tag:theconversation.com,2011:/uk/topics/eu-commission-10119/articlesEU commission – The Conversation2022-07-25T13:42:43Ztag:theconversation.com,2011:article/1872782022-07-25T13:42:43Z2022-07-25T13:42:43ZTech firms face more regulation after moves to stop ‘killer’ acquisitions – but innovation could also be under threat<figure><img src="https://images.theconversation.com/files/474828/original/file-20220719-16-9if249.jpg?ixlib=rb-1.1.0&rect=20%2C25%2C3323%2C2180&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Regulators are increasingly concerned about the impact of larger firms acquiring smaller rivals.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businesswoman-drawing-big-fish-eat-small-235025512">Shutterstock</a></span></figcaption></figure><p>One way to eliminate the competition in business is simply to buy them out and shut them down. And that means less choice for consumers and sometimes the loss of innovative and, in the case of the pharmaceutical industry, even life-saving products. But such so-called killer acquisitions are likely to face greater scrutiny in the US and EU following a recent expansion of competition regulators’ powers.</p>
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<p>A July 2022 decision by the European Court of Justice has <a href="https://www.euractiv.com/section/digital/news/eu-court-confirms-commissions-extended-powers-in-merger-reviews/">expanded</a> the European Commission’s ability to investigate a wider range of mergers and acquisitions (M&A). And last year, the US Federal Trade Commission (FTC) also <a href="https://www.ftc.gov/system/files/documents/public_statements/1596396/statement_of_chair_lina_m_khan_commissioner_rohit_chopra_and_commissioner_rebecca_kelly_slaughter_on.pdf">changed its criteria for scrutinising</a> certain deal types. </p>
<p>Historically, these regulators have only been empowered to examine business deals of a certain size, mostly between potential direct competitors. These recent rulings will empower them to examine almost any purchase. </p>
<p>When applying these new powers to fast-moving industries such as pharma or technology, however, regulators must navigate a world of costly and risky investments in research and development. It’s very difficult for regulators to spot a killer acquisition before it happens, and many M&A deals can actually benefit consumers. So calling it wrong could actually stifle innovation and stop new products from reaching the market.</p>
<p>US and EU regulators share the same fear: if dominant players are allowed to buy up start-ups, this could impact innovation and market concentration, depriving consumers of the benefit of new products and technology. In its announcement about its new approach, the FTC said “several decades” of consolidation across the economy has corresponded with a “lessening of competition reflected in growing mark-ups and shrinking wages”. </p>
<p>There is <a href="https://academic.oup.com/qje/article/135/2/561/5714769">research</a> to support this view. Similarly, <a href="https://ec.europa.eu/competition/consultations/2021_merger_control/guidance_article_22_referrals.pdf">EU regulators</a> want to be able to investigate – and potentially prevent – any acquisitions they believe may hurt consumers. </p>
<h2>Killer acquisitions</h2>
<p>When competition regulators try to ensure that established firms buying small innovative players don’t hinder or even destroy innovation, killer acquisitions are one of their top concerns. As documented in an <a href="https://www.journals.uchicago.edu/doi/10.1086/712506">influential economic paper</a> on the pharmaceutical industry, the goal of the dominant firm in such a deal is to destroy a potential competitor to its own business, even if it means patients never benefit from better treatments.</p>
<p>The recent changes to US and EU M&A scrutiny powers were triggered by a 2020 <a href="https://investor.illumina.com/news/press-release-details/2020/Illumina-to-Acquire-GRAIL-to-Launch-New-Era-of-Cancer-Detection/default.aspx">announcement</a> by US biotech firm Illumina about its plans to acquire Grail, a developer of early-detection cancer tests. At the time, this sounded like the kind of acquisition that would not suffer much scrutiny by antitrust authorities. </p>
<p>Grail’s product is not yet operational and acquiring it does not affect the dominant market position of Illumina. The deal did not even breach the EU merger regulation threshold of €5 billion (£4.3 billion) combined worldwide turnover for the companies involved. </p>
