Nascent Acquisitions Turning into Killer Acquisitions – A Potential Competitive Threat

[By Pragya Dixit]

The author is a student at ILS Law College.

Introduction

In contemporary times, it is an evidentiary fact that the core stimulus of any economy is its Nascent firm industry. It is an industry that is a representative of new and developing ventures by novice entrants to bring new operations, products, and value addition into the market. They are a hub of fresh talent, ideas, disruptive innovation, and with their non-conformist approach, they become a flag bearer of evolution and development in the industry.  But what makes their existence all the more crucial is their role in maintaining balance and healthy competition in the market. They do so, by breaking into the concentrated markets and forcing the incumbent firms to either keep up with the innovations to co-exist or accept defeat in the race of competition and exit the market.

As significant as their presence is for the market, it surely acts as a hurdle for the incumbent dominant firms, as they are a source of potential future threat for them. It is this fear and threat which persuades existing firms to engage in acquisitions of such novice firms.

Nascent Firm Industry a Threat – But Why? 

The most prominent reasons for the companies to perceive this industry as a threat are:-

  1. The Nascent firms are in a position to accrue various benefits from the government in the form of subsidies, tax cuts, etc, which gives them an advantage over others to develop.
  2. They generally possess such technologies that have the potential to knock down an entire line of product of a dominant player.
  3. Also, their gradual entry into market space takes away the consumer base of the incumbent players. Thus, contributing to monetary losses.

The above-mentioned factors inter alia lead to an undesirable increase in the competition in the market for the incumbent firms. Sometimes, it also results in their complete elimination.

So, as a way out, the dominant firms adopt the practice of acquiring such firms. This practice not only helps them in lessening the future competition but it also provides them with added benefits by giving them access to the resource bank of the target firm. Thus, this practice is widely followed and for some time now we have seen a surge in another trend, where Nascent Acquisitions are turned into “Killer Acquisitions”.

What are “Killer Acquisitions”?

 In such cases not only the competitor is killed but also the product. Hence, it is detrimental to both market competition as well as consumer welfare. The most common reasoning used behind Killer Acquisitions is that the big firms find it more convenient to buy and shut down a new firm rather than carrying on with it at a risk of putting the sales of its own product in danger or suffering a loss of revenue that it was expecting to earn from the sale of the product that it might substitute.

Every industry has the potential for such acquisitions but the major prey are the firms that are specifically acquired for their potential know-how or technological advancements like pharma industries and digital markets.

In a study report of  Cunningham et al(2018), it has been found that 6% of the acquisitions that take place in the pharmaceutical industries with drug projects are Killer Acquisitions. An example of such acquisition in the United States was the “acquisition of a pharmaceutical firm Mallinckrodt by Questor, who was a dominant player in the category of ACTH drugs(with its product named Acthar). In the mid-2000s, the Mallinckrodt started working on the development of a new synthetic called Synacthen, having the potential of being a direct competitor to Acthar. Sensing this threat, in 2013 Quesctor acquired the US development rights in Synacthen and followed the path of killer acquisition, acquired Mallinckrodt rights, and did not develop Synacthen at all”.

The same adverse impact can also be seen in the purchase of US-based Newport Medical Instruments by Covidien, which is an established ventilator manufacturer, used in cases of viruses like flu or Covid-19. In 2010, Newport received a tender from the US government to produce ventilators for any future emergency that may arise. But, in 2012 when Covidien acquired Newport, they reached out to the government citing the reasons they needed extra funding for the completion of the deal. Later, in 2014, they rescinded the contract on account of unprofitability from the deal,  and the government had to later award the deal to Philips. This single act of Covidien delayed the supply in general, we can see its impact on the masses.

The situation in cases of digital Market are no better, In 2020, a study by the world-famous researchers showed that recently companies like Google, Amazon, Facebook, and Microsoft are engaged in some 175 acquisitions, out of which 105 brands of the target firms were discontinued within a year.

What Measures Does India Have In This Regard?

In India, competitive matters related to acquisitions are dealt with under the Competition Act. But the competition law regime of our country is inadequate in deterring such acquisitions. Currently, only the acquisition of shares that meet the monetary and asset level thresholds which are mentioned in section 5 of the Competition Act is needed to be mandatorily notified to the CCI. The nascent acquisitions are way beyond such prescribed limits. Thus, these limitations make the scrutiny of such acquisitions impossible.

