A Boiling Frog? Merger Enforcement of Early-Stage Tech Companies

Fable has it that a frog placed in tepid water slowly brought to a boil will not perceive danger until it is too late to leap. According to some critics, U.S. high tech merger review has a similar problem insofar as it fails to adequately consider and challenge acquisitions of startups that, on their face, appear to constitute incremental changes to competitive dynamics but that over time may suppress competition. Indeed, a U.S. Federal Trade Commission (FTC) official confirmed last week that the agency faces “withering criticism of antitrust” and its enforcement with respect to competitor acquisitions of startup companies.

The comments were made during a conference in San Francisco by Michael Moiseyev, Assistant Director of the FTC’s Bureau of Competition and a leading enforcer with responsibility for merger and acquisition review. Without identifying particular transactions, he acknowledged that players in the venture capital (VC) space have characterized the U.S. antitrust agencies as “snookered” in permitting certain early-stage companies to be acquired.

Making the case that an existing competitor’s acquisition of a nascent, potential rival poses “a substantial lessening of competition” (Clayton Act, § 7) is a high hurdle for the U.S. agencies to clear. Mr. Moiseyev assessed the state of current case law as both “terrible” and “unforgiving.” The agency’s most recent challenge invoking a potential competition theory resulted in a district court concluding that the FTC had failed to provide evidence the target would have launched a new, competing technology. FTC v. Steris Corp., No. 1:2015cv01080 (N.D. Ohio 2015). In that matter, the FTC had sued and invoked the theory that the target, if it were not acquired, was poised to create “actual potential competition” for the U.S. market leader by importing technology currently offered by just one European facility. The merging parties undermined that theory by demonstrating a dearth of customer commitment to using the would-be-imported technology.

Yet criticism of a perceived lack of U.S. agency challenges in the tech sector continues to mount.

Under this pressure, will the U.S. agencies take a fresh lens to acquisitions of new and innovative competitors? The key analytical question is how to evaluate whether those companies would evolve to constrain actual, current competition. This fall, the FTC’s ongoing policy hearings devoted a day to acquisitions of potential competitors in tech markets. Nearly all participants endorsed studies of the effects of past transactions via merger retrospectives. Several panelists advised that the agencies scrutinize more closely transactions involving dominant platforms and whether the underlying deal removes a nascent competitive threat. Other participants in the hearings emphasized that the competitive analysis should focus on harms to innovation but that an information imbalance at times constrains the agencies’ ability to assess emerging industry developments.

We do not know whether a boiling frog is in our midst. Nevertheless, if you are advising VCs or a company that is considering an acquisition involving an innovative, new or potential competitor, reach out to antitrust counsel to consult on these issues.