University of Amsterdam
International and European Law
European Competition Law and Regulation
Master Thesis
Killer Acquisitions in the Digital Sector
Should the EU introduce a supplementary transaction value threshold to the current merger review system to tackle the issue of Killer Acquisitions in the digital sector?
by
Julian Buhr
Date of Submission: 26.07.2019
Supervisor: Prof. Dr. Rein Wesseling
Student Number:12340413
Student E-Mail: j.buhr92@gmail.com
Abstract
In the opening speech of the European Commission’s 2019 conference on “Shaping competition policy in the era of digitalisation”, the current Commissioner for Competition Margrethe Vestager outlined that large tech-companies acquire small and innovative start-ups to kill innovation and future competition.1
This process is often compared to the so-called ‘Killer Acquisitions’ in the pharmaceutical sector and the potential anticompetitive conduct raised the concern of the European Commission. Moreover, it presents an issue of competence. The current European Merger review system is based purely on turnover thresholds. Therefore, transactions involving small and innovative start-ups which yet not create enough turnover to be caught under this threshold might escape European scrutiny. This circumstance led to the debate for a legislative update of the EUMR and the research question of this thesis: “Should the EU introduce a supplementary
transaction value threshold to the current merger review system to tackle the issue of Killer Acquisitions in the digital sector?”
To answer this question, this thesis investigates a twofold issue. The anticompetitive harm arising from ‘Killer Acquisitions’ in the digital sector and the demand for a supplementary transaction value threshold to close a potential enforcement gap within the EUMR.
The conducted analysis led to the finding that at the current state of research the European merger review system does not require a legislative update. Unlike in pharmaceutical ‘Killer Acquisitions’, digital innovation is rarely discontinued and rather integrated into an existing ecosystem. The research shows that a supplementary transaction value thresholds raises issues regarding legal certainty and misses a clear local nexus. Based on these issues, there is yet not enough concrete evidence for the existence of an enforcement gap which could justify the introduction of this threshold into the EUMR.
However, the Commission should still closely monitor the developments in the digital sector and consider amendments to the current merger review system when new evidence for the existence of an enforcement gap arises and future research about digital acquisitions indicate clear anticompetitive harm.
1Report by Global Competition Review,
Table of contents
ABSTRACT ... II
TABLE OF CONTENTS ... III
I. INTRODUCTION AND METHODOLOGY ... 4
1.INTRODUCTION ... 4
2.METHODOLOGY ... 5
II. THE CURRENT STATE OF EUROPEAN MERGER REVIEW ... 6
1.THE NATURE OF EUROPEAN MERGER CONTROL ... 6
2.THE CONCEPT OF A CONCENTRATION ... 7
3.COMMUNITY DIMENSION ... 7
4.CONCENTRATIONS WITH A COMMUNITY DIMENSION ... 9
5.EXTRATERRITORIALITY OF EUMERGER CONTROL ... 10
III. KILLER ACQUISITIONS IN COMPETITION LAW ... 10
1.INNOVATION AND COMPETITION LAW ... 11
2.PHARMACEUTICAL SECTOR ... 14
3.INTERIM CONCLUSION ... 15
IV. KILLER ACQUISITIONS ON THE DIGITAL MARKET ... 16
1.THE DIGITAL MARKET AND ITS CHARACTERISTICS ... 17
a) Returns to scale ... 17
b) Two-or multi-sided nature of online platforms ... 18
c) The role of data and data access ... 19
2.MERGERS WITH START-UPS –TYPICAL KILLER ACQUISITIONS? ... 20
3.THE JURISDICTIONAL PROBLEM OF EUMERGER CONTROL IN THE DIGITAL SECTOR ... 23
a) The low turnover but high transaction value of acquisitions in the digital sector ... 23
b) Case Study Facebook/Whatsapp merger ... 25
c) Interim Conclusion ... 27
VI. SHOULD THE EU INTRODUCE A TRANSACTION VALUE THRESHOLD? ... 28
1.THE GERMAN AMENDMENT ... 28
2. ISSUES FOR INTRODUCING AN EUROPEAN SUPPLEMENTARY TRANSACTION VALUE THRESHOLD ... 30
a) Legal certainty ... 30
b) Sufficient local and material nexus ... 32
3.RECOMMENDATIONS ... 34
V. CONCLUSION ... 36
I. Introduction and Methodology
1. Introduction
With the rise of the digital sector, new challenges have arisen for traditional competition law enforcement. Large tech companies such as Amazon, Facebook and Google changed the ways consumers interact with each other, find information online and purchase goods. One observation about these digital platforms is that all have been engaging in a significant number of corporate transactions.
In the past decade, Amazon, Facebook, Google and Microsoft combined, have acquired more than 400 target companies.2 One specific scenario has raised concerns of Competition Authorities and stakeholders; transactions involving young and innovative digital start-ups, which create little turnover but are highly valued. In the current European merger review system, turnover is the exclusive proxy for the competitive significance of a transaction. Consequently, mergers with low-turnover targets might escape European scrutiny and create an enforcement gap within European merger review.
In this regard, one particular case opened up a discussion about the effectiveness of the current European turnover threshold. In 2014 Facebook Inc. notified the European Commission about the intention to merge with the communication service provider WhatsApp. Despite the fact that two large market players in their respective fields were involved the merger did not constitute a community dimension due to the low turnover of WhatsApp in the previous financial year. However, as the case could be reviewed in at least three Member States the Commission gained jurisdiction by way of the referral system.
In the aftermath of this case, two Member States, Austria and Germany, introduced a supplementary transaction value threshold to close the possible enforcement gap and indicated that the Commission should follow suit.3
2Furman, J., Coyle, D., Fletcher, A., McAuley, D., Marsden, P., 2019, Unlocking digital competition. Report of the Digital Competition Expert Panel, page 99.
A catalyst in the debate of a possible enforcement gap is the comparison of tech acquisitions with digital start-ups to so-called ‘Killer Acquisitions’ in the pharmaceutical sector. In ‘Killer Acquisitions’, already established drug producers with market power acquire targets with overlapping innovative projects in the same category of drugs to discontinue the development of the innovative product after the transaction.4 Consequently, this process results in anticompetitive effects for the market and consumers as it decreases the innovation potential of a market and deprives consumers of innovative and possibly better products. In the digital sector, a similar concern exists when large companies acquire young an innovative start-ups to integrate them into the existing ecosystem.
Based on this concern, effective European competition enforcement and jurisdiction over tech acquisitions are essential to oversee developments in the digital sector.
