Introduction

The term ‘Killer acquisition’ has been a new buzzword and occupies centre stage in the Global mergers and acquisition regulatory environment, especially in the Digital and Pharmaceutical industry. ‘Killer Acquisition’ commonly denotes the strategic move of a well-established corporation acquiring a smaller, innovative competitor with the main objective of leveraging its financial prowess to either shutter or significantly impede the progress of the competitor's product or technology. This practice resembles the concept of "nip in the bud” which may impede future competition in the market, as companies with the potential to emerge as robust while fair competitors are acquired in their nascent stages by the existing market leader in the course of executing killer acquisitions. In such circumstances, the regulation of such acquisitions becomes crucial to ensure a fair and competitive market landscape and to deter such concentrations from having a significant impact on the market conditions. Many Jurisdictions have attempted to assess and review the risk posed by such concentrations through their merger control systems.

India's digital economy is poised to experience a remarkable six-fold growth in the upcoming eight years, reaching $1 trillion by 2030, compared to the current figure of around $175 billion. Before 2023, India merely had a minimum asset/turnover threshold requirement for notification of a transaction to the CCI but there has been a change in this regime post the latest amendment to Section 5 of the Competition Act, through which Deal-value Threshold(DVT) has been adopted due to compelling needs in light of the exponential growth of acquisitions in digital industry. Competition law regimes globally are grappling with the challenge of solving this complex issue to ensure that transactions do not result in any "appreciable adverse,” “substantial” or “significant” impact detrimental to the competition. This blog delves deep into the problem of Killer Acquisitions and the newly introduced Deal-Value Threshold (“DVT”). Firstly, the meaning of Killer Acquisition and its impact on the market competition is exemplified. After this, I have decoded the current legal framework in various countries and how they tackle the problem of Killer Acquisitions. Then I critically analyse the newly introduced DVT and show certain important loopholes in the amendment that are required to be corrected. The last part of the blog suggests new measures and policy frameworks that may be adopted in India to keep in check the frequency of Killer acquisitions and promote innovation.

Killer Acquisitions, reasons and their impact

According to OECD, “Killer acquisition is a theory of harm and involves the acquisition of innovative start-ups by dominant firms that aim to eliminate or prevent the development of products or services that could threaten or cannibalize the acquiring firm’s core business or market position.”

In other words, the underlying purpose behind these transactions is to stifle pioneering firms with the aim of obtaining the high-potential emerging technology and essential personnel of the target company. A point of distinction is to be made between two types of acquisitions; the first, is a "killer acquisition," wherein a larger incumbent company purchases a smaller entity with the intent of terminating a particular product or project, and the second is an "acquisition to continue," aimed at expanding the acquiring company's portfolio of products and services.

The prominence of killer acquisitions in antitrust policy discussions and merger control has significantly increased since the publication of the seminal paper by Cunningham, Ederer, and Ma in 2021. The authors elucidate that in scenarios marked by patent overlapping of products, incumbent companies face dual incentives. One of them is the ‘efficiency effect’ which entails the acquisition and discontinuation of the entrepreneur's project for profit. Alternatively, acquisitions may also be pursued for their incremental profits, termed the ‘replacement effect’. A killer acquisition is highly probable when shutting down a project holds more value than bringing it to market, while an acquisition to continue occurs if the opposite is true. The authors demonstrate killer acquisitions with data from the pharmaceutical sector. They indicate that the likelihood of acquired drug projects being developed is lower when they coincide with the acquirer's current product portfolio, particularly when the acquirer has significant market power as a result of little competition or far-off patent expiration. They estimate that 5.3%–7.4% of acquisitions are killer acquisitions. The targeted companies are typically in their early stages of operation, lacking substantial turnover or a significant market presence that would trigger automatic notification requirements. Initially, adopting a narrow perspective may suggest some apparent advantages in the form of substantial rewards for innovation and technological progress. However, over the long term, the adverse and far-reaching effects on industry competition become evident, significantly hampering the organic dynamics of the market. The essence of the concern about killer acquisitions is that an incumbent firm may acquire potential, or ‘nascent’, products or competitors with the intention of ‘killing’ the competitive threat that they represent. The bottleneck also pertains to the potential monopolization of markets by certain platforms, thereby excluding prospective competitors. To protect and preserve market competition, merger control acts as a pivotal tool in competition law to address legitimate concerns arising out of ‘killer acquisition’. Merger control regimes are set up through regulatory authorities to prevent, a priori, the implementation of mergers that may distort competition or hinder the proper functioning of the internal market.