<p>Almost immediately, however, regulators <a href="https://www.ftc.gov/news-events/news/press-releases/2021/03/ftc-challenges-illuminas-proposed-acquisition-cancer-detection-test-maker-grail">in the US</a> and the <a href="https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3844">EU</a> challenged the merger. Both announced plans to scrutinise its potential impact on competition and innovation in the market for genome-based diagnosis. </p>
<p>In this kind of situation, regulators are often concerned about market concentration. If another start-up comes up with better diagnostic tests, for example, a dominant player like Illumina might <a href="https://www.jstor.org/stable/2534783">make its life difficult</a> in order to protect its recent acquisition. </p>
<p>But killer acquisitions are the most extreme case of this kind of acquisition deal. <a href="https://www.journals.uchicago.edu/doi/10.1086/712506">Research shows</a> that only about 6% of pharma acquisitions involve a large company buying a smaller one with a promising new drug simply to discontinue the innovative project.</p>
<p>In digital markets, dominant firms are also often suspected of pursuing a similar strategy. Last year, the UK regulator <a href="https://www.gov.uk/government/news/cma-directs-facebook-to-sell-giphy">ordered Facebook to sell Giphy</a>, a database of GIF-like animations it had <a href="https://www.theverge.com/2021/11/30/22740272/facebook-giphy-acquisition-competition-and-markets-authority-uk-regulator">acquired</a> in 2020 for US$315 million (£262 million), for fear that it was a killer acquisition aimed at destroying a potential rival in the advertising market. When Meta started its appeal of this decision in April 2022, Giphy had <a href="https://www.reuters.com/technology/meta-fights-overturn-uk-order-sell-giphy-2022-04-25/">yet to sell a single ad</a> in the UK.</p>
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<span class="caption">Mergers & acquisitions activity.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/merger-acquisition-business-concepts-join-company-716579470">Shutterstock</a></span>
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<p>Similar to the pharma sector, however, <a href="https://www.crai.com/insights-events/publications/beyond-killer-acquisitions-are-there-more-common-potential-competition-issues-tech-deals/">few tech deals seem to</a> correspond to the specific definition of a killer acquisition. And, in fact, dominant firms buying innovative start-ups before they generate any profit is a common business model in the digital economy.</p>
<p>In 2013, Waze was a potential disruptor to Google Maps as the dominant firm in the market for free online maps. But when <a href="https://techcrunch.com/2013/06/11/its-official-google-buys-waze-giving-a-social-data-boost-to-its-location-and-mapping-business%22%22">Google acquired it</a> for US$1.1 billion, it did not close Waze, as you would expect with a killer acquisition. </p>
<p>Instead, it added some of Waze’s innovative features into Google Maps and <a href="https://www.reuters.com/article/us-alphabet-google-waze-idUSKBN2AJ02O">kept the former as a niche product</a>. This allowed Google to stay dominant and <a href="https://www.jurist.org/news/2022/04/federal-antitrust-lawsuit-filed-against-google-over-maps-monopoly-and-waze-deal/">to boost its profits</a> from user data. </p>
<p>In this case, consumers benefited from a better Google Maps product, but Waze now has less incentive to innovate because it is not competing anymore. The FTC did not oppose the acquisition <a href="https://www.bloomberg.com/news/articles/2013-10-01/google-said-to-avoid-u-s-antitrust-challenge-over-waze">in 2013</a> but is now <a href="https://www.bloomberg.com/news/articles/2020-02-14/google-s-waze-deal-is-a-likely-target-in-new-ftc-antitrust-sweep">reportedly considering looking at it</a> again.</p>
<h2>Regulators’ big gamble</h2>
<p>If regulators routinely block such acquisitions, start-ups will need to operate differently. Rather than relying on an acquisition by a dominant player to inject capital into the company, they will have to find other ways to earn money – possibly by charging consumers directly. </p>
<p><a href="https://www.vox.com/2014/10/28/11632404/facebook-paid-19-billion-for-whatsapp-which-lost-138-million-last-year">WhatsApp</a> and <a href="https://www.npr.org/2012/04/10/150372288/instagram-sells-for-1-billion-despite-no-revenue?t=1658220346107">Instagram</a>, for example, had almost no revenue when Facebook bought them for US$19 billion and US$1 billion respectively. But they benefited from being acquired by a larger platform. Neither were killer acquisitions, but both increased market concentration.</p>
