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

-Manasa Murali Dhar*



“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.[15] Another challenge is the enquiry into the counterfactual, which may be more difficult in digital industries than in the pharma sector since the latter has lesser uncertainty regarding product development pathways.[16] Finally, a cumulative effect of the above theories of harm may result in causing consumer harm in terms of price rise, reduction in product variety and overall consumer choice.

While some theories of harm seem obvious, it is not so in reality as recognizing such mergers as competitive threats have been tricky. This is especially so because of turn-over thresholds[17] under the EU Merger Regulations (EUMR) filters out nascent firms/entrants, as the focus of such firms, especially in the digital industry, is to build a product, expand its user-base, and then monetize on it. This renders their turn-over below the EUMR thresholds. Further, due to this growth trajectory of start-ups, it is crucial to ascertain the right timeframe for assessment of the competition concerns posed by such mergers in order to avoid overenforcement.

Recent literature on such acquisitions calls for recognition of new theories of harm to assess such mergers since the existing theories of harm seem to be ineffective in identifying anti-competitive mergers. One such theory of harm is the ‘nascent competitor theory’ proposed by Hemphill and Wu.[18] This theory follows that a competition law analysis may be necessary when a nascent firm introduces an innovation, wherein such innovation has not achieved its full potential, and stands to pose a serious threat to an incumbent firm. It is not clear as to how a ‘serious threat’ to the incumbent firm is to be determined. The authors suggest that “the prospects disruptive competition”[19] may indicate a threat to the incumbent. This may require an enquiry into whether the nascent firm is a maverick, i.e., a firm that innovates more than the existing firms, and is aggressive while being non-dominant.[20] If the nascent firm is indeed a maverick, the acquisition by the incumbent may lead to the elimination of an important competitive constraint.[21] A closer look at the theory of harm of the nascent competitor theory reveals that it is not exactly a novel theory, but falls back on the traditional theories of unilateral effects without dominance, and/or coordinated effects in identifying anti-competitive behaviour.

As discussed above, Cunningham et. al., and the OECD recognize the ‘killer acquisition theory’ as a theory of harm in itself. On a fundamental level, this theory enquires into whether an incumbent’s acquisition of a nascent firm results in killing / discontinuing the development of the innovation that the nascent firm introduced. This, in most cases, requires an ex post facto analysis of the merger especially since the path of innovation is often unpredictable, with more diverse products being offered than planned.[22] Therefore, it may not be evident at the time of the merger if the incumbent intends to kill the innovation of the nascent firm. It may be beneficial, at this stage, to enquire into whether the incumbent firm is willing to offer commitments to offset the competitive harm of eliminating a rival from the market. For instance, the Oracle/Sun Microsystems merger was approved in stage two of the investigation only after Oracle made a public pledge to not eliminate MySQL, Sun Microsystem’s open-source database, after the merger.[23]

Article 22 Mechanism

As concerns regarding such mergers rise, the EU Commissioner for Competition, Margrethe Vestager, called for a revival of the Article 22 referral mechanism of the EUMR (the Dutch clause) to address the competition problem posed by these mergers.[24] In this context, the Commission issued a Guidance Paper on the application of the Dutch clause in certain cases.[25] This follows that Member States may refer transactions to the Commission even if they are below the threshold values set out in Article 1 of the EUMR if the concentration affects the trade between Member States and if it threatens to significantly affect competition within the territory of the Member State(s) making the request.[26]

While the revival of the Dutch clause may provide a means to scrutinize transactions that were getting filtered out of the jurisdictional threshold requirement, it may also lead to legal uncertainty since there is no definite framework within which transactions get referred. Paragraph 15 of the Guidance Paper sheds some light on the circumstances under which Member States may make a referral. The Guidance Paper relies on the provisions of the Horizontal and Non-Horizontal Merger Guidelines to assess the concentrations. Accordingly, this includes a preliminary analysis by the Member State on identifying the theories of harm in the concentration based on the Significant Impediment to Effective Competition (SIEC) test.[27] While an analysis of the competitive harm is an obvious first step, this provision does not provide a well-defined means to anticipate if a merger is likely to cause competitive harm. For example, some of the digital mergers that were analysed by the Commission, such as Facebook/WhatsApp reached the Commission via the referral mechanism because there were specific criteria set out for identifying potentially problematic mergers.[28] However, no such specific criteria are forthcoming from the Guidance Paper.

