of a deal on
It’s important to note that EU and US rules
haven’t come up with a precise definition of
innovation competition, which complicates matters further.
However, the introduction of the concept makes sense,
especially when it comes to horizontal combinations (mergers
between companies operating in the same space).
In 2016, the Commission vetoed the proposed takeover of O2
by Hutchinson in part because it would have 'hampered
innovation and the development of network infrastructure in the
UK’. In the Novartis/GSK Oncology Business
deal, the Commission expressed concerns that existing and
pipeline products for the treatment of different types of
cancer could potentially be affected.
Disruption to innovation, as a theory of harm, could prove
to be a useful tool to address concerns that
aren’t covered by the static criteria of turnover
and market share. But it’s an uncertain exercise,
especially as regulators are looking at the prospective future
"It's also necessary to consider the prospective time period
within which the assessment is being made – most
regulators are rightly cautious about speculating
about what could happen in five years' time," says
Ahlborn agrees: "Authorities will get better at identifying
innovation harm the more they look at individual
Why are thresholds relevant?
EU Commissioner Margrethe Vestager noted in an April 2016
speech that the Commission was
considering looking into notification thresholds again to
enable it to examine the acquisition of companies with 'a lot
of good ideas but not yet much in the way of
sales’. It is taking a similar approach to its US
counterparts, the Department of Justice and the Federal Trade
The UK CMA’s
overarching goal is to ensure that proposed significant mergers
– those where the target has a turnover over £70
million ($93 million), and the combined firms will have more
than a 25% market share – do not negatively affect
consumer welfare by, for instance, impacting prices, or
restricting or preventing access to products and services
(so-called PQRS (price, quality, range and service)
Thresholds are different depending on jurisdictions: German
law specifies that the domestic turnover of one undertaking has
to be over €25 million ($29.4 million) and Indian rules
also include the turnover of the seller in the calculation. The
US relies on a size-of-transaction threshold (in excess of
$80.8 million) and a size-of-person one, which is associated
with minimum net sales or total asset levels.
EU-level merger control relies on yet another set of
different thresholds. For instance, concentrations will have to
be notified to the European Commission if they each of at least
two of the undertakings in question have EU-wide turnover of
€250 million ($294 million).
One problem that arises in the technology space –
though this is an issue that can happen in any sector
– is when the acquisition target is small and has a
turnover lower than the minimal threshold. Many technology
startups have little no sales to speak of, meaning they could
possibly slip through the oversight net.
That being said, sales aren’t necessarily a
good indicator of market presence when it comes to smaller
organisations. A small competitor may be a force to reckon with
because of its potential to disrupt the market in the future
– via innovation, technological improvements, access
to key data or resources etc - even if current turnover at the
time it’s taken over is negligible.
If current turnover
isn’t necessarily the right criteria in technology
deals, what is?
That’s open to debate. If a future turnover
criterion is used, the risk is that a number of companies that
have no business being reviewed may be caught in the
Other elements such as a target’s intellectual
property (patents for instance) or future product pipeline
could be used in the merger control process. It all comes back
to innovation ultimately (see question 3).
What about national security concerns?
Regulators in the UK, US, China and Germany have been paying
closer attention to proposed combinations that may pose a
threat to national security. The transfer of sensitive national
technology to a foreign company is a problem that these
regulators want to prevent from happening.
"When it comes to the hi-tech industry, under the
current UK merger rules, a desire by the government
to intervene in an acquisition on public interest grounds has
to relate to possible national security implications" said
Republican US senator John Cormyn told attendees at an event
in June that China was looking to 'weaponise’
investment – including via an aggressive international
M&A strategy – to get ahead of the US when it
comes to key technology. The acquisition of a majority stake in
German robotics technology company Kuka by Chinese electrical
appliance maker Midea also set regulatory alarm bells ringing
"It’s a completely different ball game here,"
said Ahlborn. "The underlying issue is often loss of
control, not of competition, so there
is a much wider range of
Commission president Jean-Claude Juncker announced
in his State of the Union speech in September a draft
regulation to streamline foreign direct investment into the
This would not create an EU-level oversight mechanism for
foreign acquirers targeting the EU but would harmonise existing
standards, after calls from a number of member states to
toughen the EU’s stance on FDI to match the US and
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