<p>By opening acquisitions of small and innovative firms to more scrutiny, regulators are taking a massive bet. To block an acquisition, they must demonstrate that it actually hurts innovation, often in very technical fields. </p>
<p>While researchers have been able to identify killer acquisitions after the fact, convincing a judge at the time of the purchase that a deal is bad for consumers <a href="https://www.cnbc.com/2021/05/17/att-fought-doj-for-time-warner-only-to-spin-out-three-years-later.html">is much more difficult</a>. As such, the stakes are high for regulators: a wrong decision could affect the future of medicine and the future of our digital lives.</p><img src="https://counter.theconversation.com/content/187278/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Renaud Foucart does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Preventing big firms buying up small ones can sometimes stop new products reaching consumers.Renaud Foucart, Senior Lecturer in Economics, Lancaster University Management School, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/296272014-07-23T17:52:21Z2014-07-23T17:52:21ZRising energy costs and insecurity show EU must get real about reducing demand<figure><img src="https://images.theconversation.com/files/54684/original/3v7k3q8q-1406129177.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Energy use - shrink it.</span> <span class="attribution"><a class="source" href="http://commons.wikimedia.org/wiki/File:Compact_fluorescent_light_bulbs_105W_36W_11W.jpg">Tobias Maier</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>In <a href="http://www.reuters.com/article/2014/07/23/us-eu-energy-efficiency-idUSKBN0FS1AL20140723">proposing</a> a 30% rather than a 40% energy demand reduction target, the European Commission is increasing the risks that European Union member states face from fossil fuel dependence and slowing the economic and social benefits of better insulated homes and lower energy bills.</p>
<p>The EU should have the courage to adopt a legally binding target of 40% energy savings by 2030 as was originally proposed. This would ensure that all member states introduce effective energy efficiency policies and would reinforce the EU’s leadership role in reducing carbon emissions and preventing dangerous climate change. </p>
<p>The proposed 30% target suggests a weakening of political commitment. Several studies have shown how the <a href="http://energycoalition.eu/sites/default/files/Fraunhofer%20ISI_ReferenceTargetSystemReport.pdf">technology and strategies are available</a> to achieve more ambitious reductions without imposing a burden on the economy. For example, there are already cars currently available that are 40% more fuel-efficient than the current EU standard – and changes in design and materials can reduce emissions by more than 40%. </p>
<p>A legally binding 40% target would potentially reduce EU gas imports by up to 40% compared to 2010, roughly equivalent to the amount of gas currently <a href="https://theconversation.com/russia-ukraine-and-europe-are-tied-by-gas-dependency-25719">imported from Russia</a>. It would <a href="https://theconversation.com/high-bills-the-cheapest-energy-is-energy-we-dont-use-20732">reduce household energy bills</a> through improved energy efficiency, lowering levels of fuel poverty and reducing the effects of poor-quality housing on health. And it would reduce the scale of investment in renewable energy infrastructure by reducing energy demand.</p>
<p>A binding target would ensure political commitment to the task of developing effective energy-efficiency policies and provide long-term confidence for investors delivering commercial goods and services for energy efficiency. It would also drive innovation in energy-efficient products, opening up market opportunities for EU industries around the world.</p>
<p>Why adopt a target as well as energy efficiency policies? Improving energy efficiency is the cheapest and fastest way of reducing carbon emissions, while at the same time providing economic, social and environmental benefits. Without an ambitious overall energy-efficiency target it’s unlikely that member states would unlock these benefits. Nor can these benefits be achieved through the carbon price delivered through the EU emissions trading scheme.</p>
