Australian regulator's proposals on Silicon Valley mergers point to a tougher stance

4 June 2019 10:22am

9 January 2019. By James Panichi.

On paper, the proposed changes to Australia’s mergers and acquisitions laws put forward in the competition regulator’s draft report on digital platforms including Facebook and Google shouldn’t be enough to set Silicon Valley’s collective imagination on fire.  

The interim recommendations propose that platforms provide advance warning of any Australian acquisition and that the regulator be granted powers to assess takeovers through the prism of the target’s potential as a future competitor. Neither proposal is anywhere near the desks of Canberra lawmakers.

What’s more, industry-specific competition legislation — in this case, laws applying to technology companies — is highly unusual. The chances that the M&A proposals contained in the top two recommendations of Australia’s groundbreaking digital-platforms inquiry will become law are slim, at best.

Why is it, then, that a rough draft of a glorified policy thought-bubble is attracting such serious attention from industry observers in Australia?  Why is the wording of the proposal being parsed and analyzed with such fervor?

The answer, it appears, is that the recommendations dealing with acquisitions are being read as part of a broader context — one in which a watchdog with growing political clout is making its concerns about regulation of the fast-moving tech industry known to both its political masters and the global digital giants. 

Even if the draft M&A recommendations were left out of the inquiry’s final report when it’s tabled on June 3, the Australian Competition & Consumer Commission, or ACCC, is telling the world that the practice of buying out startups to stop them evolving into competitors should be viewed as problematic.  

This reading suggests ACCC Chairman Rod Sims, whose bipartisan support in federal parliament saw him appointed to another three-year term last year, is providing the policy drive to follow through with previously expressed concerns over strategic, pre-emptive acquisitions.

The Sims worldview on tech deals sees reasons for grave concerns about Facebook’s 2012 acquisition of photo-sharing app Instagram, or Google’s 2007 purchase of technology company DoubleClick, or even Facebook’s broken promises on data sharing ahead of its 2015 acquisition of WhatsApp.   

Speaking just two months ahead of the draft report on the digital-platforms inquiry, Sims said that while the impact of the Facebook-Instagram deal on competition would have been “extremely difficult to predict,” regulators still need to get into the game when the acquisition of smaller rivals is being considered.

Sims has used the draft report’s M&A recommendations to place the regulation of Silicon Valley’s approach to acquisitions at center stage. This fact alone is bad news for the US platforms, but it’s even worse news for local startups hoping to make a fast buck by selling out early to a global tech giant.

‘Remove any ambiguity’

Two of the 11 recommendations contained in the preliminary report on the ACCC’s Digital Platforms Inquiry touch on mergers and acquisitions.  

The first suggests legislators tweak section 50(3) of Australia’s 2019 competition law. The new wording would add three words to the legislation to allow the ACCC to step in if an acquisition were to remove from the market a competitor “or potential competitor.”

In other words, the ACCC wants to spell out its right to intervene even when a company’s present-day market share presents no objective challenge to competition. Again, this harks back to Sims comments on Instagram, a company that had just 13 staff and no revenue when it was acquired by Facebook.

In the same breath, the regulator argued that other sections of the legislation already provide it with the power to consider possible, future competition. Yet the proposed wording would “remove any ambiguity” and would help by “signaling the importance” of these concerns.

The notes accompanying the recommendation name-check the deal that Sims sees as emblematic of the regulatory challenge: Facebook’s Instagram acquisition. But the draft report concedes that, even with the benefit of hindsight, the decision to block that deal wouldn’t have been an easy one to make.

The first recommendation also makes reference to the "amount and nature of data which the acquirer would likely have access to as a result of the acquisition" — again, although the control of data is something the ACCC is already able to take into account, the spelling out of this priority may suggest a plan to narrow its focus. 

The draft report’s second recommendation is tailor-made for digital platforms such as Facebook and Google. It suggests that the companies provide “advance notice of the acquisition of any business with activities in Australia and to provide sufficient time to enable a thorough review” of the deal.

“If such a commitment were not forthcoming from the major digital platforms, other options could be considered to address these issues,” Recommendation 2 of the interim report reads — an allusion to possible additional enforcement powers.

The reasoning here appears straight forward. There is no compulsory merger-filing requirement in Australia and, under current rules, the ACCC has a maximum of just 12 weeks after announcing a public review to decide whether to clear a deal or mount an in-depth review.

The argument is that it requires time to assess a deal not just in terms of its present-day competition implications but also its future ones. The ACCC is demanding a new arrangement for what it sees as a new regulatory challenge.

Statement of intent

Those advising startups in Australia say they can offer their clients some reassurance: at this stage, the interim report is merely advancing policy proposals and, in the past, legislators haven’t shown an inclination to adopt sectoral-specific prohibitions similar to the one contained in Recommendation 2.

Nonetheless, they say that the proposals do raise issues of “real, genuine and significant importance” that are magnified by the fact that the ACCC’s digital-platforms inquiry is a world-first investigation into Silicon Valley’s impact on publishing.

“They are certainly providing leadership; they are also looking at enforcement action in this space,” says Minter Ellison’s Melbourne-based partner Geoff Carter.

According to Holding Redlich partner Angela Flannery, the M&A recommendations are noteworthy more for the issues the ACCC is attempting to bring to the fore than for any likely legislative outcome.

She believes that, with the regulator saying it already has the power to assess a merger’s impact on future competitiveness, the first recommendation should be seen as a warning that the ACCC is likely to refocus its merger reviews to include an analysis of whether the target of an acquisition is a potential competitor.

“It’s an issue that the ACCC will take into consideration more seriously that they might have before,” Flannery said. “However, the ACCC will need to take great care in assessing whether an entity is a potential competitor, as this definitely involves an element of crystal-ball gazing.”

As for the second recommendation, Flannery believes this is the ACCC signaling that it will have a discussion with the tech companies about giving binding undertakings to provide adequate notice of planned deals with an Australian element. “They’re hoping that the platforms will voluntarily agree to do that,” she said.

ABA 2019