Paragraph 19 of the Guidance Paper provides specific illustrative categories of undertakings that may come under the radar for the preliminary analysis. These include start-ups with significant competitive potential that are yet to generate significant revenues, firms involved in innovative products or significant research, firms that are actual or potential competitive force, firms that have access to competitively significant assets such as IPR, data, or infrastructure, and firms that provide products or services that are key inputs/components for other industries. However, there are no guidelines on what constitutes “significant revenue”, “significant research”, or how to ascertain if a firm is indeed a “competitive force”. However, these are merely illustrative in nature, and they serve the purpose of indicting the direction in which a deeper analysis is necessary. Needless to say, these illustrations, on a standalone basis, do not help in anticipating if the transactions are problematic.

Pursuant to paragraph 30 of the Guidance Paper, one of the legal requirements for a referral is that the concentration should threaten to significantly affect competition within the territory of the Member State(s) so referring. This takes away the EU character / cross-border dimension of the competition analysis and restricts it to the study within the referring Member State.

The timeframe for referring a concentration to the Commission is 15 days from the moment the transaction is “made known” to the Member State. i.e., when there is “sufficient information to make a preliminary assessment as to the existence of the criteria relevant for the assessment of the referral”.[29] While transacting parties are permitted to voluntarily provide information[30], it is unclear as to when the starting point of the referral process is in other cases. This also raises uncertainty as to the timeline of the transaction itself and may potentially impact business. Accordingly, it may be relevant for the parties of the transactions to include the possibility of an EC referral in the conditions precedent clause and require the parties to cooperate in such circumstances.[31]

Given the existence of some drawbacks in the revival of the Dutch clause, it may be advisable to either finetune its application or devise a more efficient mechanism to address the issues.

Germany and Austria, in a move away from jurisdictional thresholds have introduced transaction-value based thresholds, which aims to identify concentrations where the value of the transaction is well over the turnover of the entrant.[32] It may be beneficial to observe how this change in threshold plays out in detecting potential competitive harm. Another option is to carry out an ex-post analysis of completed transactions to avoid overenforcement. However, such analysis must be undertaken within a strict timeframe so as to avoid making the parties moving targets.

In order to finetune the Dutch clause, the referring State may, in line with the illustrative categories provided in Paragraph 19 of the Guidance paper, use filters based on product / innovation type and transaction type, apply market-share threshold values or transaction-value thresholds (German-Austrian mechanism), and assess the likelihood and magnitude of harm in its preliminary analysis. Further, it may be relevant to analyse the business plans of all the parties to the merger to fully understand the intent behind the merger. As an indication of what the post-merger situation may look like, it may be valuable to gain insights from consumers and other competitors (if any) in the relevant market, regarding their usage of the product and if their consumption would change due to the potential merger. From the perspective of the transacting parties, it may be advisable to provide a rebuttable presumption of anticompetitive effects,[33] and the parties are allowed to establish efficiencies or offer commitments to reduce anti-competitive risks of the merger.

The Dutch clause, at best, is a heuristics technique to address the issues concerning killer acquisitions. In the absence of any other mechanisms in identifying killer transactions, it is currently the safest mechanism to attempt to protect competition in the market. In a display of its serious commitment to consider Article 22 referrals, two such referrals are currently being scrutinized by the Commission.[34] It may be pertinent to observe and gain valuable lessons from the proceedings of these referrals before any changes to the EUMR are undertaken.

