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Saturday, August 08, 2020

Ensuring market dominance through acquisitions

Existing limits on regulatory intervention allow larger firms to cement their market dominance by acquiring smaller firms.

Published: July 8, 2020 9:41:38 pm
The role of startups in the competitive assessment of markets has been limited as their presence is used for providing evidence that a relevant market is likely to become increasingly competitive.  (Illustration: C R Sasikumar)

Written by Sanjay K Pandey

The corporate game is a serious affair. It is about an instinctive survival approach. A miss and one is out of the market with no easy possibility of re-entry. The best not only remain in the race but also win it. New entrants with novel ideas and products find it hard to sustain and are easily gobbled up by the bigger players. In the realm of antitrust law, such a corporate strategy or practices have come to be known as killer acquisitions.

Globally, competition/antitrust authorities are grappling with issues where a dominant firm tries to remain perpetually dominant by following the banyan tree approach. We know that no sapling grows under a banyan tree, it keeps spreading through the trunk and roots forever. Applying a similar analogy to modern corporate strategy, the Columbia Law School professor Tim Wu, in his book The Master Switch: The Rise and Fall of Information Empires, has used “Kronos Effect”.

Wu explains the Kronos Effect as the effort undertaken by a dominant company to consume its potential successors in their infancy. Understanding this effect is critical to understanding the cycle, and for that matter, the history of information technology. It may sometimes seem that invention and technological advance are a natural and orderly process. But this is an illusion. Whatever technological reality we live with is the result of industrial competition. These battles are more decisive than those in which the dominant power attempts to co-opt the technologies that could destroy it — Goliath attempting to seize the slingshot.

No wonder, complexities are rising when it comes to an analysis by competition authorities concerning startup acquisitions. Many competition jurisdictions including India have a threshold system for competitive scrutiny, which means that any acquisition below a threshold goes without antitrust scrutiny. Does this mean that big competitors would mask their disadvantages with perceived advantages by gobbling up smaller firms below the threshold?

The role of startups in the competitive assessment of markets has been limited as their presence is used for providing evidence that a relevant market is likely to become increasingly competitive. All startup acquisitions may not be killer acquisitions, as some may enhance efficiency and improve symbiotic relations. The OECD attempted to define killer acquisitions as an acquisition of a nascent firm that triggered a loss of not only a competitive constraint but also a product (as when a retail acquisition results in a store closure). Thus, a theory of harm, which should be the sine qua non for ascertaining competition violation has to be first established. In the case of killer acquisitions, the theory of harm may be “loss of potential competition through the acquisition of a nascent firm”.

In the Indian scenario, the CCI does competition analysis of notifiable transactions. In absence of any residuary powers, the CCI cannot venture into competition assessment of non-notifiable acquisitions. The Competition Act, 2002, prescribes thresholds in terms of assets/turnover qualifying, of which a combination is considered as notifiable. The government has exempted notification of transactions wherein the target enterprise whose control, shares, voting rights or assets are being acquired has either relevant assets of a value of not more than Rs 350 crore ($50 Million) or relevant a turnover not more than Rs 1,000 Crore ($143 Million) in India. Given the exemption thresholds, many startups acquisitions will remain outside the purview of CCI.

The significant question is: What type of acquisitions would go away un-scrutinised? Disruptive innovations generally do not have many physical assets in the initial stage, though they hold potentials. Targeted acquisitions occurring in digital markets/new-age technology/e-commerce may not have a huge asset base or maybe offering services that are either free or generate insignificant turnover in the initial stages. These acquisitions derive their value from the data or some innovation/new idea/new technology. In the pharmaceutical space, the value of such acquisitions is stored in the potential demand of a new drug/medicine launched by the target, not in its physical assets.

The life of such startups is not very long before they are acquired and made to vanish. It is suggested that deal value thresholds could be an ideal remedy for such breakneck acquisitions and for restoring future competition. However, deal value may not be the panacea for killer acquisitions because value is inherently a subjective concept, and the value of acquiring a business may be higher than the valuation of the target on a standalone basis for reasons that are benign or pro-competitive.

In the Indian context, the Competition Law Review Committee (CLRC) in its report has deliberated on the challenges arising due to start-up acquisitions. The focus of these considerations in the CLRC report relates to the new age economy and digital markets. Although the CLRC report refers to digital markets/new age markets, such enabling provisions would probably allow CCI to analyse killer acquisitions in other sectors as well. Globally, various competition authorities are mulling over changes in legal frameworks to facilitate the use of different techniques for analysing such killer acquisitions.

The writer is adviser law and head advocacy division, Competition Commission of India. Views are personal

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