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Killer Acquisitions: An Analysis through the lens of the Article 22 Mechanism

Manasa Murali Dhar

*LLM Candidate, Law and Technology, Tilburg Institute for Law, Technology, and Society, Tilburg University.


These businesses are nascent, but the networks established, the brands are already meaningful, and if they grow to a large-scale (sic) they could be very disruptive to us... Given that we think our own valuation is fairly aggressive and that we’re vulnerable in mobile, I’m curious if we should consider going after one or two of them. What do you think?” wrote Facebook CEO Mark Zuckerberg in emails exchanged with the CFO, David Ebersman, as recent antitrust findings in the Facebook/Instagram acquisition reveal. The competitive anxiety created by the nascent firm, Instagram, was palpable when Zuckerberg wrote those emails, and subsequently acquired Instagram.[1]

Pharmaceutical industry, and more recently, digital industries, have been and continue to be subject to competitive anxiety.[2] Subsequent to the publication of the seminal work aptly titled ‘Killer Acquisitions’ by Cunningham et. al.,[3]several competition authorities, around the globe, have taken note of the subtle manner in which acquisition of nascent firms by established companies leads to distortion of competition in the market. While some of these mergers may bring about synergies and efficiencies, and provide an exit route for investors[4], some have come to be referred to as ‘killer acquisitions’[5] or ‘zombie acquisitions’[6] as they may acquire start-ups with the sole intention to either bury or abandon the innovation in anticipation that it may pose a competitive threat to the incumbent.

While digital industries have some room for further developing such an innovation, in the pharma sector, it is easier to anticipate competitive threats to an incumbent even at the clinical trial stage, and there is little room for innovation apart from being an overlapping drug.[7] Hence, killer acquisitions are more prevalent and more obvious or identifiable in the pharma sector. On the other hand, in the technology sector, it is often less noticeable. This may be attributed to the growth trajectory of innovation, which may not be obvious or predictable. The notion of ‘function creep’[8] in technology, which is often imperceptible and unintended, renders this prediction less obvious, and perhaps more insidious in escaping the radar of the competition authorities.

However, competition authorities have stridently woken up to this new regulatory challenge. Notably, in 2020, the Federal Trade Commission issued Special Orders to Google (or Alphabet), Apple, Amazon, Facebook, and Microsoft, the largest technology firms that have made numerous acquisitions in recent years, directing them to provide information regarding the acquisitions, specifically those that were not reported to the federal US antitrust agencies under the Hart-Scott-Rodino Act. The report, while making important observations on the trends and patterns in such acquisitions, did not provide any recommendations for addressing the competitive concerns.[9] Similarly, the OECD, and the European Commission have taken serious note of this challenge, which we will discuss below. Before delving into it, it is imperative to first look into the competitive concerns that such acquisitions give rise to.

Competition Concerns

Killer or zombie acquisitions have given rise to various competition concerns. In recognition of this, the European Commission also released a report highlighting that such mergers have the potential to seriously impede competition, and suggesting how they can be scrutinized and addressed.[10] In this light, it is relevant to set out the theories of harm in such mergers.

First, the killer acquisition theory propounded by Cunningham et. al. follows that such mergers are horizontal in nature, with the outcome where the product development of the entrant is terminated.[11] The OECD recognizes the killer acquisition theory in itself as a theory of harm.[12] An extension of this gives rise to the threat of foreclosure of future or potential competition. This foreclosure also leads to the threat of diminishing innovation in the market.[13] This threat has a two-fold impact-both in stifling the development of the entrant’s product, as well as the opportunity cost for the incumbent in foregoing the innovation it could have developed with the resources expended on acquiring the entrant.[14] Further, such mergers lead to the creation or strengthening of the incumbent’s dominance in the relevant market. This may potentially lead to entry barriers for new start-ups, especially in the pharma sector since it involves huge initial set-up costs. Additionally, there is a threat of coordinated effects in bringing about such mergers since both parties stand to gain as such mergers provide an exit route for the investors, and for the start-ups to switch to a fresh innovation. However, this is a weak theory of harm as such a merger may give rise to efficiencies with the start-up contributing to innovation, and the incumbent providing the resources needed to further deploy those products and commercialise them.