<p>An aggregate target helps ensure that energy savings in one area are not offset by the rebound effect of increased energy demand in another. A legally binding target at the EU level would help ensure that progress is monitored, action is taken and results achieved. None of this is incompatible with the emissions trading scheme provided the appropriate steps are taken to ensure a minimum carbon price.</p>
<p>A 40% target is within our grasp, technically and economically, and would send a strong message that EU intends to lead on these issues. Regional instability in North Africa, the Middle East and now Ukraine has shown time and again that over-reliance on imported fossil fuels makes countries vulnerable to price shocks and supply interruptions.</p>
<p>We need to reduce those risks and at the same time protect the climate. Improved energy efficiency comes top of the list for cost-effectiveness and wider benefits. Recent progress has demonstrated that significant reductions in energy consumption can be achieved while maintaining productivity and quality of life – UK energy consumption fell by 12% between 2000-2012, while <a href="https://www.gov.uk/government/collections/energy-consumption-in-the-uk">GDP increased by 58%</a>.</p>
<p>Improvements in technology and changes in behaviour will make a 40% reduction by 2030 not only desirable but entirely achievable. But it must be backed up by political commitment.</p><img src="https://counter.theconversation.com/content/29627/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Barrett receives funding from the Research Council's Energy Programme for the UK INDEMAND Centre and the UK Energy Research Centre</span></em></p><p class="fine-print"><em><span>Andrew ZP Smith receives funding from Research Councils UK. He works for the UCL Energy Institute.</span></em></p><p class="fine-print"><em><span>Steve Sorrell receives funding from the RCUK Energy Programme as part of the Centre on Innovation and Energy Demand.</span></em></p>In proposing a 30% rather than a 40% energy demand reduction target, the European Commission is increasing the risks that European Union member states face from fossil fuel dependence and slowing the economic…John Barrett, Professor of Sustainability Research, University of LeedsAndrew ZP Smith, Academic Head of RCUK Centre for Energy Epidemiology, University College CorkSteve Sorrell, Senior Lecturer, SPRU, University of Sussex Business School, University of SussexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/261182014-04-30T16:20:21Z2014-04-30T16:20:21ZUK must pick the right time to fight EU financial transaction tax<p>“In capitalist countries, the bank robs <em>you</em>.” Rightly or wrongly, this phrase – a reversal of an internet meme – sums up many Europeans’ reactions to the bank bailouts and austerity of the last few years. The EU responded with a series of populist measures – a restriction on <a href="http://eulawanalysis.blogspot.co.uk/2014/01/the-eus-financial-supervisory.html">short-selling</a>, criminal penalties for <a href="http://eulawanalysis.blogspot.co.uk/2014/02/jailing-bankers-new-eu-directive-on.html">market abuse</a>, and a proposal by 11 member states for a “Robin Hood tax” known as the Financial Transaction Tax (FTT).</p>
<p>The UK challenged the FTT in the European Court of Justice, fearing it could <a href="http://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Pages/The-effects-of-a-financial-transaction-tax-on-European-households'-savings.aspx">significantly damage</a> the City. But now, as widely expected, European judges have <a href="http://www.bbc.co.uk/news/business-27218615">ruled against</a> the UK. So at first sight the news looks like a big blow for the City, and indeed the whole country. </p>
<p>But in reality it is no such thing. The UK will still be able to bring a separate legal challenge to the FTT, if and when it is finally adopted, and, for the reasons set out below, such a challenge would have a much better chance of success. </p>
<p>The first thing to point out is that EU law is not “one size fits all”. Indeed, there are a number of different possibilities for some states to go ahead and adopt measures without all the others joining in. This is known in EU jargon as “differentiated integration”. The single currency is the most obvious example of such differentiation.</p>
<p>But there is also a lesser-known option for some member states to go ahead without the others in any area of EU law. This procedure, known as “enhanced cooperation”, has been used only twice before: in <a href="http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:189:0012:0013:en:PDF">divorce law</a>; and to create a “<a href="http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:076:0053:0055:en:PDF">unitary patent</a>”, applicable across various member states. The third usage was to authorise a group of member states <a href="http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:022:0011:0012:EN:PDF">to adopt an FTT</a>. </p>