From FY 2015 to FY 2019, approximately 582 acquisitions were finalised within the Indian startup ecosystem. As per the CCI's E-commerce Study, a concentration of dominance is evident in various platform/intermediation services, with players such as Flipkart and Amazon in consumer goods, Make My Trip in accommodation, and Zomato and Swiggy in food services. Over the past decade, these five major companies have been involved in around 40 acquisitions or investments. Remarkably, out of this activity, only three transactions were officially reported to the Competition Commission of India (CCI). In recent times, many budding and innovative startup acquisitions despite being a threat to competition, have escaped the scrutiny of CCI as they fell below the jurisdictional threshold based on turnover and assets. The acquisition of Uber Eats by Zomato, Ola Cabs' acquisition of Taxi For Sure, Myntra's acquisition of Jabong.com, and the recent merger of PVR and Inox have gone ‘under the radar’. Insofar as this is a legitimate concern, merger control is the natural pillar of competition law to address.

Generally, two major gaps are flagged as the reason for under-enforcement of merger control which are (i) Jurisdictional Gap and (ii) Substantive Gap.

Indian Merger Control Regime- The Introduction of DVT

The Competition Commission of India (“CCI”) is the relevant regulatory authority reviewing mergers and acquisitions under the Competition Act 2002 (“Competition Act”). All Mergers, acquisitions, and amalgamations that require notification in terms of the Competition Act are referred to as combinations.

Before the amendment, the asset/turnover jurisdictional thresholds that required notification were as follows:

(i) Parties test- “the parties have combined assets in India of 20 billion rupees or combined turnover in India of 60 billion rupees; or the parties have combined worldwide assets of US$1 billion, including combined assets in India of 10 billion rupees or a combined worldwide turnover of US$3 billion, including a combined turnover in India of 30 billion rupees.”

(ii) Group test- “the group has assets in India of 80 billion rupees or a turnover in India of 240 billion rupees; or the group has worldwide assets of US$4 billion, including assets in India of 10 billion rupees or a worldwide turnover of US$12 billion, including a turnover in India of 30 billion rupees.”

In 2018, the Ministry of Corporate Affairs established the Competition Law Review Committee (CLRC) to scrutinize, and evaluate the enforcement of the Competition Act of 2002 and “recommend a robust competition regime”. On 26 July 2019, the CLRC submitted a comprehensive report highlighting issues revolving around the existing legislation, suggesting policy changes, and evaluating strategies for addressing challenges in contemporary markets, among other considerations. The report after due deliberations recommended the introduction of the 'Deal Value Threshold' (DVT) concept to adapt to the evolving digital market needs. Acting upon the recommendations provided by the CLRC, the legislature incorporated two new clauses into Section 5 of the 2002 Competition Act through Section 6 of the Competition (Amendment) Act, 2023. According to these clauses, mergers, acquisitions, and amalgamations necessitate notification to the Competition Commission of India (CCI) if:

"(i) the transaction's value exceeds two thousand crores rupees (approximately USD 267 million) and;

(ii) the target enterprise possesses 'Substantial Business Operations in India.'"

The ‘value of the transaction’ is an inclusive term that places undercover any form of consideration paid directly or indirectly. The Draft M&A Regulations also clarify that “if 10% of the target enterprise’s global user/subscriber/ customer base, gross merchandise value (GMV), or turnover in the past 12 months/last financial year is in India, the target would be deemed to have substantial business operations.”