2. Methodology
In light of the possible existence of an enforcement gap and the potential anticompetitive harm of transactions including digital start-ups, this thesis aims to analyse the effectiveness of the current European merger review system in the digital sector and evaluate a possible amendment by introducing a supplementary transaction value threshold. In consideration of this analysis and evaluation, this thesis will answer the following research question:
“Should the EU introduce a supplementary transaction value threshold to the current merger review system to tackle the issue of Killer Acquisitions in the digital sector?”
In order to answer this question, in Chapter II this thesis will explain the relevant norms of the current European merger review system. Chapter III primarily focuses on ‘Killer Acquisitions’ in the pharmaceutical sector by analysing the conduct and the effects on innovation. Chapter IV investigates whether the attributes of ‘Killer Acquisitions’ on pharmaceutical markets could be transferred to the digital sector with their special sector characteristics. Furthermore, this chapter examines the origin of the possible jurisdictional issue of European merger review at the basis of the Facebook/WhatsApp merger.
In a comparative approach Chapter V evaluates whether the criticism against the German introduction of a supplementary transaction value clause would equally apply to a hypothetical European transaction value threshold. The chapter concludes with a recommendation of whether an amendment of the current European merger review system may be justified and proportionate. Chapter VI presents the final outcome to the research question, and provides an outlook to when the perspective outlined in the discussion might change.
II. The Current State of European Merger Review
Mergers create relevant and lasting change in the European markets. To regulate uprising concerns for anticompetitive behaviour, the Council adopted the first European Merger Regulation (“EUMR”) in 1989 to regulate Mergers on a European level. After amending the Regulation in 1997 it was consolidated into a new regulation, Regulation 139/20045, which is now in force since 2004. This chapter aims to provide a general overview of the current merger review system and outlines the relevant norms for the further analysis.
1. The Nature of European Merger Control
The EUMR distinguishes between horizontal and non-horizontal mergers. Horizontal mergers contain undertakings as (potential) competitors whereas mergers between undertakings which are not in competition are considered non-horizontal, i.e. conglomerate mergers.
Horizontal mergers, in particular, have the effect of reducing the number of players on the respective market. This may raise devise obstacles for effective competition when the number of competitors pre-merger is already limited. Therefore, the merger can create an increase in market power of the merging parties allowing them to exploit and engage in anticompetitive behaviour with the effect of strengthening a dominant position. Non-horizontal mergers, on the other hand, are less likely to induce competitive harm.6 Vertical integration of complementary goods may even have pro-competitive efficiencies.7 However, the possible foreclosure of competitors remains a threat to effective competition. Consequently, the Commission assesses each case individually to distinguish pro-competitive from anticompetitive mergers.
5 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between
undertakings (the EC Merger Regulation).
6 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of
concentrations between undertakings, OJ, 18.10.2008 (2008/C 265/07), paragraph 13.
The European merger review system is based on a mandatory notification system.8 Therefore, undertakings concerned are required to notify the Commission about the intention of a possible transaction when two conditions are fulfilled. First, the transaction must constitute a concentration within Article 3 EUMR. Second, the concentration has a Community dimension as foreseen in Article 1 EUMR.
2. The concept of a concentration
The first condition for a transaction to fall under the scope of the EUMR, is based on its nature. The transaction must constitute a change of control on a lasting basis to qualify as a concentration.9 The concept of concentrations intends to only include operations to the scope of the EUMR which result in a lasting change in European markets.10 In this regard, Article 3 (1) EUMR distinguishes between two categories of transactions.
The first category includes mergers between two or more previously independent entities which cease to exist as separate legal entities after the merger.11 The second category catches transactions in which one undertaking alone, or more undertakings jointly acquire decisive influence over another undertaking.12 Therefore, the undertakings concerned are obligated to evaluate the nature of the transaction to assess whether it may require notification.
3. Community Dimension
The second condition for the transaction is the requirement of a Community dimension of the concentration.13 In compliance with the principle of subsidiarity, only concentrations with an appreciable effect on the Community market are reviewed by the Commission.14 Other concentrations remain within the jurisdiction of the Member States with the possibility of referral discussed later in this chapter.
8 Van Bael & Bellis, 2010, Competition Law of the European Community, page 643. 9 Article 3 EUMR.
10 Commission Information, 2008, Commission Consolidated Jurisdictional Notice under Council Regulation
(EC) No 139/2004 on the control of concentrations between undertakings, paragraph 7.
11 Ibid, paragraph 9. 12 Article 3 (1) (b) EUMR.
13 Recital 9 of Regulation 139/2004. 14 Recital 8 of Regulation 139/2004.
The EUMR provides guidance to determine whether a concentration has a Community dimension by laying out quantitative thresholds based solely on turnover calculations of the undertakings concerned in the preceding financial year.15 Article 1 EUMR provides the thresholds.
Article 1 (2) EUMR,
A concentration has a Community dimension where:
(a) the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5000 million; and
(b) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million,
unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.
Article 1 (3),
A concentration that does not meet the thresholds laid down in paragraph 2 has a Community dimension where:
(a) the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 2500 million;
(b) in each of at least three Member States, the combined aggregate turnover of all the undertakings concerned is more than EUR 100 million;
(c) in each of at least three Member States included for the purpose of point (b), the aggregate turnover of each of at least two of the undertakings concerned of more than EUR 25 million; and
(d) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 100 million,
unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member state.
Therefore, if the undertakings concerned exceed the set threshold and the transaction constitutes a concentration it is deemed to have a community dimension. The first limb of this turnover based threshold in Article 1(2) got introduced in the original European Merger Regulation in 1989. The Commission added Article 1(3) in the amendments to the Regulation in 1998 as the result of a Green Paper indicated that a significant number of concentrations with an appreciable effect on the Community market fell outside of the scope of Article 1(2) EUMR.16
4. Concentrations with a Community dimension
After establishing that the merger constitutes a concentration with a Community dimension it must be notified to the Commission.17 Article 21 EUMR provides that those concentrations fall within the exclusive competence of the Commission. In general, the Commission has the exclusive competence to review and issue decisions based on the EUMR and no Member states can apply national legislation to concentrations with a Community dimension.18
Contrary, concentrations without Community dimension remain within the jurisdiction of the Member states and no EU law applies. However, the EUMR establishes a flexible mechanism allowing cases to be referred to and from Member states.19 The underlying rationale behind this mechanism is that a turnover based evaluation of concentrations facilitates legal certainty for the notifying parties but in exceptional cases, a National Competition Authority may be the more appropriate authority to carry out the investigation in concentrations with Community dimensions.20
In other cases, the Commission may be more appropriate to investigate cases without a Community dimension.21 Once a merger is notified, the Merger Regulation operates as a ‘one-stop-shop’ meaning that the case is handled by a single competition authority to decrease operational cost for both the businesses and administrations.22
16 Kekelekis, M. 2006, The EC Merger Control Regulation: Rights of Defence, International Competition Law
Series, Kluwer Law International, page 36.