<p>Enhanced cooperation works in two stages. First of all, the EU Council authorises a group of member states to go ahead in a particular area – divorces, patents, taxes. These authorisation decisions do not go into any detail about the law concerned. The EU institutions then negotiate the details of the legislation itself. This is known as the measure “implementing” enhanced cooperation.</p>
<p>When the enhanced cooperation procedure was used for the first time (in divorce law), the Council very quickly agreed on the implementation measure. However, on the second occasion when this procedure was used (the unitary patent), arguments over a <a href="http://www.unified-patent-court.org/">Unified Patent Court</a> meant it took nearly two years for the EU to adopt the implementing legislation. </p>
<p>Similar delays have occurred over the FTT. Legislation to set up the transaction tax was first proposed back in 2011. Enhanced cooperation has been authorised, but participating members each have a veto and they are struggling to reach agreement on rules of the tax itself.</p>
<p>It is easy to see why the UK objects to the proposal. It would not only tax transactions which take place in the financial markets of the participating member states (reasonably enough), but also those which take place in the financial markets of non-participating states – as long as one of the parties to the transaction is located in a participating state. To this end, the proposal would deem a British bank to be a French bank (for instance) in certain circumstances.</p>
<p>There is a very good argument that this proposal violates the EU’s rules on free trade in the internal market, and interferes with taxation sovereignty. EU treaties require any enhanced cooperation to be consistent with those rules. Indeed, it is widely known that the EU Council legal service believes that, for these reasons, the Commission’s proposal <a href="http://blogs.ft.com/brusselsblog/2013/09/10/eu-legal-opinion-against-the-ftt-full-text/">would be illegal</a> – if it were in fact adopted. </p>
<p>Though these arguments have been rejected by today’s judgment at this stage of the process, this was simply because the final shape of the transaction tax has not yet been decided. It is entirely possible that those countries who do want the tax might never reach agreement on the details, or that they might agree on an arrangement which doesn’t violate EU law.</p>
<p>Even if they do agree to adopt the current proposal, the UK will be able to challenge the relevant directive when the time comes. </p>
<p>If the UK’s challenge had succeeded, it would have ended any prospect of a European FTT for the time being. Its failure keeps the prospect alive. But because the courts rightly did not rule on the merits of the UK’s case against the Commission proposal – simply because that proposal has not yet been adopted – the UK has only lost a minor skirmish, not the war.</p>
<p>The mere fact the tax was challenged at all has made it clear to the participating states that the UK will vigorously defend its legal position, and may therefore have contributed to their difficulties in agreeing to the Commission proposal. The government’s legal action, although unsuccessful, may yet play some role in ensuring that a transaction tax, if one is finally agreed, does not hurt British banks.</p>
<p>An FTT limited to transactions within participating countries would of course not raise as much money. Then again, the UK could also reduce its budget deficit if it could (for instance) collect a toll from drivers on German motorways, or tax all the cheese bought in France. The absurdity of these scenarios shows why a future British legal challenge to the final FTT, if such a challenge is necessary, would have a much greater chance of success.</p><img src="https://counter.theconversation.com/content/26118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steve Peers does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>“In capitalist countries, the bank robs you.” Rightly or wrongly, this phrase – a reversal of an internet meme – sums up many Europeans’ reactions to the bank bailouts and austerity of the last few years…Steve Peers, Professor of Law, University of EssexLicensed as Creative Commons – attribution, no derivatives.