In recent years, M&A activity for digital and technology assets has surged as companies look for the fastest way to build up their digital capabilities. In the context of this surge, the Australian Competition and Consumer Commission (ACCC) has recommended changes to Australia’s merger review framework as part of its Final Report on the Digital Platforms Inquiry. Although the recommendations would not result in a substantive change to the law, they represent a shift in the ACCC’s approach to acquisitions in the digital space towards greater scrutiny and more intervention even in speculative cases, focussed on potential competition. This shift in focus is likely to significantly impact whether and how businesses notify the ACCC of digital transactions, regardless of the target’s size; and this notification and engagement with the ACCC may impact execution risk and deal certainty, including both timing and outcome.
Recommendation 1: Merger law changes
The first recommendation in the ACCC’s Final Report is to amend the Competition and Consumer Act 2010 (Cth) to add the following as factors that must be considered when assessing whether a merger is anti-competitive:
- the likelihood that an acquisition would result in the removal of a potential competitor, and
- the nature and significance of assets, including data and technology, being acquired directly or through the body corporate.
Recommendation 2: Advance notice of acquisitions by large digital platforms
The ACCC also recommends that large digital platforms should agree to a notification protocol under which they would provide advance notice of any proposed acquisitions that would potentially impact competition in Australia. The protocols would cover the kinds of acquisition that would require notification, any minimum value thresholds, and the notification period.
The recommendation is aimed principally at Facebook and Google, though the ACCC says it may also apply to other large platforms. If the platforms do not commit to protocols of this kind, the ACCC will ask the Government to address the issue.
What issue does the ACCC want to address?
Features of the tech acquisition boom include that many target companies have had few (if any) customers, minimal turnover and low market shares at the time of acquisition. The value of these targets is instead highly based on their future potential earnings and their intellectual property including software, algorithms and, increasingly, user data. This trait reflects the dynamic nature of the markets in which these transactions occur: the products are often novel, there may be little historic data or precedent and the competitive landscape is subject to rapid change.
The dynamic nature of these acquisitions poses a challenge for competition regulators. The debate continues as to whether traditional modes of antitrust analysis are suited to fast-moving, data-rich markets, with zero price products. Where regulators have assessed these transactions, the issue of framing the counterfactual (ie. the world “without” the merger) has proven especially contentious, since it is often difficult to foresee what the transaction’s competitive effects will be, and how the target would have developed (if at all) absent the transaction proceeding. For example, Instagram has grown increasingly similar to Facebook since its acquisition by the social network, but it is not clear that it would have developed in the same direction under different ownership. Prior to its acquisition by Facebook, Instagram had only around 10 employees and was not monetizing its app by selling ads.
In 2019, the United Kingdom’s Competition and Markets Authority (CMA) commissioned an assessment of past merger decisions in digital markets, including the acquisitions of Instagram by Facebook, Waze by Google and The Book Depository by Amazon. It found that the competition authorities that cleared those transactions may have underestimated the likelihood that the target would provide a competitive constraint; the potential of the transaction to exclude other competitors; and the impact of the transaction on all relevant markets (and all sides of multi-sided markets). However, the CMA did not conclude that it would have reached different conclusions, only that it ought to have conducted more in-depth reviews.
The Final Report reflects the ACCC’s concern to address these and similar issues.
Given the evolving nature of digital and tech-related acquisitions, there are two key competition law concerns in the Final Report:
- Strategic acquisitions: the ACCC has focused on “strategic acquisitions”, which give the acquiring digital platform both advantages of scope (particularly in relation to the extent of user information collected) and reduced potential competition. A commonly cited strategic acquisition is Facebook’s US$715 million acquisition of Instagram in 2012. Facebook has now integrated Instagram into one of its key products, with a similar online advertising strategy, raising questions about the extent to which the acquisition may have removed a significant potential competitor or protected Facebook from competition from other market participants.
A subset of these strategic acquisitions is the “killer acquisition” concept that the Final Report borrows from other regulators. Killer acquisitions are where the strategic acquisition reduces potential competition to the acquiring digital platform specifically because the target is a smaller innovative company, and the acquiring platform discontinues the target’s innovative projects to eliminate future rivals. The Final Report highlights the UK Furman Report’s statistic of killer acquisitions representing over 6% of acquisitions in pharmaceuticals – a similarly innovation-heavy, competition-for-the-market industry as the digital platforms sector.
Whether “killer” or not, the possibility that the acquisition of a nascent target will be assessed as anti-competitive simply because that target could have become a significant future constraint on the acquiring platform is often a small – very small -- possibility.
- Combined data sets: the ACCC’s focus on how these transactions can combine sets of data between the target and the acquirer relates to its concern that competitors may not be able to match the scale or scope of those combined data sets, which then may have the effect of raising barriers to entry or foreclosing access to markets.
Although the Final Report acknowledges concerns from stakeholders that data is only one of the many assets that may be competitively significant and should not be given undue prominence, the ACCC has chosen to broaden the recommended factor to cover all assets (including data and technology), rather than removing it.
What do the proposed changes signal about the ACCC’s approach?