17 Article 4, Regulation 139/2004.
18 Article 21 (2)-(3), Regulation 139/2004.
19 Article 4 (4) and (5), Article 9 and Article 22, Regulation 139/2004.
20 Commission Notice on Case Referral in respect of concentrations, (2005/C 56/02) Paragraph 3 and 5. 21 Ibid.
However, it is possible under the referral system that multiple competition authorities, if better suited, review the merger and its effect on all markets to ensure protected competition.23 In most cases, concentrations with Community dimension will be handled by the Commission.
5. Extraterritoriality of EU Merger Control
As stated above, the Commission has jurisdiction for concentrations with Community dimension. However, the jurisdiction does not only apply for concentrations within the European territory. In addition, concentrations outside the EU are also affected by the EUMR. This “long-arm” of EU merger control even applies to undertakings without a residence in the European Union.24 According to the CJEU, the EUMR is applicable and justified under public international law if the concentration provides a foreseeable effect on the European market.25 This is generally the case when the turnover thresholds of Article 1 EUMR are met. Mergers outside the EU can have an appreciable effect on the world market and therefore, also on the European market.26 The extraterritoriality of EU Merger Control is especially important for digital markets in which their undertakings do not reside in the EU but conduct business inside the Community.27 Due to these circumstances, the Commission may issue decisions on concentrations happening outside the territory of the European Union.
III. Killer Acquisitions in Competition Law
The term ‘Killer Acquisition’ firstly arose prominence in the pharmaceutical sector. It is defined as when an incumbent acquires a target with innovative products with the intention to discontinue the production of that product.28 Hence, the innovative product will not reach the market and cannot compete with the incumbents’ products on the merits. This procedure harms the market as it decreases the incentive for future competitors to innovate.
23 Ibid. Paragraph 13.
24 Van Bael & Bellis, 2010, Competition Law of the European Community, page 671.
25 Judgment of the CJEU, 25.03.1999, Gencor Ltd v. Commission, ECLI:EU:T:1999:65, paragraph 90. 26 Ibid, paragraph 100.
27 Themelis, A., 2012, The Internet, Jurisdiction and EU Competition Law: The Concept of ‚Over-territoriality‘
in Adressing Jurisdictional Implications in the Online World, World Competition Law and Economics Review,
Volume 35, Issue 2, page 353.
As competition law aims at protecting the consumers not only by ensuring fair prices and competition on the merits; it also protects innovation as it is a decisive factor in the purchasing decisions of consumers.29 This chapter outlines the importance of innovation for competition law and analysis the competitive harm arising from ‘Killer Acquisitions’ in the pharmaceutical sector.
1. Innovation and Competition Law
Innovation is an indicator of the functioning of a market and competition is an important driver for innovation.30 This relationship reflects the connection between competition and innovation. By protecting the competitiveness of a market, competition authorities can ensure that undertakings are in constant competition for innovative products.31 Strict enforcement of competition rules is therefore needed to ensure innovation.32 The Economic analysis distinguishes between two types of innovation.33
Innovation in the market describes undertakings who compete in already existing markets and products with follow-up innovation. Therefore, undertakings with market power, when under pressure by competitors, will innovate to retain their position or further expand their market power.34 Innovation for the market takes place when undertakings attempt to develop new markets to subsequently enter and dominate. In this scenario, competing undertakings innovate to disrupt existing markets with the intention to create a monopoly position in the newly created market.35
In order to foster innovation competition authorities have to overview several factors of a market. Market access has to be possible for entrants to facilitate competition.36
29 Kern, B., 2014, Innovation Markets, Future Markets, or Potential Competition: How should Competition
Authorities account for Innovation Competition in Merger Reviews, World Competition Law and Economics
Review, Volume 37, Issue 2, page 173.
30 Ibid.
31 Commission Staff Working Document, White Paper, Towards more effective EU merger control, COM(2014)
449, paragraph 24.
32 Commission Communication, Europe 2020 Flagship Initiative Innovation Union, COM(2010) 546, Page 8. 33 Graef, I., 2016, EU Competition Law, Data Protection and Online Platforms: Data as Essential Facility,
International Competition Law Series, Volume 68, page 76.
34 Ibid.
35 Ibid, page 71.
Markets with high barriers to entry decrease the likeliness of new market entrants who can join the competition for innovative products. A reason for market barriers might be the ownership of intellectual property rights of the already established market players.37
In this scenario, patents might protect the incumbents’ products which consequently hinders firms to compete in that market.38 However, innovation has to be appropriable, i.e. through financial benefits for the innovator to give the economic incentive for research and innovation.39 This is usually achieved through intellectual property rights which safeguard that the innovator can cover the resulting costs of innovation and product development.40 Without the assurance of financial benefits or gain in market shares, the cost and risk of R&D and innovation would exceed the firms’ incentive to innovate.
Another substantial factor for innovation is a barrier-free access to knowledge. Undertakings without access to data cannot utilise available knowledge to further improve products and services. In this regard, access to data can raise a barrier to entry. This detrimental factor will be touched upon in the later chapter on digital markets.
It is still controversial, whether further concentration in markets leads to an increase or decrease in innovation through competitive pressure.41 In economic literature, Joseph Schumpeter claims that monopolies benefit innovation.42 According to Schumpeter, a monopoly is in a better position to afford the risk of R&D in comparison to small business who might not possess the necessary funds to innovate. In addition, in order to decrease the competitive pressure from potential entrants innovation could function as a barrier to entry.43 In this scenario, the monopolist is under the pressure that potential competitors enter the market with innovative and better products. In order to maintain the monopoly position, the monopolist has the incentive to innovate to counteract the competitive pressure.44 Therefore, a concentrated market could increase the innovation potential of that market.
37 Hildebrand, D., 2016, The Role of Economic Analysis in EU Competition Law: The European School, Page
255.
38 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of
concentrations between undertakings, OJ, 18.10.2008 (2008/C 265/07), paragraph 71 (b).
39 Catalin, S., Mooij,B., 2016, Innovation and EU Competition Law: In need of a narrative for where the money
is put, Legal Issues of Economic Integration, Volume 43, page 178.
