Vertical mergers in the technology sector

Written on 23 May 2018

The European Commission recently announced that it was conducting an in-depth investigation into Apple's proposed acquisition of UK-based music-recognition service Shazam. This is despite the transaction failing to meet the prescribed EU Merger Regulation's turnover thresholds and notwithstanding the Commission's stated intention of moving away from carrying out in-depth investigations into potential vertical mergers by competition authorities.

As with the Commission's review of Facebook's 2014 purchase of WhatsApp, the authority is taking the opportunity to review another cross-border tech-sector deal that raises potential vertical foreclosure and Big Data concerns – but this time in circumstances where it has seized jurisdiction from a number of national competition authorities.

Digital 'megadeals' and the concept of value

The Commission's willingness to review mergers with genuinely pan-European effects, such as that between Apple and Shazam, appears to be in response to concerns that so-called 'megadeals' in the digital economy are otherwise at risk of avoiding proper scrutiny at a national level. This reflects the fact that the jurisdictional thresholds of most EU Member States are based on the parties' turnover in that country, which can fail to capture transactions involving a commercially highly-valued target that only generates limited actual turnover.

The concept of 'value' is becoming increasingly difficult to pin down in the tech sector. The ability to collect and utilise users' data (although soon to be limited by the GDPR), connect with a pre-existing loyal user base and/or force users to move away from a competitor's product by acquiring a service and then restricting its compatibility, can often hold substantially more value than a target's turnover might otherwise suggest.

To address this, competition authorities in Germany and Austria have recently moved away from assessing mergers solely on turnover by introducing a "deal value" element to their merger rules – although, in this case, the proposed Apple/Shazam merger was caught instead by the standard Austrian merger threshold. The transaction was notified to the Austrian authority, which submitted a referral request to the Commission under Article 22(1) of the EU Merger Regulation. This was then joined by six other Member States.

In examining the referral request, the Commission acknowledged that the acquisition did not meet the EU Merger Regulation turnover thresholds for triggering a notification, but noted that as the transaction "may have a significant adverse effect on competition", it was "best placed to deal with the cross-border elements of the transaction" and would therefore take over the investigation.

The Commission's decision to review this transaction has similarities with its decision to review  Facebook's 2014 acquisition of messaging service WhatsApp. That deal also fell short of the Merger Regulation turnover thresholds, but was notified to the Commission at the behest of Facebook, in order to avoid having to notify in multiple EU Member States.

Implications for the technology sector

The technology sector has a track record of raising new questions for competition authorities, which has not gone unnoticed by the European Commission. Johannes Laitenberger, the Commission's Director-General of Competition, noted in a recent speech that it was vital for competition enforcement authorities to remain "ahead of the curve" in the context of mergers and the digital economy.

A more value-based merger assessment has already been introduced in Germany and Austria, and it will be interesting to note whether other EU Member States or the Commission itself elect to introduce similar measures.

Osborne Clarke comment

It is clear that the digital sector remains an area of focus for competition authorities. There is also a clear move towards asserting jurisdiction over proposed mergers in the digital sphere in the light of the parties' internal documentary evidence – particularly regarding the underlying rationale behind each deal – rather than relying exclusively on turnover.

At the same time, senior officials at both the European Commission and the French Competition Authority have noted that, while each case should be assessed on its own merits, competition agencies would benefit from making early decisions on whether proposed vertical mergers are likely to have anti-competitive effects.

However, any move towards widening competition authorities' discretion to assert jurisdiction where established jurisdictional thresholds have not been satisfied has serious implications for business certainty.  To address this concern, the European Commission should issue new guidance on the circumstances when it can be expected to assert jurisdiction despite the jurisdictional thresholds having not been satisfied.