Within the technology sector, foreign enterprises commonly establish development centres or other revenue-generating operations in India, acting as catalysts for their global operations. Despite the nominal on-paper market valuation of these operations, they can be considered as forming "substantial business operations" in India. The MCA also clarified during discussions with the Standing Committee that the DVT primarily targets digital and emerging markets. Importantly, the amendment's language does not limit the application of DVT to any specific industry. According to the CLRC's report, the amendment aimed to bring mergers/acquisitions within the purview of the CCI when they result in an ‘Appreciable Adverse Effect on Competition’ (AAEC) in the Indian market. This is crucial because such transactions might go unnoticed by the CCI due to not meeting the asset or turnover-based thresholds outlined in section 5 of the act. The implementation of a DVT for combinations is anticipated to include ‘killer acquisitions’ which are particularly common in digital industries. A notable example of the inception of this new threshold is the acquisition of WhatsApp by Facebook, valued at around US$19 billion in the US. However, since the Indian component of the deal fell below the asset and turnover thresholds stipulated under the Act at that time, the acquisition escaped scrutiny by the CCI, despite its significant impact on the digital market.

After extensive consultations with government departments, industry stakeholders, and the Competition Commission of India (CCI), the Parliamentary Standing Committee on Finance finalized its Fifty-Third Report titled "Anti-Competitive Practices by Big Tech Companies”.

The report outlines distinctive features of the digital economy, differentiating it from traditional markets as after some time a digital market turns into a ‘monopoly’ or an ‘oligopoly’ where only a few players dominate the market. Consequently, the Standing Committee recommended the establishment of a new regulatory framework alongside the existing Competition Act. The committee recommended the identification of ‘Systematically Important Digital Intermediaries’(“SIDIs”) by virtue of their market capitalizations, revenue and other criteria. The Committee suggested that SIDIs should, before carrying out any planned consolidation or entering into any agreement/announcing a public bid/acquiring a controlling interest, notify the CCI about such consolidation. This applies when the merging entities or the target company offer services in the digital sector or facilitate data collection, regardless of whether it meets the notification requirements of the CCI. The suggestions made align with the gatekeeper approach adopted in EU’s ‘Digital Markets Act’( “DMA”).

CROSS-BORDER JURISDICTIONAL ANALYSIS

EU regime and its approach

Before 2021, the European Commission was only empowered to review all the mergers/transactions that met the requisite jurisdictional turnover threshold. The EU’s Merger Regulation (EUMR) is the over-encompassing regulation which lays down the exclusive powers of the EC to probe, review, and deter the relevant transactions through an ‘ex-ante’ in a one-stop shop manner. As per Article 2, “concentration which would ‘significantly impede effective competition’ shall be declared incompatible with the common market.” Post 2021, this limited approach was revised and transformed through a non-legislative modification in the relevant guidance. Article 22 of EUMR provides that a combination can be referred for scrutiny to the EC if a transaction (i) affects trade between Member States and (ii) threatens to significantly affect competition in the Member State(s) making the request. This marked a drastic shift from the 2005 guidance on referrals which underscored the notion that referrals represent an exception to the standard rules, and their application should be judiciously restrained, given the paramount importance of upholding legal certainty associated with quantitative thresholds. This “referral mechanism” equips the member states to remedy any concentration that significantly affects the market dynamics and competition although it might have already been given a ‘green light’ under the jurisdictional criterion or was non-notifiable at that time. The Illumina/Grail Case gave judicial precedent which affirmed and applied the new approach for the first time to tackle killer acquisition.

A merger in Europe falls under the purview of the EC’s review jurisdiction if:

Combined Global Sales- The companies involved in the merger have total worldwide sales exceeding €5 billion. Individual European Sales- At least two of the companies involved in the merger each have sales within the European Union exceeding €250 million.

Most of the scholars are sceptical about the success of the wide-reaching and unfettered powers in the new regime as the legal impact of it will be the risk of ex-post control over the transaction and uncertainty. The ‘referral mechanism’ is then left at the discretion of the authorities and the acquirer would have to be overly cautious in finalizing the deal. On the other hand, it is also considered a heuristic technique to curb ‘killer acquisition’.’ In 2022, the EU enacted ‘European Commission's Digital Markets Act’ (“DMA”) which introduced a novel ‘gatekeeper approach’, where huge tech companies are labelled as ‘gatekeepers’ in the market after fulfilling some objective criteria listed in Article 3(1).