40 Ibid.
41 Ibid, page 180
42 Schumpeter, J.A.,1942, Capitalism, Socialism and Democracy, pages 100-101. 43 Ibid.
44 Graef, I., 2016, EU Competition Law, Data Protection and Online Platforms: Data as Essential Facility,
This view is challenged by Kenneth Arrow who argues that competitive markets increase innovation rather than monopolies.45 According to Arrow, monopolies may be better to appropriate the profits reached through innovation but are less likely to innovate as they give up the monopoly profits they could achieve without innovation.46 In consequence, monopolies only innovate when potential competition is likely and barriers to entry are low.
On the contrary, companies in competitive markets have the constant incentive to innovate in order to gain market shares and consequently, increase profits.47 Consequently, competitive markets generate increased innovation potential.
The current merger control system focuses more on the factors price and output than on innovation as the empirical assessment of the correlation of innovation and concentrated markets cannot deliver a clear answer. Since the decision in Dow/DuPont48, however,
innovation competition was introduced into the merger assessment by the European Commission. In the decision, the Commission investigated whether the merger may affect future R&D in the market.49 On a market, with only a few competing R&D organisations a merger could lead to the discontinuation of one of those organisations and, therefore, reduce innovation competition.50 This procedure of the Commission evoked criticism.
Prior to Dow/DuPont the Commission investigated only defined product markets and the step to also include R&D capabilities of the undertakings concerned bears the risk of being speculative as not every product or service under development enters the market after all.51 On the opposite, merger regulation as foreseen under the Guidelines on horizontal co-operations can also apply to the effects on market research capabilities of mergers.52 The Guidelines provide that a merger between two important innovators on a product market could significantly impede competition when the merger eliminates the competitive pressure to innovate.53
45 Arrow, K.J., 1962, Economic Welfare and the Allocation of Resources for Invention published in The Rate of
Inventive Activity: Economic and Social Factors, page 622.
46 Ibid. 47 Ibid.
48 27.3.2017, Case M.7932 Dow/DuPont. 49 Ibid, paragraph 277.
50 Ibid, paragraph 278.
51 Colomo, P., 2018, Competition Law and Innovation: Where do we stand? Journal of European Competition
Law & Practice, Vol. 9, No. 9.
52 Ibid.
53 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of
This development reflects the increasing recognition of innovation as an important factor in Competition Law. Despite the diverging views, it is undisputed that innovation is a desirable objective for the competition in and for the market and should be protected by competition authorities. Especially, in the assessment of ‘Killer Acquisitions’, the effects of competition on innovation and the innovative potential of a market are factors which need to be considered by competition authorities when reviewing merger cases.
2. Pharmaceutical Sector
When speaking about ‘Killer Acquisitions’ in the pharmaceutical market, it describes the procedure in which already established drug producers with market power acquire targets with overlapping innovative projects in the same category of drugs.54 Post-merger the acquirer terminates those innovative projects to protect its own drugs on the market.55
This procedure results in great harm to the market and ultimately the consumers. Not only will this reduce the competitiveness on the relevant market by increasing the market power of already established undertakings but it also deprives the consumers of innovative and possibly better products.
In the paper Killer Acquisitions, Cunningham et al. estimated that around 6 % of yearly acquisitions on the pharmaceutical market are Killer Acquisitions.56 When companies compete on the merits of their products they will have the incentive to innovate to satisfy consumer needs and to increase their share in the market.
In contrast, when innovative undertakings get acquired in the early stages of drug development the incentive to innovate decreases as the innovative products will not reach the market. Especially in markets with high barriers to entry like the pharmaceutical sector due to the high cost associated with R&D and regulation, competition authorities have the task to protect less established undertakings to ensure innovation competition.
54 Cunningham, C., Ederer, F., Ma, S. 2018. Killer Acquisitions, page 1. 55 Ibid.
Nonetheless, it is certainly not easy to distinguish Killer Acquisitions from other mergers as the motives for a merger have to be predicted by the competition authorities. Due to information asymmetries between the market players and the competition authorities, the latter can only use indicators to distinguish mergers which might result in a Killer Acquisition from a normal acquisition.
One indicator for the incentive to discontinue drug development post-mergers is the overlap of drug production of the incumbent and the target. When the use of the existing drug is similar to the innovative product under development the incumbent is more likely to acquire the target and terminates the production to protect its market power and to restrict future competition.57 The development of a new and better drug could decrease the value of its predecessor for consumers and therefore, decrease the profitability of the incumbent when the drug hits the market.
In the pharmaceutical sector, incumbents are, however, not incentivised to acquire targets with no product market overlap and then to discontinue drug development. One of the main reasons for acquiring a target with product market overlap is the reduced competition on the relevant market. This factor is missing when the acquirer buys a target without product market overlap. The cost to buy the target and discontinuing drug development would diminish the profitability of the transaction making it less likely to occur.58 In case of a merger, it is more profitable to continue drug development and to make use of combined R&D departments. This circumstance can increase the innovation potential of the merged entity and raise the competitive pressure on other competitors to innovate and, therefore, have pro-competitive effects on innovation.59
3. Interim Conclusion
This chapter focused on the interplay between innovation and competition and the negative effect of Killer Acquisitions on the pharmaceutical sector. Unfortunately, the pharmaceutical sector is the only market in which profound and empirical research about Killer Acquisitions exists. It is questionable whether the findings of the paper Killer Acquisitions can be transferred extensively to other sectors such as the digital market.
57 Ibid, page 3. 58 Ibid, page 15.
59 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of
The authors of the paper suggest that competition authorities should continue to closely investigate mergers and acquisitions to detect likely ‘Killer Acquisitions’ using the indicator of innovation resulting in future competition by product market overlap.60
The decrease of future competition in a market through a merger and the lack of innovative products reduce consumer welfare on that market.61 The next chapter will transfer the findings of this chapter to the special characteristics of the digital market.
IV. Killer Acquisitions on the Digital Market
Since the introduction of the internet, the digital market grew at a fast pace. In the era of data collection, many undertakings provide improved solutions and adapted products for consumers. Digitalisation changed the way we interact with each other and how we make decisions, i.e. buying the product with the best reviews online. The internet gives more choice to consumers than traditional retail and enables simplified cross-border shopping. Service providers benefit from the reduced cost of distribution by digital processes and new business opportunities on the digital market.62 Access to knowledge and information technology allows for more and steady innovation in many sectors which is beneficial for consumers in all aspects of life.63
In recent years the digital market brought up several big market players such as Amazon, Facebook, Google(Alphabet Inc.) and Alibaba ranking amongst the fastest growing and most profitable companies in recent years.64 With those few platforms on the rise, it raises concerns and challenges for competition authorities to ensure fair competition on the digital market.
