Denham Sadler
December 17, 2018

Mergers changes to hit startups

ACCC

Mergers changes to hit startups

Rod Sims: The ACCC platform review could seriously impact local startups

The competition watchdog’s proposed changes to Australian merger and acquisition laws could damage local tech companies and their ability to reach an exit, according to Tamme co-founder Jessica Glenn .

The ACCC released its much-anticipated draft report on its “world-first” inquiry into digital platforms this week, featuring several major recommendations.

The first such recommendation was for changes to Australian M&A laws to ensure that tech giants like Google and Facebook can’t use strategic acquisitions to stifle competition.

Under the changes, regulators would have to consider whether a planned acquisition involved a “potential competitor”, along with the amount of data that will be acquired.

Tech companies would also be compelled to give the ACCC enough notice of an acquisition for it to conduct a thorough review.

There were concerns that these proposals could hamper Australian startups’ ability to achieve a successful exit, and could reduce the size of these exits if global tech companies are taken out of the equation.

“What’s being recommended is the widening of the scope to anything that could be a ‘potential competitor’. That’s a terrifying phrase,” Ms Glenn told InnovationAus.com.

“It is possible to envision that being applied as ‘all platforms that connect users with content’, or even as ‘all platforms that could potentially connect users with content’," she said.

"That’s a level of uncertainty that will depress the amount of business activity across the sector.”

“They very well may have the ability to poison a deal. It’s an uncertain process that both companies need to submit to, with way too much room for interpretation. Overall, it makes it less attractive to acquire an Australian tech company.”

Being acquired by a global tech giant like Facebook or Google is a common exit strategy for many young tech companies, but the tightening of Australian laws could remove this as an option.

Sydney-founded mapping company Where 2 Technologies was acquired by Google in 2004 and was transformed into Google Maps. But under the changes proposed by the ACCC, the deal may never have happened.

The ACCC inquiry found that Facebook and Google enjoy huge market dominance that impacts the journalism and media industries, and all Australians, and that the government should take action to reduce this.

“While dynamic competition may place some degree of competitive constraint on Google and Facebook, the ACCC considers that this constraint is likely to be weak due to the size of the barriers to entry and expansion,” the report said.

“The ACCC has reached the preliminary view that strategic acquisitions by both Google and Facebook have contributed to the market power they currently hold,” the report said.

It found that both of the big tech companies have used strategic acquisitions to “entrench market power” and stifle competition in the space.

“This highlights an inherent challenge for regulators reviewing potential acquisitions by digital platforms: the need to speculate about changing digital habits by consumers, and the likelihood of firms to grow and develop to match those changing habits in the absence of a potential acquisition,” it said.

The competition watchdog recommended that Section 50(3) of the Competition and Consumer Act 2010 by amended to make it clear that the likelihood an acquisition would result in the removal of a “potential competitor” and the amount of data the acquirer would be obtaining as a result should be considered.

“The ACCC notes that it is currently not prevented from taking these factors into account in reaching a view as to whether a merger or acquisition is likely to substantially lessen competition and the ACCC will likely consider such factors in relevant cases even without the legislative amendment,” the report said.

“This recommendation is intended to signal the significance of these factors in relevant cases and remove any ambiguity as to their relevance.”

“In particular, articulating these factors in legislation is also intended to have the effect of signalling the importance of these factors to the courts of the Competition Tribunal, in assessing whether a merger or acquisition has the effect or likely effect of substantially lessening competition.”

The new rules could also reduce the size of exits for Australian startups, Ms Glenn said.

“Policies like this, combined with the tightening of the research and development tax incentive, the abandonment of the Innovation Agenda, and the Access and Assistance Bill all signal to the rest of the world that Australia is too hard to do business with, at least in the tech sector,” she said.

“That will lead to less potential acquisition partners and by extension lower value exits for companies that remain in Australia.”

It could also lead to Australian companies relocating overseas.

“What’s more damaging long-term though is that tech startups will go back to flipping offshore at the earliest chance. That is terribly disappointing as over the last five years this had been occurring less and less - there were even a number of companies that had flipped back,” Ms Glenn said.

“These recommendations, though well intentioned, are likely to do much more harm than good.”

Australia’s M&A laws need to put more scrutiny on “potential competition”, the competition watchdog said in the report.

“While it is easier with hindsight to identify technologies, products and startups that had the potential to thrive and compete vigorously, and to identify issues with them being acquired by the largest incumbent in the market, more emphasis is needed on the potential for competition," it said.

"Merger parties can be quick to dismiss the need for ACCC engagement when buying a relatively small business, particularly where there is no immediate overlap."

The ACCC is now accepting submissions on its draft report until mid-February, and is expected to hand the final recommendations to government by June next year.

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