Gatekeeper status entails certain antitrust compliance obligations for large tech firms, aiming to proactively address unfair business practices. The gatekeepers are subject to additional merger control notification requirements where Article 14 of this act mandates notification of all concentrations where either of the parties provide “core platform services or any other services in the digital sector.

US

The primary source of merger control is outlined in Section 7 of the Clayton Act ( “CY Act”) along with the necessary minimum jurisdictional thresholds essential to activate the reporting mechanism of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, ("HSR Act”). Section 7 of the CY Act forbids transactions if "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." The enforcement of these anti-trust legislations is undertaken by the Federal Trade Commission (FTC) and the Department of Justice (DOJ). As per HSR, there are three tests that are used to determine an obligation of ex-ante notification. These are:

(i) ‘Commerce Test’

(ii) ‘Size of Transaction Test’

(iii) ‘Size of Person Test’

It is pertinent to note that a combination doesn't need to exceed a specific numerical threshold to undergo scrutiny. The authorities have the liberty to examine and possibly contest any transactions, even those completed or exempt from Hart-Scott-Rodino filing requirements.

In 2021, the ‘Platform Competition and Opportunity Act’ was introduced with the objective “to promote competition and economic opportunity in digital markets” and to outlaw acquisitions total or partial by ‘covered platforms’ of smaller technological entities. The PCOA establishes a precisely defined category of "covered platform" determined by criteria like sales, capitalization, and user thresholds. This designation targets specific platforms Amazon, Apple, Google, Meta, and Microsoft that consolidate their powers by indulging in ‘Killer Acquisition’. The PCOA is however criticised for disregarding “innovation-enhancing funding strategy” and disrupting the virtuous cycle of synergistic growth thereby causing unintended harm to the consumers.

UK

The primary authority for overseeing merger enforcement in the UK is the Competition and Markets Authority ("CMA"). Under Section 23 of the Enterprise Act, 2002, if two or more entities cease to be distinct and come under common ownership and control, the thresholds under the act come into play. Subsequently, for the Competition and Markets Authority (CMA) to initiate merger scrutiny, one of the following criteria must be met:

(i) Standard turnover test - “The UK turnover associated with the enterprise being acquired exceeds £70 million.”

(ii) Standard Share of supply test- The merger results in "a share of 25 per cent or more in the supply or consumption of goods or services of a particular description in the UK (or in a substantial part of the UK) is created or enhanced.”

In recent years, the ‘Share of Supply Test’ has proved to be both effective and beneficial in activating the review of combinations by CMA despite them not falling under the ambit of EUMR or the ‘National Competition Authorities' (NCAs) turnover thresholds. Instances include transactions such as Amazon/The Book Depository, Facebook/Instagram, Google/Waze, and Priceline/Kayak.

In April 2023, the UK Government introduced the Digital Markets, Competition and Consumers Bill (“DMCC Bill”) which is designed to bring novel jurisdictional criteria for assessing well-established businesses' purchases of emerging competitors that may strengthen position in their market. If it is passed, the threshold is satisfied when one party individually holds a share of supply of at least 33 per cent and possesses a UK turnover surpassing £350 million, provided the other party has a UK connection, such as a subsidiary or customer. Additionally, the Bill will grant the Digital Markets Unit of CMA, the authority to designate businesses as having "Strategic Market Status" (SMS). Companies with SMS will be subject to an obligatory filing requirement if they acquire at least 15% of a target with a UK nexus for a consideration of £25 million or more, in contrast to the voluntary merger control framework that applies to all other companies. The expansive powers granted to the regulator on account of the government’s commitment have stated that this threshold is intended to capture vertical and conglomerate mergers which were not adequately covered by the previous tests. The CMA faces the challenge of translating the expansive goals for digital markets outlined in the DMCC into precise and proportionate interventions, ensuring that it does not inadvertently undermine the interests of UK consumers or broader economic outcomes.