60 Cunningham, C., Ederer, F., Ma, S. 2018. Killer Acquisitions, page 42.
61 Kern, B., 2014, Innovation Markets, Future Markets, or Potential Competition: How should Competition
Authorities account for Innovation Competition in Merger Reviews, World Competition Law and Economics
Review, Volume 37, Issue 2, page 173.
62 Monopolkommission, 2015, Competition policy: The challenge of digital markets, paragraph S3.
63 Tavassi, M.A., Bellomo, G., 2019, The interplay between Competition Law and Intellectual Property: An
international perspective, International Competition Law Series, Volume 77, page 275.
64https://www.statista.com/statistics/263264/top-companies-in-the-world-by-market-value/ (last visited
In 201765,201866 and 201967 the European Commission issued three decisions against Google LLC and its parent company Alphabet Inc. resulting in over €8 billion for breaches of EU Competition Law and the German Bundeskartellamt imposed restrictions on Facebook’s processing of data resulting from anticompetitive behaviour.68
The following analysis will outline the special characteristics of the digital market, transfer the findings of the previous chapter on possible ‘Killer Acquisition’ in the digital sector and assess the potential arising enforcement gap in the European merger review system.
1. The digital market and its characteristics
In comparison to traditional markets with competing undertakings, platforms and ecosystems developed on digital markets. The online market is dynamic and highly competitive but it was still possible that some of the platforms acquired likely dominant positions in their respective field.69 Google for its search engine, Facebook for the way online consumers interact with each other and Amazon for the purchase of goods on the internet. The following findings will indicate that once an incumbent established market power other undertakings are less likely to enter the market. One reason for that is the extreme returns to scale of online markets.
a) Returns to scale
Returns to scale are defined as the relation between input and output quantities.70 On the digital market, once a product is developed it can serve a disproportionate number of customers compared to the input variable. To give an example, after the development of Google’s search engine it has been able to serve an almost infinitive number of users without having to proportionally increase production compared to traditional markets. Instead, the search engine operates at a very low cost compared to its user size.
65 27.06.2017, Case AT.39740, Google Search (Shopping).
66 18.07.2018, Case AT.40099, Google Android, there is no public version available, for reference: Press release
of the Commission, http://europa.eu/rapid/press-release_IP-18-4581_en.htm.
67 20.03.2019, Case AT.40411, Google Search (AdSense), there is no public version available, for reference:
Press release of the Commission, http://europa.eu/rapid/press-release_IP-19-1770_en.htm.
68 06.02.2019, Case B6-22/16, Bundeskartellamt v. Facebook Inc..
69 Mandrescu, D., 2018, Applying (EU) Competition Law to Online Platforms: Reflections on the Definition of
the Relevant Market(s), World Competition Law and Economics Review, Volume 41 Issue 3, page 454.
Large returns to scale have the effect on competition that the producers with similar products can not cover their costs as other competitors are willing to price below the marginal cost of the products to steal customers leaving no room for profits.71 This results in a significant competitive advantage for incumbents on a market and consequently raises barriers to entry for other firms as joining competition against the incumbent is not profitable.72 Another factor on why incumbents can retain their market position is the positive network effects of online platforms.
b) Two-or multi-sided nature of online platforms
One reason why some platforms achieved a better market position than competing platforms is network externalities, especially the two- or multi-sidedness of online platforms. When a platform connects two different but identifiable groups of customers we speak from the two-sidedness of a platform.73 To give an example, eBay connects on the one side, people who want to auction goods to, on the other side, customers who want to buy goods. In return, this can create positive externalities. The more sellers the platform attracts, the more customers will look to buy goods on that marketplace and vice versa.
When one platform benefitted from this network effect it raises the barriers for market entry for competing platforms. A rationale user will most likely choose the platform with the highest user count over platforms with fewer users making it hard to establish new platforms.74 This procedure can be described as a winner takes it all scenario.
In addition, other groups such as advertisers will show greater interest towards platforms with large user bases creating multi-sided platforms. In light of competition law, a platform with a large user base and network effects benefits both the seller and the customer and might create efficiencies through economies of scale and scope effects. It is, however, problematic that the winner takes all scenario likely results in less competition in the market. Users of one platform will not have the incentive to migrate to another platform which might provide better services without the coordination of larger user groups to ensure the network effect.75
71 Harris, B.C., Smith, D.D., 2006, Competition Rules for the 21st Century: Principles form America’s
Experience, International Competition Law Series, Volume 9, page 445.
72 Crémer, J., De Montjoye, Y.-A., Schweitzer, H., 2019, Competition policy for the digital era, page 2. 73 Filistrucchi, L. 2013, Identifying Two-Sided Markets, World Competition Law and Economics Review,
Volume 36, Issue 1, page 34.
74 Holzweber, S., 2017, Market Definition for Multi-Sided Platforms: A legal reappraisal, World Competition
Law and Economics Review, Volume 40, Issue 4, page 566.
Hence, incumbents will retain their market power on most digital markets as other firms may not enter the market, due to the scale of the network effect. Finally, data and the access to data plays an important role in the digital economy.
c) The role of data and data access
In a digital world, data became an important asset for success and innovation. Data is a heterogeneous good, it can be personal or impersonal, individual or bundled, reusable and therefore, hard to be distinct for Competition Law analysis. The increased collection and use of data can have a positive welfare effect for consumers. The more companies know about the needs of their consumers, the better they can provide goods and services.76
In consequence, online platforms collect data and information from their users and by evaluating this data, platforms can derive better goods and services personalised to the needs of consumers.77 This makes data a valuable asset in today’s society. The data is, however, not available for every market player. In most cases, there are only a few individual companies within the market who possess large quantities of data. Other smaller companies do not have access to these big data facilities and are, therefore, inferior to the big players on the markets.78 As a consequence, large data processing firms have a significant competitive advantage over new entrants with access to less amount of data.
Another issue is the lack of portability of data and multi-homing. In most cases, user data is locked into the platform in which it was processed. If a user wants to change platforms or emigrate to another service the previous data is solely connected to the incumbents’ platform and consequently, the new provider cannot compete with equally personalised services. Moreover, large platforms have the interest to not grant access to their data as they monetise from its use.79 This raises barriers to entry for new market entrants.
76 Graef, I., 2016, EU Competition Law, Data Protection and Online Platforms: Data as Essential Facility,
International Competition Law Series, Volume 68 , page 1.
