Reconsider mergers between tech rivals

“Do we review merger thresholds downwards and or completely revise criteria for determining market shares (turnover consideration)?” posed the the Competition Authority of Kenya (CAK) Director-General on one of our LinkedIn posts after we published the first part of this article on “Why ‘killer acquisitions’ should worry regulators”on September 29, 2020, in the Business Daily.

He went on to note that “this is an area of great interest, especially post Covid-19 due to the increased digitalisation of the economy”.

In this second segment, we highlight how the CAK may be able to pre-empt the acquisition of nascent competitors in the Kenyan digital space, protecting innovation and future competition.

For clarity, there is a distinction between a killer acquisition and the acquisition of a nascent competitor. The former involves an incumbent player acquiring a potential future competitor to shut down the innovation. The latter frequently involves the acquisition of a potential competitor for integration within the incumbent’s ecosystem.

Our focus is on the acquisition of nascent competitors such as the acquisition of Instagram by Facebook.

We analyse the gaps under our current competition regime in protecting future digital competition based on the Facebook-Instagram merger, had it been done in Kenya.

The first step would be for Facebook and Instagram to establish whether they need to notify the CAK of their merger and if notifiable, give the CAK the authority to analyse whether the merger is pro or anti-competitive then approve or reject it. For a merger to be notified to the CAK, there are rules, which generally focus on the value of the assets and turnover of the merging parties.

Considering that Instagram did not have significant revenues when it was acquired and assuming Facebook had insignificant revenues/assets in Kenya, the merger would not have been notifiable and thus not scrutinised by the CAK.

Yet, it’s been argued that there are several anticompetitive effects that should have been considered by competition authorities at the time of the merger. Innovative startups are usually acquired by dominant companies early on in their life cycle before they have any significant revenues/assets (if any), making it difficult for such acquisitions to qualify for scrutiny by competition authorities.

The CAK could consider pushing for the current thresholds to be amended to not only focus on the turnovers and assets of the merging parties, but also the purchase price. If that was the case, the $1 billion purchase price paid for a two-year-old startup that did not have tangible revenue model would have been an indicator that the acquisition could have been done by Facebook with the motive of eliminating a future competitor.

The justification being that the purchase price paid by Facebook may have better reflected the economic potential of Instagram than its earnings at the time. However, we recognise that the current rules give power to CAK to scrutinise mergers that fall below the threshold where there are competition concerns but it would require CAK to always have its ears in the market rather than being notified.

Now, assuming that the merger would have been notified to the CAK — what would CAK have taken into consideration before approving (with or without conditions) or rejecting the merger? The regulator has published guidelines on how it assesses mergers, the key factor being to assess whether a merger would substantially prevent or lessen competition and a public interest assessment.

In assessing the effect of the merger on competition in Kenya, the CAK would have compared the competition landscape if the merger had been approved and the landscape if the merger did not happen (the counterfactual).

This is where the rubber meets the road. It would be easier to picture how competition would be like if you have a merger involving two established competitors.

However, in our scenario, Instagram had limited social network functionalities, insignificant advertising revenues and was merely a photo sharing application at the point of acquisition.

The CAK would have had to project and predict the growth of Instagram into today’s social networking competitive force to determine whether its acquisition would have substantially lessened competition.

This is an extremely complex exercise that even the competition authorities in developed countries are still figuring how to go about. It’s been proposed that this could be resolved by empowering the authorities with powers — if they don’t already have them — to require the merging parties to disclose a wider set of information as possible. For example, the disclosure to the US Congress of communications at Facebook, which showed that the Instagram acquisition was about eliminating a future competitor would have provided otherwise unavailable evidence for the merger determination at the time.

The CAK should thus consider reviewing the set of information it requires from merging parties, especially in the digital space as it could be the key to unlocking the complexity of the exercise — and would offer them a better view of the counterfactual.

Protecting nascent competitors should be a concern to Kenyan consumers as it could help spur innovation, improve the price and quality of goods and services. However, it will not be a walk in the park for regulators.

Mr Karanja is data protection compliance & commercial law practitioner and Mr Ndegwa is corporate & commercial lawyer