Start-ups, Killer Acquisitions and Merger Control

Start-up or nascent firms play a vital role in competitive markets, but traditionally, their relevance to merger control has been limited to providing evidence that a relevant market was likely to become increasingly competitive. Recent empirical work has shown that in some cases the acquisition of a nascent firm has triggered the loss of not only a competitive constraint, but also a product (as when a retail acquisition results in a store closure). Such cases have been labelled ‘killer acquisitions’. Killer acquisitions are therefore a theory of harm, which is a particular variation on the more general ‘loss of potential competition through acquisition of a nascent firm’ theory of harm. The risk that a loss of potential competition can harm consumers is well established, and research, ex-post assessment and case-law continue to identify new examples of such cases involving nascent firms. We see no reason why these risks should be ignored, nor that such concerns are likely to be confined to specific industries. The necessary conditions for a killer acquisition are however more specific than for a ‘loss of a nascent competitor’ and hence are likely to be rarer. Whether an agency chooses to go beyond meeting the evidentiary threshold required to substantiate the simpler potential competitor theory of harm will likely depend on whether the additional harm from a product withdrawal, over and above the loss of price and quality competition constraints, would affect either the weighing of harm against possible efficiencies, or the expected harm posed by a transaction. It may also reflect a decision to investigate such acquisitions as exclusionary strategies via ex-post investigation where necessary. We explore the extent to which nascent acquisitions can be investigated and challenged when necessary under existing merger control frameworks. We identify the need to conduct an in-depth counterfactual analysis, to consider new investigative tools, and to ensure that any claimed efficiencies are tied to the specific transaction in question. However, while the framework can, should, and is already being flexed, we suggest that an important shift in merger policy is required in this area. Such a shift might be facilitated through the explicit adoption of an expected harm test to remove a systematic bias against challenging mergers, through changes to notification processes, and by clarifying and hence placing a greater weight on the value of potential competition. We also see considerable merit in legislating to reverse the burden of proof in some circumstances, for example by creating a rebuttable presumption of anticompetitive effects for nascent acquisitions by dominant incumbents, either in general, or where the acquisition increases the risk of competitive harm, for example that there were a reasonable (25-30%) prospect of harm.