Footnotes [1] Investigation of Competition in Digital Markets, Subcommittee on Antitrust, Commercial, and Administrative Law of the Committee on the Judiciary, United States, 2020, available at: <> (accessed 27 February 2022). [2] L.Cabral, ‘Merger policy in digital industries’, (2021), < > accessed 26 November 2021. [3] Coleen Cunningham, et. al., ‘Killer Acquisitions’ (2020) Journal of Political Economy, Vol. 129, No. 3, pp. 649–702. [4] Jacques Crémer, et. al., Competition Policy for the Digital Era (European Commission, 2019) <> accessed 26 November 2021. [5] (Coleen Cunningham, et. al., ‘Killer Acquisitions’ (2020) Journal of Political Economy, Vol. 129, No. 3, pp. 649–702.) [6] Ibid, 2. [7] Amy C. Madl, ‘Killing Innovation?: Antitrust Implications of Killer Acquisitions’ (2020) <> accessed 26 November 2021. [8] Function creep is an imperceptible transformation in the data-processing system’s proper activity / original purpose. Simply put, it is the use of a technology / instrument for a purpose other than its original or intended purpose. See more at: Bert-Jaap Koops, ‘The Concept of Function Creep’ (2021) 13 Law, Innovation and Technology 29. [9] Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019, Federal Trade Commission September 15, 2021, <> accessed 26 November 2021. [10] Ibid, 4. [11] Ibid, 3. [12] OECD, Start-ups, Killer Acquisitions and Merger Control (2020) <> accessed 26 November 2021. [13] In recent recognition of this theory of harm, the FTC has challenged Illumina’s proposed acquisition of Grail, See [14] Cristine Caffarra, “‘How tech rolls’: Potential competition and ‘reverse’ killer acquisitions” (2020) <> accessed 26 November 2021. [15] Ibid, 2. [16] Ibid, 12. [17] Article 1, Council Regulation (EC) No 139/2004. [18] C. Scott Hemphill and Tim Wu, ‘Nascent Competitors’ (2020) 168 U. PA. L. REV. 1879 <> accessed 13 January 2022. [19] Ibid, p. 1888. [20] Case No. COMP/M.3916 T-Mobile Austria/Tele.ring (2006) <> accessed 13 January 2022. [21] Case COMP/M.5529 Oracle/Sun Microsystems, <> accessed 13 January 2022. [22] Ibid, n. 18. Hemphill and Wu give the example of the product plasticity of mobile phones which was initially meant for making calls on the go, but has now diversified to compete with laptops, televisions, cameras, and credit cards. [23] Moritz Lorenz, An Introduction to EU Competition Law (Cambridge University Press 2013), p. 281 [24] Margrethe Vestager, EU Commissioner for Competition, 'The Future of EU Merger Control’ (11 December 2020) < > accessed 27 November 2021. [25] Commission Guidance on the Application of the Referral Mechanism set out in Article 22 of the Merger Regulation to Certain Categories of Cases [2021]. [26] Ibid, Paragraph 13. [27] While the Guidance Paper does not make a reference to the SIEC test, paragraph 15 provides that the competition analysis may be based on “prima facie evidence of a possible significant adverse impact on competition”. [28] Case COMP/M.7217 Facebook/WhatsApp, <> accessed 13 January 2022. [29] Ibid, 25, Paragraph 28. [30] Ibid, 25, Paragraph 24. [31] Latham & Watkins, “Analysis of Commissioner Vestager’s announcement to accept referrals from NCAs for non-reportable concentrations” (18 September 2020) <> accessed 27 November 2021. [32] Bundeskartellamt / Bundeswettbewerbsbehörde, Guidance on Transaction Value Thresholds for Mandatory Pre-merger Notification (Section 35 (1a) GWB and Section 9 (4) KartG [July 2018] <> accessed 27 November 2021. [33] Ibid, n. 14. [34] Illumina/Grail, see; Facebook/Kustomer, see 13 January 2022.


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



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