As regulators around the world tighten their scrutiny of killer acquisitions, the challenge is to strike a balance between competition and continuous innovation.
Killer acquisitions are a major concern for competition authorities, particularly in the rapidly evolving digital and pharmaceutical markets. The term refers to situations in which market-dominant companies acquire smaller, innovative companies with the intention of eliminating their competing projects or products, thereby eliminating competition and maintaining their market dominance. While this approach is strategic for the acquiring company, it can stifle innovation, limit consumer choice and hinder competition.
In India, the Ministry of Corporate Affairs has recognised the need to address killer acquisitions, particularly under the proposed Digital Competition Policy Bill. The bill provides for ex-ante rules requiring digital companies to notify the Competition Commission of India (CCI) if they meet certain criteria that qualify them as systemically important digital companies. Due to their market influence, such companies are under scrutiny to prevent practices that could harm competition, including killer acquisitions.
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The Digital Competition Act
The bill initially exempted mergers and acquisitions from its ex-ante obligations and instead proposed to regulate killer acquisitions through the Competition Act. The Competition Amendment Bill, 2023 introduces a transaction value threshold, requiring any transaction above Rs 2,000 crore to be reported to the CCI if the target company has significant operations in India. This move is aimed at snagging high-profile deals in asset-light sectors such as digital markets, which have so far evaded scrutiny due to their business models.
The regulatory shift towards transaction value thresholds is a significant development and reflects a global trend to address the challenges posed by killer acquisitions. The implementation of this threshold will require clear guidelines from the CCI, particularly on calculation of transaction value and establishing India nexus for global transactions.
Increased controls in the US and EU
Globally, competition authorities in the US and European Union have also stepped up efforts to take a closer look at killer acquisitions. Regulators have expanded their powers to investigate a wider range of mergers and acquisitions, even those that fail to meet traditional reporting thresholds. For example, the US Federal Trade Commission (FTC) and the European Commission have begun to focus on the potential impact of acquisitions on innovation, particularly in fast-moving industries such as pharmaceuticals and technology.
One notable case that sparked this increased attention was the proposed acquisition of Grail, a developer of cancer screening tests, by biotech company Illumina. Although the deal did not meet the thresholds of the EU Merger Regulation, it was challenged by both US and EU regulators over concerns that it could hamper innovation in the genome-based diagnostics market. This case highlights the complexity of regulating killer acquisitions, where the intent and impact on innovation are not always immediately apparent.
Challenges in regulating killer acquisitions
Regulating killer acquisitions presents authorities with several challenges.
Recognize intent: One of the biggest hurdles is determining whether an acquisition is truly aimed at eliminating competition or whether it is a legitimate business strategy. While some acquisitions can result in the shutdown of innovative projects, for example, others, such as Google's acquisition of Waze, integrate the acquired company's technology into the parent company's offerings, potentially benefiting consumers.
Impact on innovation: Blocking acquisitions on the grounds of potential harm to innovation is a high-risk decision. Regulators must demonstrate that the acquisition is likely to hamper innovation, which often involves predicting future market developments – a difficult and speculative task.
Economic compromises: Regulatory intervention in mergers and acquisitions can have unintended consequences. For example, if regulators frequently block acquisitions, it can become difficult for start-ups to obtain funding and scale their innovations, as many of them rely on acquisitions by larger companies to access capital and resources.
Global consistency: As markets become increasingly global, inconsistent regulatory approaches across jurisdictions can create uncertainty for companies. Harmonizing standards and approaches to killer acquisitions across countries is critical to creating a predictable regulatory environment.
The innovation dilemma
While the intention behind regulating killer acquisitions is to preserve competition and encourage innovation, there is a risk that over-regulation could have the opposite effect. If market-dominant companies are prevented from acquiring smaller, innovative companies, these start-ups could struggle to commercialize their innovations due to a lack of funding or resources. This could slow down the pace of innovation and reduce the overall dynamism of the market.
In addition, acquisitions are often a viable exit strategy for start-ups because they provide entrepreneurs with incentives to innovate. Without the prospect of an acquisition, the motivation to develop disruptive technologies could decrease, especially in capital-intensive industries such as pharmaceuticals and technology.
Killer acquisitions pose a significant challenge as they must balance the need to protect competition and innovation with the risk of hampering economic growth. Recent changes to Indian competition law and global regulatory trends reflect an increasing awareness of the risks of these acquisitions. However, the success of these efforts will depend on clear guidelines, the ability to accurately predict market outcomes and global coordination of competition policy.
Ultimately, while regulating killer acquisitions is essential to preserve competition and innovation, it must be carefully balanced to avoid unintended consequences that could harm the very targets they are designed to protect. As the digital and pharmaceutical industries evolve, the regulatory frameworks that govern them must also adapt to ensure they are robust enough to meet the challenges of the future.
