Two mergers by social media giant Facebook may be an early look at the future for tech deals in a world of competition regulators concerned about “killer acquisitions” and dominant online players.
Facebook could be forced to sell Giphy Inc., a GIF repository that Facebook purchased in May 2020, based on antitrust concerns raised by the U.K.'s Competition and Markets Authority. Its purchase of Kustomer Inc. is also under in-depth review by the European Union’s Competition Commission.
Neither deal is directly about the market where Facebook is arguably dominant: online display advertising. They are both vertical deals, expanding Facebook’s reach into services it doesn’t currently provide. If they didn’t involve a big platform, they likely wouldn’t have garnered a second look.
But competition regulators are very concerned about online platforms, and see their past approach to smaller, vertical deals as having permitted the online giants to build fortresses impenetrable to new competition and innovation. They see threats where they didn’t before, and are therefore trying new approaches to reach and review deals. The scrutiny that these deals are receiving foretell a world of very skeptical regulators with a lot of ways to review a deal that makes them uneasy.
Engagement Is King
As most of the planet knows, Facebook doesn’t sell its headline social network per se (or its subsidiary networks, WhatsApp and Instagram)—it sells advertising. In 2020, according to Facebook’s public disclosures, it earned practically all of its revenue from advertising: Specifically, its advertising business earned Facebook about 98% of its $86 billion in revenue during 2020. It identified “decreases in user engagement, including time spent on our products” as an important risk to that revenue.
Giphy is an attractive purchase for Facebook because engagement is so important to its business. Giphy is one of the largest online platforms for animated GIFs, which are popular additions to online messaging. When a user looks for a GIF and opens options on a platform, they are almost always looking at either Giphy or its primary rival, Tenor Inc. (owned by Google).
The U.K.'s CMA is concerned about the deal because of Giphy’s important place in the “GIF” ecosystem. If Facebook quit permitting rival platforms to access Giphy, or started demanding more data or other harsh terms, those rivals would have only one comparable GIF repository to turn to (owned by the other online advertising behemoth, Google).
However, the CMA also expressed concerns about potential competition between Facebook and Giphy. Before the merger, Giphy sold advertising in GIFs: companies (including PepsiCo Inc.) used the service to promote their brands through visual images and GIFs. CMA found that Giphy was considering expanding those offerings to the U.K., which the CMA alleged would have provided a horizontal competitor to Facebook in the U.K.'s 5.5 billion pound ($7.6 billion) online advertising market. Facebook currently holds 50% of that market, the CMA found.
The CMA’s suggested remedy is for Facebook to unwind the entire $400 million deal.
Building Sticky Relationships
Kustomer is a customer relations management (CRM) services provider that allows businesses to track data about a customer’s interactions across platforms. This “omni-channel” approach includes all interactions that a consumer has had with the business in a single timeline view, and integrates with a wide range of communication channels, including phone, email, webchat, SMS, Messenger, WhatsApp, Instagram, and Twitter.
That makes it useful to Facebook, which provides some business services to companies that host their main customer-facing presence on Facebook. It could provide a new revenue stream, but also would make an attractive add-on for businesses looking to manage customer relationships through Facebook’s systems.
In announcing its in-depth investigation of the deal, the EU’s Competition Commission expressed concerns about two markets that may be impacted by the merger. The EU worries that Facebook may have the incentive to stop giving other omni-channel CRM services access to its data. Without those feeds, other omni-channel CRM services would be at a huge disadvantage. That would damage competition in the CRM services market and related data markets, the commission said.
But the EU is also concerned about Facebook getting access to another data stream for use in targeting online advertising. If Facebook can increase its data advantage in personalizing and targeting ads, “it would be more difficult for rivals to match Facebook’s online advertising services,” the EU said. That could further entrench Facebook’s dominance in the ad market.
One might wonder how the U.K. became a regulatory sticking point for a merger that doesn’t have an obvious U.K. nexus, or why the European Union is investigating a merger that didn’t trigger EU merger review thresholds. After all, each of the parties in both of these deals is a U.S. corporation with its principal place of business in the U.S., and U.S. regulators (among others) are also reportedly investigating the mergers.
As it turns out, each of these regulators stretched a bit to get its arms around these deals.
Indeed, Facebook objects that the U.K. lacks jurisdiction to review its Giphy merger because nothing about Giphy’s business touched the U.K. and Facebook and Giphy operate in no overlapping markets. According to Facebook, CMA has “tied itself in knots” coming up with a rationale for reviewing the merger, and legally failed to assert jurisdiction or a plausible theory of market harm.
The EU has also taken an unusual route to reviewing the Facebook–Kustomer deal. Because the deal didn’t trigger EU review, it relied on a referral from Austria (where the deal did trigger review) to take charge of the investigation. Once the EU accepted the referral—which was joined by Belgium, Bulgaria, France, Iceland, Italy, Ireland, the Netherlands, Portugal and Romania—it instructed Facebook to formally provide notification to the EU for review.
That’s significant because Austria, along with Germany, recently enacted a “transaction value” threshold meant to catch deals among online competitors that don’t generate a lot of revenue. Through the referral process, those countries now give the EU a handle on deals that definitely wouldn’t trigger its review thresholds. But even if the deal hadn’t triggered a member state’s merger review, the EU also recently revised its procedures to permit it to accept referrals from concerned states whose merger laws aren’t engaged.
The goal of the new thresholds and referral procedures is to find and block “killer” acquisitions of competitors with low revenue before they become a threat to a dominant company. But effectively, this could give the EU the power to review—and seek to block—transactions that never trigger the threshold for either EU or member nation review, as long as the EU can prove that the deal significantly harms competition in the EU common market.
Certainly, these particular deals don’t look like the type of deal that would have garnered much scrutiny in the past, because the parties aren’t competitors. The fact that premier regulators are now stretching to review these acquisitions, and may well challenge them, would have shocked practitioners only a few years ago.
These reviews point to the very real threat that some deals will face aggressive review in a host of jurisdictions where the parties have no real footprint. At the moment, the EU and other regulators (including the U.S.) seem particularly concerned about tech mergers by dominant platforms, but these mechanisms could be used to review any deal. That could affect timing for deals, increase costs for pre-merger regulatory risk analysis, and throw cold water on deals in the online sector more broadly.
When it comes to the big online platforms, at least, the years of flying under the regulatory threshold may be over.
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