How CCI should look at M&A deals in digital economy
M&A deals in the digital economy require antitrust authorities to scrutinize transactions on a holistic understanding of the market
Internet firms have revolutionized the way in which business is conducted, across the globe and in India. Innovative technologies have benefited the economy and all stakeholders through a reduction in the dependency on cash (e-wallets) and by facilitating ease of access to services (online bookings).
Mergers and acquisitions (M&A) in the digital economy require antitrust authorities to scrutinize transactions on a holistic understanding of the market. Further, disruptive technologies that challenge the traditional markets must be analysed carefully while keeping in mind their pro-competitive effects and benefits to consumers.
CCI’s decisional practice relating to e-commerce
The Competition Commission of India (CCI) has played a key role in enabling businesses in the digital economy to thrive and grow while ensuring that innovation of the internet economy is not hindered. If the key objective of a merger is to acquire access to new data, which would result in higher concentration of data post-combination, this could potentially result in market foreclosure and creation of entry barriers, and would become a competition law concern. However, the regulator must evaluate the merger in terms of sufficiency of choices for consumers, innovation and improved quality products and services, while maintaining a fine balance in order to not impede M&A activity.
CCI has assessed several transactions relating to e-commerce marketplaces such as investments in Snapdeal and BigBasket, and the consolidation of Flipkart and eBay India. CCI observed that the e-commerce marketplaces offer better services to consumers in terms of discounts, more product offerings and doorstep delivery. This availability of choice to consumer and presence of multiple players has significantly contributed to the regulator concluding that investment and consolidation in the e-commerce market are not detrimental to competition.
Ongoing consolidation (Amazon’s proposed bid to acquire a majority stake in Flipkart) will lead to interesting regulatory outcomes and CCI is likely to continue to test mergers using traditional tools of analysis while applying these to the specific factual matrix of the digital economy.
Guidance from global experience
In 2005, Myspace was acquired by News Corp. for $580 million, followed by a $900 million advertising deal with Google in 2007. However, post the entry of Facebook, Myspace lost its relevance as the customers shifted to Facebook, and it was ultimately sold for $35 million in 2011. This demonstrates the transitory and dynamic nature of the market, where the new entrant/innovator/ has the ability to alter market dynamics. Globally, there has been increased interest in antitrust issues with respect to technology firms and the approach of other antitrust regulators is of significant relevance in today’s inter-connected world to the CCI. One such instance was Facebook’s acquisition of WhatsApp that was considered and approved by the Federal Trade Commission and the European Commission (which reviewed the transaction as it met the jurisdictional thresholds of Cyprus, Spain and UK), but despite the acquisition affecting a combined amount of 1.7 billion users, it escaped the scrutiny of competition regimes based on turnover, such as, India—as digital companies tend not to have high turnover due to provision of free services.
Data can have pro-competitive and anti-competitive effects. When data becomes a source of market power, it can lead to a situation of a data advantage to the established players to the detriment of smaller or newer entrants. Conversely, data can address information asymmetry by increasing transparency.
The flip side of this is transparent markets are more prone to cartelization. Given that it is data and not market shares or turnover which will be the key in future mergers of this ilk, competition regulators are increasingly amending their merger control regimes to adapt to the unique situation of the digital economy.
It may be time for CCI to consider several alternatives (transaction value, users, data, etc.) to review merger thresholds for the digital economy to avoid a Facebook/WhatsApp-like situation.
Nisha Kaur Uberoi is partner and national head, Competition Law at Trilegal
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