TMT 2020: Salvation Through Innovation: Not So Fast
Looking to get your deal cleared in the U.S.? Point to a disruptive technology or innovative new entrant as evidence that current market shares are not indicative of the combined company’s future significance. Easy clearance in less than 30 days, right? No so, according to the outgoing Deputy Director of the U.S. Federal Trade Commission’s Bureau of Competition, Stephen Weissman.
In remarks before the Washington State Bar Association on November 4, 2015, Mr. Weissman warned that merging parties’ claims that “disruptive forces . . . will soon emerge and shake up the competitive dynamic in the market in the near future” do not automatically result in clearance. This is significant for companies in the TMT space, where technological change is omnipresent and current market shares are often not indicative of the future competitive landscape. In this article, we describe how the U.S. competition agencies evaluate innovation and tips from Mr. Weissman’s speech on how to make such arguments effectively during merger review.
Background on the U.S. Competition Analysis
Mr. Weissman explained the U.S. competition agencies’ (the FTC and DOJ) approach to merger investigations and pointed to transactions in the last several years where disruptive forces did (or did not) tip the balance.
- Under Section 7 of the Clayton Act, the agencies are tasked with evaluating whether a proposed transaction is likely to substantially reduce competition in any relevant market.
- To perform this analysis, the agencies assess the transaction’s impact on several dimensions of competition, which include price, quality, service and innovation.
- The typical starting point, however, is the parties’ historical market shares and their prior bidding and pricing behavior.
Where market conditions are stable, Mr. Weissman stated, “those historical facts may provide most if not all the information [the agencies] need to feel comfortable in our predictions of the future.” Where it appears either company’s position may change, the agencies need to look further.
Many parties steer the agencies to consider technological change or new competitors that would make the current competitive landscape irrelevant as an indicator of the merged company’s post-transaction behavior. In United States v. Microsoft, 253 F.3d 35 (D.C. Cir. 2001), the D.C. Circuit court articulated this theory that “[r]apid technological change leads to markets in which firms compete through innovation for temporary market dominance, from which they may be displaced by the next wave of product advancements.” Id. at 49. Under the 2010 DOJ/FTC Horizontal Merger Guidelines, to be considered, such changed circumstances must be “timely, likely, and sufficient either to deter or counteract the competitive effects of concern.” Where the evidence the parties provide for this change mirrors the facts the reviewing agency gathers in its investigation (i.e., through its review of the parties’ ordinary course business documents, its interviews of customers and competitors, and its review of data obtained from such third parties), Mr. Weissman said the agency is likely to clear the transaction without action.
The Impact of Technological Change in Recent Transactions
Mr. Weissman identified Google’s acquisition of AdMob in 2010 as a prominent example of how technological change can affect the analysis. The FTC was initially concerned the deal would eliminate direct competition between the two leading mobile advertising platforms. During the course of the investigation, two major developments occurred that demonstrated competitive circumstances could change in a way that meant Google and AdMob would no longer be the leaders. First, Apple acquired the third largest mobile advertising platform, and Second, Apple introduced its own platform that would be distributed to app store developers. Because of the timing and impact of Apple’s entry, the FTC cleared the transaction without conditions, stating, “[a] s a result of Apple’s entry (into the market), AdMob’s success to date on the iPhone platform is unlikely to be an accurate predictor of AdMob’s competitive significance going forward, whether AdMob is owned by Google or not.” Google/AdMob is a quintessential example of how the rapid pace of innovation and change in tech fields can make all the difference in a deal that looks challenging at the outset.
Likewise, in its closing statement for the Office Depot/Office Max transaction in 2013, the FTC pointed to “the explosive growth of online commerce” as the key changed condition from its 1997 litigated challenge of Staples’ proposed acquisition of Office Depot. Office supplies are not considered “high tech” but their method of delivery had changed as a result of tech (the internet). By contrast, in The Men’s Warehouse’s acquisition of Jos. A. Bank, the parties’ claims that internet sales were eating into their traditional store-based sales model (thus reducing their competitive significance over time) were not persuasive. The FTC agreed there was some increase in the online sale of suits but this was not meaningful enough to drive their analysis. What sealed the deal for the FTC in allowing the transaction to close was competition from other brick-and-mortar stores, not an internet-based disruption in how men purchased suits or rented tuxedos.
Additional key takeaways from Mr. Weissman’s remarks include:
- Disruptive technology and innovative new entrants can be meaningful arguments for why the current competitive significance of merging parties may be overstated. These arguments have particular significance for companies in TMT industries, where change is rapid.
- Such arguments, however, must be backed by strong evidence that these game-changers are timely (i.e., will occur within 2-3 years), likely, and sufficient to counteract present-day competitive concerns, as was the case in Google/AdMob.
- In crafting their merger clearance strategy, parties must not overlook arguments that current competition in the relevant market at issue is robust.
How We Can Help
Hogan Lovells’ ACER practice group can guide TMT clients in developing global merger clearance strategy when a deal is just a glimmer in a business development executive’s eye. Leveraging the firm’s deep industry background in the TMT sector, Hogan Lovells can provide tailored advice to help clients through worldwide merger review.