77 Ibid.
78 Monopolkommission, 2015, Competition policy: The challenge of digital markets, paragraph 65. 79 Graef, I., 2016, EU Competition Law, Data Protection and Online Platforms: Data as Essential Facility,
The European Union tackled this lock-in effect with Article 20 of the General Data Protection Regulation (‘GDPR’)80 which allows users to receive the collected user data from one platform and transmit it to another platform. In effect, this does not mean that users will only transfer their data from a large possessing company to smaller ones but also vice versa. The GDPR was drafted to protect the rights of data subjects and can only as a side effect interact with competition law aspects.
Another important aspect of data is its relevance to innovation. As mentioned above, collected data allows platforms to personalise services. Moreover, data can be used to develop new products based on consumer needs.81 Hence, access to data plays an important role in competition for new markets. Large data companies have a significant competitive advantage in innovation when they possess large quantities of data for the use of innovation.
When putting these factors into a conclusion, incumbents will likely retain their market power against smaller companies when they use their competitive advantage granted by the possession of data.
2. Mergers with Start-Ups – Typical Killer Acquisitions?
The further analysis will highlight the potential benefits and risks of transactions including innovative start-ups. One observation about digital markets is the development of digital conglomerates and their pro-competitive effects. Large tech-companies do not remain on their initial market but also expand into new markets. For instance, Google started as a search engine and expanded, under the holding of Alphabet Inc, into Artificial Intelligence (DeepMind), self-driving cars (Waymo), biotech (Calico) and other markets.82
80 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection
of natural persons with regard to the processing of personal data an on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation).
81 Graef, I., 2016, EU Competition Law, Data Protection and Online Platforms: Data as Essential Facility,
International Competition Law Series, Volume 68 , page 1.
82 Massarotto, G., 2018, From Standard Oil to Google: How the Role of Antitrust Law has Changed, World
One reason for expanding into other markets is the diversification of the product or service portfolio. A diversified portfolio creates an economy of scope. Economies of scope describe the scenario in which different types of products produced jointly are more cost-efficient than separately, due to sharable and re-usable inputs.83 These inputs can be, e.g. human resources, production facilities or technical know-how.
On digital markets, data became an important input for the development of new and existing products. A diversified conglomerate can collect, analyse and transfer more data, resulting in better products on new markets.84 This creates advantages for firms with a diversified portfolio in contrast to market entrants who are not benefiting from economies of scope.85 By creating a product ecosystem, consumers can benefit from shared functionalities and the convenience of linked products.86
These kinds of mergers can create pro-competitive efficiencies and benefit consumers with economies of scale and economies of scope effects, due to better products and reduction in price. This ultimately raises the question of whether those tech acquisitions of young and potential start-ups can, strictly speaking, be called Killer Acquisitions. On pharmaceutical markets, as outlined in Chapter III, the innovation with a certain degree of product market overlap gets discontinued, whereas on digital markets the innovation will rather be integrated into an ecosystem and rarely discontinued.
The current Commissioner for Competition Margrethe Vestager outlined in her opening speech of the European Commission’s 2019 conference on “Shaping competition policy in the era of digitalisation” that large tech-companies acquire small and promising start-ups to kill innovation and future competition.87 This effect might be observed in cases in which large tech companies eliminate arising competition by pre-emptively acquiring competitors in fear of disruptive innovation.88
83 Hildebrand, D., 2016, The Role of Economic Analysis in EU Competition Law: The European School, Page
255.
84 Bourreau, M., de Streel, A., 2019, Digital Conglomerates and EU Competition Policy, page 11.
85 Hildebrand, D., 2016, The Role of Economic Analysis in EU Competition Law: The European School, Page
255.
86 Bourreau, M., de Streel, A., 2019, Digital Conglomerates and EU Competition Policy, page 13.
87 Report by Global Competition Review,
https://www.lexology.com/library/detail.aspx?g=2825b2ab-409e-47de-a6e4-a923f92314b5
Disruptive innovation is achieved by the entrance of alternative and better products or technology to an established market and as a consequence, is opening up new contestable markets.89 Unlike in the pharmaceutical market, the cost of R&D is relatively low on the digital market and many new products enter the market resulting in a low product life cycle of digital products. 90 Therefore, many small companies have the chance to compete for the market with their products and innovation.
As a consequence, incumbents on the previous market fear to lose the competitive advantage which they established and lose their access to the new market and its consumers who will tend to buy the new products instead of the incumbents products. For incumbents, one effective way of combating this concern may be to acquire the firms producing innovation and to integrate them into their portfolio. Consequently, the incumbent can benefit and monetize the innovation instead of competing with innovative start-ups.
Moreover, the potential that large incumbents will buy up any competing small firm or copy their products, leads to what business analysts named a “kill zone.91 Especially, when large tech giants establish so-called “kill zones” to protect their market position, a similar effect of decreased potential innovation as in Killer Acquisitions in the pharmaceutical sector might be observed. Competing firms have decreased incentives to innovate or to engage in economic activity in those fields as the possibility exists that the innovative product will be copied or the firm be bought up.92
Therefore, both Killer Acquisitions in the pharmaceutical sector and establishing “kill zones” on digital markets might result in negative effects for competition on the markets and also deprive consumers of the benefits of innovation. However, unlike in the pharmaceutical sector, there is yet no concrete and extensive research on the anticompetitive effects of mergers with innovative start-ups in the digital sector. This lack of evidence does not allow general industry-wide assertions about the potential anticompetitive effects of the serial acquisition of innovative start-ups.93
89 Tavassi, M.A., Bellomo, G., 2019, The interplay between Competition Law and Intellectual Property: An
international perspective, International Competition Law Series, Volume 77, page 173.
90 Ibid. 91 Ibid.
92 Crémer, J., De Montjoye, Y.-A., Schweitzer, H., 2019, Competition policy for the digital era, page 117. 93 Speech by D. Bruce Hoffman, Director of the Bureau of Competition, U.S. FTC, 2019, Antitrust in the Digital
The next issue arises from the fact that in most cases, the European Commission does not gain jurisdiction to review those merger cases including innovative start-ups. Therefore, no leading case-law exists which could verify the potential existence of ‘kill zones’ in the digital sector.
