The acquisition of start-ups by dominant incumbents looking to pre-empt the emergence of rival products – known as “killer acquisitions” – has caused concern and much discussion amongst competition enforcers around the world. OECD’s Chris Pike sets the scene for the 2021 OECD Competition Open Day discussions.
Start-ups play a vital role in competitive markets. They are a key source of new ideas and products, disruptive innovation and maverick business models. They help break up concentrated markets, force less efficient incumbents to improve or exit, and thus help deliver competitive markets that increase efficiency and reduce inequality. They are also particularly vulnerable both to exclusionary unilateral conduct and to the distortionary effects of rent-seeking by incumbents who may lobby for subsidies, anticompetitive regulation, or trade protection. Competition agencies are therefore often keen to ensure that start-ups enjoy a level playing field and the opportunity to compete on the merits without the threat of exclusionary behaviour from dominant incumbents. However, their relevance to merger control is often limited to their role as a potential new entrant, whose presence might allow agencies to clear otherwise worrying merger transactions.
This all changed in 2018 when researchers identified that large incumbents in pharmaceutical markets were acquiring start-ups, but not adopting and developing the acquired product, as had been assumed, but instead neglecting and discontinuing the development of the product. These were labelled ‘killer acquisitions’ and it soon became clear that these were quite carefully organised to keep them off the radar of enforcers. In the wake of these revelations, it was quickly identified that thousands of start-up acquisitions were also taking place in markets involving digital platforms, and that like the pharmaceutical cases these were rarely ever examined in depth by competition agencies. However, in some of the most controversial cases the concern was not a straight killer acquisition theory of harm. Instead, the concern was perhaps better described as a reverse killer acquisitions theory of harm (since it was the incumbent’s product who’s development was shutdown or mothballed), or simply as a loss of potential competition that reduced the value of the product offered, rather than killing it off.
As the OECD’s report on Start-ups, killer acquisitions and merger control sets out, some agencies used the flexibility of their merger review system to immediately increase their examining of such acquisitions (e.g. using ex-post assessment when allowed in their legal system or share-based thresholds), while others moved to change notification processes to plug the gap (for example Germany and Austria). Certainly, some agencies have always scrutinised start-up acquisitions that meet the relevant thresholds, particularly in highly regulated pharmaceutical markets where agencies have been able to use the regulatory approvals process to gain confidence in their ability to identify uncertain harms. For example, Oldale, Sayyed & Sweeting, (forthcoming) note that the US FTC challenged 81 mergers on potential competition grounds over 25 years. However, without the comfort provided by such structured product pipelines, many have been reluctant to take any action in the face of the uncertainty that is endemic in cases involving a loss of potential competition.
It therefore seems clear that fewer anticompetitive acquisitions of start-ups will entirely evade scrutiny in future. However, it remains the case that in dynamic and uncertain markets, successfully challenging the acquisition of innovators on the basis of potential competition, whether that ultimately results in ‘a killing’ or not, is incredibly difficult, and this introduces an under-enforcement bias. This has led to increasing calls for a rethink of merger control to make sure it can function effectively in dynamic and uncertain markets. These include proposals:
- To create a ‘balance of harms’ test that can block or remedy ‘low likelihood – high detriment mergers (Furman report, 2019, Stigler centre report, 2019, Crémer, 2020, Pecman et al, 2020, and Motta & Peitz, 2020);
- To assess some start-up acquisitions as exclusionary conduct (US FTC, 2020)
- To introduce a rebuttable presumption in relation to dominant or a specified subset of firms (Valletti, 2018, Stigler centre report, 2019, Cremer report, 2019, Motta & Peitz, 2020, US House of Representatives Subcommittee on Antitrust, 2020);
- To lower the evidentiary standards that agencies face; or
- To introduce a burden-shifting framework that maintains existing evidentiary standards but allocates the burden of proof to different parties depending on the stage of the process (Caro de Sousa & Pike, 2020).
Faced with this, some have called instead to maintain a policy of precautionary inaction, arguing that such acquisitions provide incentives and funding for innovation. However, making it more difficult for dominant incumbents to acquire start-ups would still allow others the chance to do so, and would also remove the distortion that focuses a start-up’s incentives on those innovations that are most valued by the incumbent rather than those that are valued by consumers. Furthermore, many of these claimed efficiencies will not be merger specific and hence will not be relevant within the context of a case. For example, ‘free’ interoperability is not a synergy that could not be achieved absent a merger. Equally, minimising exit barriers or providing funds for serial innovators do not benefit those consumers that might stand to be adversely effected by the merger. Similarly, while such effects might conceivably benefit future consumers of other unknown future products, this remains unclear, and Zingales et al and others have argued that a hands-off approach to start-up acquisitions has had precisely the opposite effect and instead damaged incentives to innovate.
In this context, as evidence of growing market power across the economy has accumulated, and ex-post assessments point towards mistakes made in past cases, many have adopted the view that – whether or not competition policy is a key driver of growing market power – it is now uncontroversial that there has been under-enforcement in relation to start-up acquisitions. As such, the case for a rethink is becoming stronger, and the question is becoming less about whether things should change, and more about how they should change. The OECD Open Day will therefore host a start-studded panel to tackle these questions on the 24 February 2021. Please follow the LinkedIn event for more information and join us for the discussion.
2021 OECD Competition Open Day Blog Series