Critical Analysis of DVT and its efficacy

The DVT has been introduced in light of the under-enforcement gap present in the already existing anti-trust regulatory framework. It is triggered even if the transaction qualifies for a ‘de minimis’ exemption under the act. While the step is significant, as now the inclusion of DVT will expand the ‘radar’ of CCI to scrutinize potential ‘Killer Acquisitions’ and safeguard the embryonic enterprises from premature elimination, it is also essential at this juncture to analyse the efficacy of DVT on different fronts. Many countries including Germany, Austria etc. have already put in place Transaction value thresholds in their Anti-trust Regimes. However, uncertainty prevails to date and tangible benefits remain elusive. For example, in 2020 Germany revealed in writing to the OECD that (i) there was only a limited rise in additional notifications following the introduction of deal value thresholds; and (ii) as of 2020, the German Federal Cartel Office (FCO) had not yet adjudicated a crucial case notified based on the transaction value threshold. International experience indicates that a DVT has not resolved the intricate issue of killer acquisitions; instead, it has amplified the regulatory burden.

The OECD in its Secretarial Note on “Startups, Killer Acquisitions and Merger Control” has also suggested the effective utilisation of ex-post assessment as a complementary tool to curb the menace of killer acquisition. In essence, it entails the investigation of a combination after its consummation by the regulatory authority. The flipside of this review mechanism is that it toils with the pre-existing system which is certain and unnecessarily burdens the Stakeholders.

Even the CLRC report apparently lacks any empirical data and suggests not to play the ‘waiting game’. Additionally, in the digital sector, if the target firm is at their nascent stage and still progressing to gain a market foothold then these mergers would not meet the DVT. There might also be increased cases of ‘false negatives’ based on transaction value although there is no real likelihood of an AAEC. The application and calculations involved in DVT are also unclear and the CCI would be required to define words for bringing much-needed certainty and ease of doing business. For example inspiration for defining “ Substantial Business Operations” could be taken from the Joint Notification Guidance Paper published by the regulatory authorities of Austria and Germany on the value of the transaction and domestic nexus.

The CCI, unlike nations like China, Germany, Brazil, the USA, etc. does not possess ‘residuary powers’ or ‘ex-post assessment powers’ to review any combinations falling below the notifiable threshold. Canada, according to the current framework, has adopted a proactive approach where parties involved in a non-notifiable merger are not obliged to inform the Competition Bureau of Canada about their merger. Nevertheless, the Bureau possesses the authority to investigate such a merger within a one-year timeframe following its occurrence.

Recommendations and Way Forward

While the digital economy is set to experience a continued boom, fostering innovation requires robust competition. The emergence of global giants such as Amazon, Microsoft, Alphabet, and Apple (AAMAM) has put the anti-trust regulatory authorities in an alert mode to keep pace with time. It is globally accepted that regulatory authorities should be vested with sufficient powers to curb and mitigate anti-competitive activities in the economy. It is suggested that a cautious ex-post assessment framework may be employed by making relevant amendments under the act that clearly lay down some objective criteria that could lead to the initiation of such a review along with an adequate look-back period. The framework will arm the CCI to scrutinize any evasive transactions that go ‘under the radar’.

While fine-tuning the ‘jurisdictional gap’ may be considered as the first step but there is also a requirement of not losing sight of the ‘Substantive Gaps’. Even if the combination has met a minimum threshold for investigation and scrutiny by CCI, the qualitative requirement of the burden of proof and standard of ‘Appreciable Adverse Effect on competition’ needs to be met based on the balance of probabilities. The government could think along the lines of tweaking the standard to ‘balance of harms’ in light of the recommendations of the Furman Review. An obligation can also be put on the acquirer to demonstrate the pro-competitive aspects of its acquisition through a shift in the burden of proof in certain circumstances. This would enable the inclusion of a flexible approach that factors in even the scale of potential harm for some specific entities.