3. The jurisdictional problem of EU Merger Control in the digital sector
In recent years, many digital platforms have been very active in M&A and, thus, effective competition enforcement is required to ensure the competitiveness of the digital market.94 Between 2009 and 2019, the large tech companies Amazon, Facebook, Google, and Microsoft combined have acquired over 400 companies worldwide with an increasing pace.95
With large, dominant tech giants being very active in vertical integration; they have the power to shape the data ecosystem and raise competition concerns in regards to the decrease of consumer choice, innovation and anticompetitive behaviour.96 As mentioned in Chapter I of this thesis, concentrations with a Community Dimension fall within the jurisdiction of EU Merger Control. The Community Dimension is based purely on turnover thresholds, therefore, the EU only gains jurisdiction over those concentrations exceeding the thresholds of Article 1 EUMR. Using purely turnover as a proxy for the competitive significance of mergers has led to the issue of competence in the digital market.97 In transactions involving a small but innovative start-up, the required turnover threshold will not be exceeded and as a consequence, the Commission does not have jurisdiction. The following analysis will illustrate this problem.
a) The low turnover but high transaction value of acquisitions in the digital sector
As mentioned above, positive network effects in the digital sector are achieved by building large user bases. The more users a product or service acquires the more valuable it becomes over time. Therefore, innovative start-ups generally focus on building a large user base before monetizing their product to become profitable.98 In cases in which such a start-up in early stages becomes the target in a transaction its turnover will consequently not exceed the thresholds set in Article 1 EUMR.
94 OECD report, 2015, Data-Driven Innovation: Big Data for Growth and Well-Being, page 93.
95Furman, J., Coyle, D., Fletcher, A., McAuley, D., Marsden, P., 2019, Unlocking digital competition. Report of the Digital Competition Expert Panel, page 99.
96 OECD report, 2015, Data-Driven Innovation: Big Data for Growth and Well-Being, page 101. 97 Jones, A., Sufrin, B., 2016, EU Competition Law, page 1105.
At the time of notification, the threshold does not reflect the competitive potential of the start-up.99 The following table will give examples of executed tech acquisitions by large digital companies during the last years.
Year Acquirer Company acquired Transaction value ($million) Investigation by DG Comp Community Dimension within Article 1 EUMR 2006 Google YouTube 1,650 No -
2007 Google DoubleClick 3,100 Yes No
2011 Microsoft Skype Technologies 8,500 Yes Yes 2012 Facebook Instagram 1,000 No - 2013 Microsoft Yammer 1,200 No - 2014 Google Waze 970 No -
2014 Google Nest Labs 3,200 No -
2014 Google Deepmind
Technologies
625 No -
2014 Facebook WhatsApp 19,000 Yes No
2016 Facebook Oculus 2,000 No -
2016 Microsoft LinkedIn 26,200 Yes Yes
2017 Apple Shazam 400 Yes No
2018 Amazon Ring 1,000 No - (Table 1) Source: IG Group100 99 Ibid, 111.
100 Figures of publicly-known transactions
https://www.ig.com/uk/cfd-trading/research/acquisitive-tech#/acquisitions, compiled in Furman, J., Coyle, D., Fletcher, A., McAuley, D., Marsden, P., 2019, Unlocking
Two observations can be made from this table. First, despite the large transaction value in all of these acquisitions, the European Commission only investigated five out of those thirteen transactions. Second, in three out of those five acquisitions the Commission only gained jurisdiction by the system of referral as foreseen in Article 4 EUMR.
In those cases, the parties did not yet generate enough turnover to fulfil the necessary threshold for the Community Dimension. It can be mentioned that those transactions not necessarily involved a small but innovative start-up as most of the targets were already established market players in the digital sector. Therefore, it is even more surprising that in most cases the Commission a priori had not jurisdiction over the transactions.
This raises the concern that those types of transactions might escape European jurisdiction even when they could affect competition in the internal market. One particular transaction, the merger between Facebook and Whatsapp, became a prominent example for a relevant merger escaping the set threshold and has been a catalyst for the discussion about the effectiveness of the turnover threshold as a proxy for the competitive significance in the digital sector.101
b) Case Study Facebook/Whatsapp merger
On the 29 August 2014, the social network Facebook, Inc. notified the European Commission by referral on the intention to acquire control over the communication service provider Whatsapp for the purchase price of USD 19 billion. The merger constituted a concentration within the meaning of the EUMR as it is a change of control on a lasting basis.102 Despite the large transaction value, the concentration had no community dimension within the meaning of Article 1 EUMR, as WhatsApp’s turnover in the relevant year did not exceed the threshold.103
Nevertheless, the European Commission gained jurisdiction through the case referral system. The case could be reviewed in at least three Member States, fulfilling the conditions set out in Article 4(5) EUMR and therefore, could be referred to the European Commission.104 The notifying party Facebook issued a reasoned submission that the Commission is more suitable to investigate the concentration, informing the competent national authorities which not
101 Commission Staff Working Document, 2017, Report on Competition Policy 2016, COM(2017) 285 final,
page 17.
102 03.10.2014, Case M.7217, Facebook/Whatsapp, paragraph 5. 103 Ibid, paragraph 9.
disagreed to that procedure.105 Hence, despite not exceeding the judicial threshold the concentration still constituted a union dimension and could be assessed under the EUMR. In the investigation, the Commission addressed the effect of the concentration on the internal market on competition. Both undertakings, with a combined 1.8 billion users worldwide and approximately 300 million users of their communication services in the EEA operate on three product markets with an EEA-wide geographic market. First, Facebook with its Messenger and Whatsapp offer services in consumer communication services, specifically for smartphones. Second, the social network market, foremost by Facebook and not by Whatsapp.106 Third, the market for online advertising services. In the competitive assessment, the Commission emphasized that the communication sector is characterized by fast market entries and short innovation cycles and Facebook and Whatsapp can be seen as complementary rather than in direct close competition.107
Moreover, there are a variety of other providers to which consumers could easily switch with low switching cost and possible market entrants, due to low barriers to entry. However, network effects play an important role in digital markets.
The more users a communication service has, the more valuable it becomes to other users. This can raise competition concerns when it allows the concentration post-merger to foreclose and hinder entry or expansion of competitors.108 In this case, a competition restraint is not likely as the transaction does not result in lock-ins of consumers who can easily switch providers or use several platforms(multi-home) without restrictions.
Within the social network market, the Commission sees the transaction compatible with the internal market as Facebook and Whatsapp do not compete with each other and the integration of Whatsapp into the social network of Facebook is unlikely due to technical barriers.109 The transaction raised the concern, that by acquiring Whatsapp; Facebook could use the collected user data of Whatsapp to further expand online advertising services.
105 Ibid, paragraph 11. 106 Ibid, paragraph 62. 107 Ibid, paragraph 104. 108 Ibid, paragraph 130.
109 Ibid, paragraph 163, in fact, post-merger Facebook integrated Whatsapp and received a fine of €110 million
for giving misleading information, see http://europa.eu/rapid/press-release_IP-17-1369_en.htm (last visited 04.06.2019).
