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Tech M&A: Regulation moving up the menu?

White & Case Technology Newsflash

CMA investigation into Amazon/Deliveroo and Paypal/iZettle deals highlights the regulator's increased interest in technology transactions.

 

The Deliveroo Order

Following Deliveroo's recent $575m investment round, led by Amazon, the UK's Competition and Market Authority (the "CMA") issued Amazon.com, Inc, Amazon.com NV, Amazon EU SARL (together, "Amazon") and Roofoods Ltd ("Deliveroo") with an initial enforcement order (an "IEO") under s.72 Enterprise Act 2002. IEOs can be issued where the CMA has reasonable grounds for suspecting that a completed transaction is reviewable under the UK's merger control rules and warrants further review.Once issued, IEOs prevent the parties from integrating their businesses while the CMA considers the implications of the transaction from a competition perspective. As a consequence of the financing round, the CMA stated that it had reasonable grounds to suspect that Amazon and Deliveroo had ceased to be (or were preparing to cease to be) distinct businesses – in other words that the investment will give Amazon at least "material influence" over Deliveroo.

Whilst the high-profile nature of these companies means that the investigation has attracted attention in the mainstream media, it is important to note that the issuance of an IEO is not unusual. IEOs are very common where the CMA finds that it has jurisdiction. However, the timing of the public announcement was significant. Only two days earlier, the CMA had issued a press release detailing its new digital markets strategy, which was launched following a robust examination of the regulator's approach to the digital economy. Technology transactions and concentrations in the digital market are a key focus of the CMA under Lord Andrew Tyrie, the recently-appointed chair of the CMA, and it is in this wider context that the Amazon and Deliveroo IEO gains additional significance.

 

An Analogue CMA in the Digital Age

It is widely accepted that technology moves faster than regulation. The accelerated pace of innovation, fuelled by investment from financiers seeking to deploy record amounts of dry powder, has resulted in a number of challenges to regulatory bodies. In August 2018, the Department for Business, Energy and Industrial Strategy requested that the CMA examine its current legislative and institutional inventory, and determine which areas needed reform in order to continue to deliver effective enforcement. The CMA subsequently issued its letter of preliminary advice in February 2019 (the "Letter"). Whilst expressing the view that the CMA remains broadly effective, the Letter reported that the UK had "an analogue system of competition in a digital age", with a complex and impenetrable legislative framework that is ill-equipped to handle fast-moving markets. It concluded that the increasing digitalisation of the economy called for a nimbler CMA, one which could intervene quickly to protect consumers and markets, whether through fundamental reform or focussed redevelopment of the current legal system.

This view was shared by the findings of the Report of the Digital Competition Expert Panel (the "Furman Report"), which was published in March 2019. The Furman Report emphasised the importance of competition law to the UK's start-up ecosystem and digital markets, and its role in promoting the UK as a jurisdiction of choice for fast growth enterprises. In order to provide adequate protections for consumers and encourage competition, the report recommended a refreshing of existing competition law to reflect the dynamic nature of the technology sector. In particular, the Furman Report noted that enterprises in the digital economy often created concentrations, and used data accumulation to create barriers to entry. Significantly, it also highlighted the concept of "killer acquisitions" (i.e. situations where large companies buy smaller or potential rivals before they can become more effective competitors – see below) as a key area of concern.

 

Competition Killer

The Furman Report describes a killer acquisition as one where a large incumbent acquires a small, innovative company, with the purpose of removing them from the market. Whilst data on technology M&A is limited, the Furman Report highlighted evidence from a study into the pharmaceutical industry, which estimated that more than 6% of annual acquisitions in that sector were designed to eliminate a smaller competitor. The Furman Report argued that whilst there was evidence that a high value acquisition by a large technology company represented a major incentive for start-ups and their investors, such transactions may create a distorting effect on innovation and reduce competitiveness. 
The CMA has recently considered this concept in a phase 2 merger inquiry into PayPal Holdings, Inc.'s acquisition of iZettle AB (the "iZettle Inquiry"). Particular attention was paid in this case to Paypal's valuation of iZettle at $2.2bn – a figure which was double that of the proposed valuation of the company only nine days earlier, when it had announced its intention to list on NASDAQ Stockholm. Whilst Paypal was eventually cleared by the CMA, the iZettle Inquiry is indicative of the tenor of the regulator's new approach to technology transactions. The Paypal case also highlights that the CMA will take decisions based on facts and the likely development of the market, so not all acquisitions by large tech companies will face regulatory intervention – and that decision is encouraging and to be welcomed.

 

What This Means for Technology M&A

The recent investigations into the methodologies and powers of the CMA have indicated the regulator's appetite for reform, and the iZettle Inquiry and the Amazon and Deliveroo IEO demonstrate a renewed focus on M&A activity in the technology sector – particularly in cases where large incumbents acquire smaller rivals. The killer acquisition concept could have a significant impact on exit strategies for investors and founders alike, and the Amazon and Deliveroo IEO demonstrates the CMA's willingness to examine minority investments in technology companies where it identifies potential competition issues. Whilst any potential changes to UK competition regime are some way off, the proposal of new investigative techniques, and enhanced scrutiny of acquisitions with unusually high valuations, will represent significant challenges to transactions in this sector, and will require careful evaluation by advisers and deal teams in order to successfully navigate a landscape of increased regulatory oversight.

 

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