Ensuring market dominance through killer acquisitions
The corporate game is a serious affair. 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.
What is the issue?
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.
What are ‘killer acquisitions’?
- 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).
- 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.
Role of Competition Commission of India –
- 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.
What is the issue?
- 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.
What can be done?
- 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.
Source – The Indian Express
QUESTION – A new culture of business by big players has been observed through which competitive new entrants are acquired by them to maintain their market dominance. Critically discuss the issue with such ‘killer acquisitions’ and suggest a way forward.