Does “Competition Amendment Bill, 2020” Offer a Solution?

In 2018, the government set up the Competition Law Review Committee (CLRC) to review the competition act. Committee in its report while deliberating over the issue of acquisitions in the digital markets, opined that the business models in the digital world are asset-light and have lesser turnovers, thus they easily escape the radar of the competition authorities. These regulatory gaps are a major lacuna and somehow leave a place for anti-competitive activities to flourish. Thus, there is a need for stringent regulations.

With this thought in mind, the amendment bill proposed to provide powers to the central government in consultation with the CCI, to prescribe in public interest any other criteria in addition to those which are mentioned in clause (a), (b), (c) of section 5 of the act and the fulfillment of such criteria can make any acquisition or merger deemed to be a combination under this section and notification to the same is mandatory to be given to the commission under section 5 of the act.

The committee during its discussions acknowledged “that the major reason behind increasing acquisitions in the digital market is that despite their small size and low turnovers, they are innovative and advanced.  They have managed to create a good consumer base for themselves which is appealing but sometimes a threat too for the incumbent firms.” So we see that these companies have capabilities to pose future competitive threats and thus they become a part of the group which is highly vulnerable to Killer Acquisitions. The changes that have been introduced in section 5 of the act provides the CCI and the government with the power to take protective measures which are necessary for the same. These introduced measures are wide enough to include the Killer Acquisitions problem holistically.

Thus, Even though the committee did not deliberate over the issue of Killer Acquisitions directly but by not making this provision exclusive, to digital market companies only it kept itself open to the possibilities of such impending dangers.

 Policy Response Which the Government Should Adopt – The Way Ahead 

With an increase in the issues of killer acquisitions globally, a gradual attention has been shifted to this issue and recently Organisation for Economic Co-operation and Development (OECD) has spoken out on this problem and in its report it has also suggested certain policy responses like :

  1. Revising the current threshold regime and adopting the criteria of transactional value thresholds alongside the turnover threshold. Transactional value thresholds are the one which involves the process of deliberation in respect to the impact of a particular transaction in the future and thus helping the authorities to consider such impact and prevent any prospective anti-competitive threat.
  2. Whenever any nascent acquisitions happen, there should be a thorough analysis as to the likelihood of that firm to thrive in the future. This analysis would also help in assessing the intent of the acquiring firm. For instance, in the United States, the Clayton Act under section 7 provides for the prohibition of any mergers and acquisitions which tend to diminish competition or try to create a monopoly in the market.
  3. A targeted approach can be followed, in which concerned authorities can analyze and list the industries in which the probability of killer acquisitions is high and make it mandatory for them to notify about any mergers or acquisitions they enter into.

The Central Government of India and CCI can take inspiration from these policy measures while framing the criteria under section 5 of the act. In addition to these, certain other measures specifically catering to the needs of Indian markets can also be adopted. Such as:-

  1.  As currently in India this issue has not been taken seriously and there is an unavailability of adequate data for the same,  so the first and foremost step would be to research, analyze or create a database of industries that are more vulnerable to it and then creating relevant policy measures accordingly.
  2. Vigilance committees can be created, which stealthily engages in identifying such transactions and their repercussions.
  3. CCI should be given more empowerment as to the creation of an adequate system of rules, regulations, directions, and penalties, and such devised mechanisms should be strictly adhered to. This would ultimately create a fright into the mind of incumbent players and will deter them from engaging in such anti-competitive practices.
  4. Establishment of a system that engages in regular inspection for the same in a time-bound manner and based on such suggestions, changes should be made as per the need of the situation.

Conclusion

The problem of Killer Acquisitions is a growing concern in contemporary time. The recent Amendment bill gives scope to include such acquisitions under its ambit but it does not exclusively pay attention to it. There is a sharp need to accept the existence of the problem and actively indulge in discussions on the same. The issue as of now is not a robust one, hence it would not be a herculean task to diminish it. All we need is a system that is aware enough to create proper measures that are required to remove this impediment and promote healthy competition in the market.   

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