The Commission notes that post-merger there are still a significant number of other competitors in the market. Therefore, the concentration will not lead to a strengthening of a dominant position on that particular market. Based on that result the Commission decided that the concentration is compatible with the internal market and hence, cleared the transaction.
c) Interim Conclusion
The Facebook/WhatsApp merger reflects the issue of low turnover but high transactional value in digital transactions and outlines the existing jurisdictional problem. Both undertakings show high-return to scale, network effects, and competitive advantages based on data collection. This raises the question, how a transaction of this calibre could escape the judicial thresholds of the EUMR.
Both undertakings were deemed established market players with large user bases and worldwide operations in the investigation. Still, Whatsapp did not generate sufficient turnover to be subjected under Article 1 EUMR. Killer Acquisitions mostly target small and innovative start-ups which are generally not as established as the example undertaking Whatsapp.
Hence, this circumstance raises the concern whether the purely turnover-based threshold is still a viable proxy to address mergers on digital markets; as mergers with small start-ups might possibly escape jurisdiction.
In the example, the Commission only gained jurisdiction by the system of referral as the concentration was caught by three Member State’s competition authorities. Relying only on the Member States potential to catch those acquisitions of start-ups and the referral system might not be sufficient enough to ensure effective competition on the internal market. In the aftermath of the Facebook/Whatsapp merger two Member States Germany and Austria introduced a supplementary transaction value threshold to tackle the arising issue.110 This opened up the debate about whether the European Union should follow suit or should rely on the existing norms.111
110Berg, W., Weinert, L. 2017, Transaction-value merger threshold soon to be in force in Germany – update on the 9th ARC revision, Kluwer Competition Law Blog,
http://competitionlawblog.kluwercompetitionlaw.com/2017/04/07/transaction-value-merger-threshold-soon-force-germany-update-9th-arc-revision/
111 European Commission Competition merger brief, 2015, What’s Up with Merger Control in the Digital
VI. Should the EU introduce a transaction value threshold?
With Member States changing laws to address the concerns arising from the digital market it remains questionable whether the EU should adjust the notification thresholds by introducing a transaction value threshold into the EUMR or should rely on the Member States and the flexibility of the referral system.
On the one hand, critics of a supplementary transaction value clause issued that broadening EU jurisdiction would increase the administrative burden on undertakings when assessing if the transaction has to be notified in light of legal certainty.112 On the other hand, there might be an enforcement gap in European Merger Regulation. Even with a flexible referral system, the danger arises that low target turnover transactions could escape European jurisdiction when not satisfying Member State thresholds.
As mentioned above, Germany introduced a new supplementary transaction value threshold into their merger review system which could be used as a model for a European amendment.
1. The German amendment
Germany reacted to the new developments on digital markets and introduced an additional threshold into German merger control similar to the US ‘size of transaction’113 test. On the 9th of June 2017, the amendments to the Gesetz gegen Wettbewerbsbeschränkungen (Act against Restraints of Competition) entered into force. Article 35 GWB presents the new threshold.
112 Crémer, J., De Montjoye, Y.-A., Schweitzer, H., 2019, Competition policy for the digital era, page 114.
113The US uses the size and value of the transaction and not the turnover of the undertakings concerned as the
indicator for competitive relevance. In 2019, the notifiable minimum transaction size is $90 million. This number is provided by Title 15. Article 18a U.S. and gets adjusted every year by the Federal Trade Commission (‘FTC’) based on the change in GNP.
Article 35 Gesetz gegen Wettbewerbsbeschränkungen
(1) The provisions on the control of concentrations shall apply if in the last business year preceding the concentration
1. The combined aggregate worldwide turnover of all the undertakings concerned was more than EUR 500 million, and
2. The domestic turnover of at least one undertaking concerned was more than EUR 25 million and that of another undertaking concerned was more than EUR 5 million. (1a) The provision on the control of concentrations shall also apply if
1. The requirements of paragraph 1 no. 1 are fulfilled, 2. In the last business year preceding the concentration
a) The domestic turnover of one undertaking concerned was more than EUR 25 million and
b) Neither the target undertaking nor any other undertaking concerned achieved a domestic turnover of more than EUR 5 million,
3. The consideration for the acquisition exceeds EUR 400 million and
4. The target undertaking pursuant to no. 2 has substantial operations in Germany. […]
With the introduction of the additional transaction value threshold of EUR 400 million, concentrations with low target turnover but a high transactional value can be caught under German Competition Law. German lawmakers acknowledged in light of the Facebook/Whatsapp merger that the existing turnover thresholds are not sufficient to ensure effective merger control on the markets.114
Especially in situations in which targets with high innovative potential but low generated turnover, like start-ups in the digital sector, get acquired, the German government has an interest that the Bundeskartellamt (German NCA) investigates these concentrations for competitive restraints.
114 Podszun, Prof. Dr. Rupprecht, 2017, Die 9. Novelle des Gesetzes gegen Wettbewerbsbeschränkungen (GWB,
In a Green paper, Germanys Federal Ministry of Economic Affairs and Energy indicated that the same deficient oversight exists in the European Merger Regulation and a supplementary transaction value threshold should be introduced.115 However, the new amendment raised criticism across stakeholders due to legal uncertainty the vague interpretation of the local nexus requirement.116
2. Issues for introducing a European supplementary transaction value threshold
Based on the received criticism for the German amendment the further analysis will investigate whether the same criticism would also apply if the European Union introduced a similar supplementary transaction value threshold. Against this background, legal certainty and a sufficient local and material nexus will be held against a possible transaction value threshold in the European merger review. The International Competition Network (ICN) provided recommended practices for merger notification and review procedures for Competition Authorities and can be used as a normative benchmark.
a) Legal certainty
Legal certainty is an important principle in the European Union and should be guaranteed by a new amendment.117 In this context, legal certainty has the objective to safeguard the notifying parties interests in which case they are demanded to notify a transaction to the respective competition authority. Moreover, a threshold should not create too many false positives by subjecting mergers without any appreciable effect on competition to a mandatory notification. According to the ICN recommendations, a threshold should fulfil the requirements being ‘clear and understandable’ and based on ‘objectively quantifiable criteria’ to achieve a high degree of legal certainty.118 In this regard, ‘objectively quantifiable criteria’ include for example assets and turnover which can be objectively measured before a notification obligation.119
115 Federal Ministry for Economic Affairs and Energy(Germany), Green Paper, 2016, Digital Platforms, page
49.
116 Berg, W., Weinert, L., 2017, New merger control threshold in Germany – beware of ongoing transactions,
Kluwer Competition Law Blog.
117 ICN Recommended Practices for Merger Notification & Review Procedures, 2002, page 4-5. 118 ICN Recommended Practices for Merger Notification & Review Procedures, 2002, page 4-5. 119 Ibid, page 6.
