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Why ‘killer acquisitions’ should worry regulators

Acquist

Summary

  • Killer acquisitions have become a phenomenon over the last few years.
  • In the March 2019 Report of the Digital Competition Expert Panel sanctioned by the UK government, it was illustrated that over the last 10 years the five largest technology firms had made over 400 acquisitions globally.
  • A popular example is the acquisition of WhatsApp and Instagram by Facebook.

“Yeah, I remember your internal post about how Instagram was our threat and not Google+. You were basically right,” wrote Facebook CEO, Mark Zuckerberg in an April 2012 email. “One thing about start-ups though is you can often acquire them,” he continued.

This was part of a series of redacted emails released for the first time on July 29 in the US Congress during the hearings on US anti-trust laws by the House Judiciary Antitrust, Commercial & Administrative Law Subcommittee. One million and three hundred thousand and five public hearings and 13 months later, the US Congress held a joint public hearing on Amazon, Google, Facebook & Apple on their often unchecked power and anti-competitive tech practices.

One such practice, “killer acquisitions”. It refers to the acquisition of nascent competitors by dominant players. A nascent competitor is an entity whose innovation represents a serious future threat, real or imagined, to an incumbent player. However, the company’s potency as a competitor is as yet to be fully developed, hence unproven.

A nascent competitor could be a new platform challenging a dominant one or a new but unproven cure to an illness where current drugs market for that illness have an incumbent player. Where an incumbent firm takes over an innovative target solely for the purpose of stopping the target’s innovation and future competition is what has been defined as a “killer acquisition”.

Killer acquisitions have become a phenomenon over the last few years. In the March 2019 Report of the Digital Competition Expert Panel sanctioned by the UK government, it was illustrated that over the last 10 years the five largest technology firms had made over 400 acquisitions globally and that they had rarely been blocked by competition regulators.

A popular example is the acquisition of WhatsApp and Instagram by Facebook. It’s reported that one Facebook senior executive wrote that “WhatsApp launching a competing platform is definitely something I’m super-paranoid about.” At the time, WhatsApp was a threat to Facebook’s dominance as a social network provider.

In 2014, Facebook acquired WhatsApp for a whopping $21.8 billion. Earlier on in 2012, Facebook had acquired Instagram for approximately $1 billion. For context, Instagram had launched two years earlier and had become one of the most downloaded applications. Reporting on the acquisition, the New York Times noted that the deal was a notable move for Facebook, which had exclusively focused on bite-size acquisitions, worth less than $100 million. Considering the rapid growth of Instagram, it could be argued that Instagram was a nascent competitor to Facebook and its acquisition was Facebook’s strategy to eliminate a potential future threat.

Whereas we are yet to see or have comprehensive studies of acquisitions in Kenya and across Africa highlighting killer acquisitions, the fast growth of the digitalised economy is likely to spur a myriad of such acquisitions of nascent competitors in the sector. According to Digest Africa, the value of mergers and acquisitions in the African tech ecosystem was $504 million in 2018. Early this year, Uber completed the buyout of Careem, a ride hailing service that has operations in Egypt, Morocco and some Middle Eastern countries for $ 3.1 billion. With the closing of the deal, Uber acquired Careem’s mobility, delivery and payments business in the countries it operates in.

Whereas, a nascent competitor would generally be an early stage business or product that is yet to be a full-fledged competitor unlike Careem, the acquisition of Careem is an indicator that businesses in Africa that challenge or threaten the dominance of global incumbents could easily be targets of killer acquisitions.

“Killer acquisitions” are and should therefore be a concern for both African and Kenyan regulators as they have the ability to suppress future competition by eliminating potential competitors in a market and/or strengthening the position of a dominant player.

Nascent competitors play a significant role in competition and innovation, and the last two decades are evidence that new firms with innovative technologies can challenge and replace incumbents. Consider the launch of the iPhone and the displacement of BlackBerry in the first decade of this millennium or the filing for bankruptcy by the famous Kodak that had become a giant in the photography industry since its founding in the 1880s.

Locally, the growth of digital lending applications and platforms such as M-Shwari, Tala, Branch, is gradually challenging the role of traditional banks in the lending industry and in same breadth, the mobile payment systems such as M-Pesa have not only led to more financial inclusion but challenged the traditional role of banks in facilitating money transfers.

By and large, competition invigorates better outcomes for consumers by ensuring that prices remain low, and goods and services are of high quality. These are benefits that could be generated in future by a nascent competitor.

It is therefore imperative that Kenya urgently sets the foundations to protect innovators through its competition regime to pre-empt “killer acquisitions” by both local and global incumbents.

In the second part of this article, we will discuss the challenge of regulating “killer acquisitions” and how our competition laws can be used to protect Kenyan innovators.

Arnold Karanja is a data protection compliance and commercial law practitioner, and Ndegwa Alex is a corporate and commercial lawyer.