The CMA announced on 11 June 2019 that it had unconditionally cleared PayPal’s acquisition of iZettle, the innovative Swedish FinTech company that offers mobile point-of-sale services, following an in-depth six month Phase II investigation.
This clearance decision is to be welcomed, as concerns had been growing about the tightening of regulatory scrutiny on deals in the FinTech sector. The clearance decision also showcases the CMA’s more forensic approach to assessing the impact of a merger in a dynamic market.
Why is this important?
The decision has been seen as an important indicator of the CMA’s current approach to mergers in the digital sector. In recent years, there has been a recognition across the EU that traditional merger control is ill-equipped to capture and assess mergers involving innovative and highly valued tech companies that do not yet generate significant turnover. While a number of jurisdictions have adopted a transaction value test – indeed, the recent Furman Review suggested that a transaction value threshold may need to be introduced into UK merger control – little progress has been made in refining traditional analytical methods.
What caught commentators’ eyes was that, only nine days before the announcement of PayPal’s $2.2 billion proposed acquisition, iZettle had disclosed that it intended to float its shares for an aggregate $1.1 billion valuation. PayPal’s near-doubling of this valuation raised concerns that this might be another example of a ‘killer M&A’ transaction, where PayPal was paying over the odds to eliminate a perceived rival.
Assessing the rationale of the transaction
The CMA subsequently spent considerable time assessing PayPal’s transaction rationale and the basis for its valuation. In doing so, it carefully considered how the market for mobile point-of-sale devices would evolve over time if the deal did not proceed, by conducting a thorough review of the parties’ internal documents. Instead of simply comparing the proposed merger against the existing competitive position (which is the traditional approach when assessing the likely impact of a merger), the CMA compared the merger against various scenarios as to how the market would develop in the future – a so-called ‘dynamic counterfactual’. In this way, the CMA was able to conclude that the merger would not result in a substantial lessening of competition, despite the nearest competitor to the merging parties having a market share of less than 10%.
In the event, the CMA considered that, absent the merger, PayPal would have the incentive to improve its offering and the money to invest in doing so. However, as customers would still have the ability to switch to rival services, the combined PayPal/iZettle would still face significant competition from both existing players and new entrants, thereby ensuring that consumers’ interests would not be significantly harmed.
Interestingly, the CMA did not adopt its usual approach of distinguishing between traditional banks and innovative disruptors. Instead, the CMA defined a single market for offline payment services, which encompassed both traditional point-of-sale providers and mobile providers. This meant that large established players such as Worldpay and Barclaycard were included in the market alongside smaller specialist players. In no small part, this is a reflection of the dynamic nature of the FinTech sector – new technologies are continuously being introduced and, for those that meet with success – take-up can be extraordinarily rapid.
The PayPal/iZettle case is the first significant merger decision in the digital space since the Furman Review published its recommendations for reforming UK competition policy to address the specific challenges and opportunities raise by digital markets. While it is too early to tell whether the CMA’s approach represents a paradigm shift in how UK merger control is applied in digital markets, the CMA is clearly aware of the need to apply UK merger control in a flexible manner, and adapt it to the rapid pace of change that is a hallmark of digital and FinTech markets.