Recommendation 1 (merger law changes) does not have any substantive legal implications in that the ACCC is already able to consider the new factors it would introduce. Nevertheless, the recommendation reinforces the ACCC’s likely focus and direction with merger reviews going forward, which will have practical implications:
- The ACCC’s emphasis on potential competition between merging parties suggests it will take a more interventionist approach to “strategic acquisitions”. This may involve the ACCC advancing more speculative counterfactuals and a more “idealised” state of competition.
- The ACCC is alert to the competitive effects of big data, and – from a merger perspective – it will voice concerns where data is a necessary input into a production process or the delivery of a service; and where a merger is likely to prevent or reduce access to that data.
- This trend is consistent with the ACCC’s decision to oppose the proposed merger between TPG and Vodafone in May this year, on grounds that, absent the merger, TPG would have built its own mobile network and challenged the incumbent suppliers. The outcome of TPG/Vodafone’s court action will provide crucial guidance as to how much and what kind of evidence is required to establish credible “potential competition” arguments.
- Recommendation 1 is also consistent with the outcome of the ACCC’s 2018 review of Transurban’s acquisition of WestConnex. The ACCC cleared that transaction subject to undertakings requiring Transurban to publish important traffic data, which it found would otherwise have been a barrier to bidders looking to compete against Transurban for future toll road concessions.
Similarly, Recommendation 2 (advance notice of acquisitions) would not change the substantive merger test but would represent at least a partial departure from Australia’s current merger review processes, which do not include mandatory notification. However, in several sectors that the ACCC considers sensitive, the ACCC already expects notification of all proposed mergers. Recommendation 2 would simply codify and extend that commitment. The ACCC may be concerned that large digital platforms are assessing the competitive impact of their acquisitions using different criteria than the ACCC would use, preventing it from assessing acquisitions before they are completed.
The Furman Report recommended a change to the United Kingdom’s merger law that would require the CMA to weigh both the scale and the likelihood of pro-competitive and anti-competitive impacts, allowing it to prevent acquisitions that could have significant detriments even where that was not the most likely outcome – a “balance of harms” test. The ACCC has not recommended a similar change to the law, but it appears to be taking a comparable approach to its assessment of the likely lessening of competition arising from the acquisition of potential competitors, and signalling an intention to intervene at an early stage where it considers there may be an anti-competitive outcome.
Implications of the proposed changes
There are several interesting aspects to what Recommendations 1 and 2 realistically mean for tech businesses and the tech industry in Australia:
- The ACCC will scrutinise very closely any mergers involving a theory of potential competition in the digital sector, requiring compulsory disclosure of internal strategy documents and forecasts of the target, as well as documents going to the strategic rationale of the acquirer. Parties will need to factor this scrutiny into their deal timetables in a way that they may not have previously anticipated.
- The types of transactions that are to be subject to greater scrutiny are almost always part of a global deal. The ACCC’s focus cannot be ignored, as doing so brings greater uncertainty, cost and risk to the transaction. If the ACCC takes a hard line, particularly with the remedies it requires, it could result in messy outcomes. Structural remedies are likely to be unpalatable to merger parties. The whole point of these transactions is often to acquire a particular asset such as intellectual property which cannot meaningfully be separated. No one wants to be in a position where they are forced, by a regulator, to divest a newly acquired asset or a corresponding part of its own business. As such, merger parties may prefer behavioural remedies (eg. terms of access or commitments to act in certain ways). While the Westconnex case may reflect a new tolerance, historically the ACCC has not favoured behavioural undertakings. Negotiation of these terms can often be drawn out and, if they are contentious, the acquirer might carve out Australia, a small economy, from the deal or the service altogether. That would likely result in a reduced user experience for Australian consumers.
- Often the precise goal of digital startups is to be acquired by a large digital platform, as this spurs their growth and innovation. If target investors/founders suspect it will be harder to sell their interest to a major platform, the recommendation could inadvertently dampen competition and innovation at the margins, and discourage the development of local products and services in the digital space. Potential investors may be reluctant to invest where there is no clear exit strategy.
- In many cases, it is arguable that consumers will benefit more from a large platform acquiring an innovative target and rolling out the gains from that acquisition to its established billion-plus user base, rather than the very small chance that the target could reach these users by bringing about a “big bang” moment substantially transforming the industry. It will also often be unclear that the target could scale and further develop itself without the resources and support of the platform offering to acquire it.
- Finally, to the extent large platforms are willing to dedicate the resources to merger authorisation applications, there may be strong efficiencies arguments with these transactions that outweigh any competitive detriments. This is particularly the case with transactions where big data’s pro-competitive effects are at play, and where potential competitors are not precluded from developing or acquiring their own data at a similarly efficient scale.
Regardless of any drawbacks Recommendations 1 and 2 may have, acquiring companies (large digital platforms included) may decide that these are a small price to pay if the alternative is missing out on an innovative target. There would be an even smaller price if the alternative is being broken up, which the ACCC has decided not to recommend for the largest digital platforms. For now.
 See Lear, Ex-post Assessment of Merger Control Decisions in Digital Markets: Final Report, 9 May 2019.
 Digital Platforms Inquiry Final Report, p. 8.
 See J Furman et al, Report of the Digital Competition Expert Panel, unlocking digital competition, 13 March 2019, p. 49; cited in Digital Platforms Inquiry Final Report, p. 76.
 Furman Report, p.100.