This article is written by Krati Agarwal, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.

Introduction

The European Union Competition Law is the law regulating the competition aspect of the market in the whole of Europe. This law prevents anti-competitive practices like creating monopolies or cartels in the markets that damage the interests of society. In Europe, only a handful of digital players capture the largest part of the online economy, and hence to regulate the fast-growing digital market, European Commission in the year 2020 proposed the Digital Markets Act. This Act aims to ensure that no abuse of power takes place in the digital market by the big tech giants and tries to build a safer environment for new digital players to enter.

Any law regulating competition has a major impact on M&A transactions. This is because any combination via M&A can have significant effects on the competitive aspects of the market as it can lead to agreements that cause anti-competitiveness in the supply or distribution of a particular product or service.  Digital Markets Act impacts M&A of social media players to a great extent by regulating the gatekeepers of the digital world and subjecting their every M&A deal to scrutiny. This article will throw light on the provisions of the Act that will impact M&A transactions of social media giants. 

The concept of “gatekeepers”

Digital Markets Act has coined the term “gatekeepers” and is used for those platforms which have a presence in one or more than one digital world’s eight-core services ( online search engines, online intermediation services, online social networking services, video-sharing platforms, operating systems, interpersonal communication services, cloud computing, and advertising.) and are operating in at least 3 EU states. These platforms meeting the following conditions will be considered as gatekeepers. 

• The platform has a significant impact on the internal market (defined quantitatively as an annual turnover of 6.5 billion Euros or a market capitalization of 6.5 billion Euros)
• The platform serves as an important gateway for business users to reach end-users (user base larger than 45 million monthly end-users and 10,000 business users yearly: and 
• The platform enjoys an entrenched and durable position or is likely to continue to enjoy such a position (meets the first two criteria over three consecutive years).

The choice of the word ‘gatekeeper’ is interesting. The big digital platforms have formed an ecosystem of agglomerate services and a business must use the service of these companies to enter the market. Big digital platforms act as a gatekeeper between businesses and users. For example; if a local business wants to switch online to sell its products, it must provide its products over Amazon for better reach to the public. In such a situation, a person has no choice but to accept the policy and pricing of Amazon to run a successful online business. (The Act does not list down any company as gatekeeper, the reference to Amazon is just an example under the author’s view of gatekeeper).

How is the Act affecting M&A of social media gatekeepers?

The Act regulates the social media gatekeepers’ M&A deals by imposing an extra scrutiny process by the Regulator even when the target is not subject to Merger Control. Digital Markets Act in its Article 12 provides for an obligation of the Social Media Giants to inform the Competition Commission of any M&A deal they might enter or contemplate entering. This provision by itself does not attract any oversight mechanism. This is clear from Recital 31 of the Digital Markets Act proposal which clarifies this process and states that this is only to ensure that the Commission can adjust the status of the platform being a gatekeeper and update the core services provided by the platform in consequence to that M&A transaction. 

In Europe, mergers and acquisition deals are governed by Merger Control Regulations. Not every deal falls within the purview of these regulations. There is a prescribed threshold to attract the scrutiny of the Commission. But the new Digital Markets Act is expanding the scope of jurisdiction of the Commission by mandating an obligation on digital platforms to inform the Commission of every deal. 

If the provision of the new Act is read with Article 22 of the Merger Control Regulation, it becomes aggressive. Article 22 of the Merger Control gives authority to the nations to approach the Commission and scrutinize an M&A deal even if the deal is beyond their national threshold. 

A combined reading of Article 12 of the Digital Markets Act and Article 22 of the Merger Regulation gives the Competition Commissioner vast jurisdiction in M&A deals. Every deal in the social media sector can be subject to scrutiny. 

The positive side of the coin

• Prevention of abuse by gatekeepers 

This law specifically targets Giants. This is because they hold the capacity to alter several fair market practices. They can easily acquire entities to form monopolies and dominate the market, resort to predatory pricing, several giants can form cartels and manipulate the price of services, etc. Since not even a small M&A of gatekeepers is left unnoticed by the Act, this Act is sure to prevent abuse by the giants.

• Consumer welfare

With the increased oversight over Social Media giants, the ultimate beneficiary is the public at large. This Act will ensure that consumers have a vast choice in terms of social media engagements (by preventing anti-competitive takeovers) and have a lesser cost to pay towards using these services.

• Better environment for new entrants

These regulations are for the primary benefit of the new social media platforms. This Act will ensure that they aren’t targeted or side-lined by the gatekeepers and make a safe environment for every entrant to play their cards.

The negative side of the coin

• Slow conclusion of deals

This Act by putting the extra measure to control mergers of every kind will slow down the process of conclusion of M&A deals. 

• Reduce the overall deals

Since all the deals can be subjected to Commission’s oversight, not all the M&A transactions will inevitably be approved by the Regulator. This in turn will reduce the number of deals.

• Increased cost

This provision is bound to increase the cost of deals as the Regulator will subject the platforms to various procedures and compliances which they ordinarily won’t do.

• Impact on innovation

Digital Markets Act has adopted the precautionary principle (ex-ante) towards M&A deals of the gatekeepers. It does so by imposing an obligation on the gatekeepers to inform the Commission. It is a well-known fact that the precautionary principle kills innovation as it requires the subject to unnecessary interference and interruption. Hence by adopting this approach, it is believed that this Act will seriously hamper the innovation in Social Media. 

What can be done further?

The basic principle of competition law is to regulate abuse of the dominant position of the company. Dominant position in itself is not a crime until the company abuses its dominant position for anti-competitive gains. This act has objectively targeted big social media houses by designating them as gatekeepers. Not every company which qualifies the above definition of gatekeeper is having a dominant position in the market. Even if they are having a dominant position, they don’t need to be misusing this. This leads to viewing every transaction by these companies with suspicion. Hence, a second look must be given to the definition of gatekeeper to comply with the principles of competition law. 

Conclusion

The behaviour of consumers about social media is an important consideration. Most of the consumers prefer a platform that can be a single fit for all, i.e. they can use it to connect to all their family and friends, access multiple opinions, share their content, sometimes even shop, etc. This behaviour favours using a single platform for multiple purposes. This consumer behaviour can be monetized easily by the social media giants by entering into various M&A transactions. This makes users extremely vulnerable to abuse by social media giants such as unilateral contracts, charging a high fee, manipulating behaviours, etc. It is at this juncture the Digital Markets Act becomes very important. The extra scrutiny by the regulator to every M&A deal prevents abuse by the giants and protects the consumer interest. Apart from this, the Digital Markets Act also prohibits combining data by the platforms collected by them from different sources without the permission of the user. This clause prevents the advantage a gatekeeper would have over the other digital platforms and, hence preventing abuse.

The downside of such regulation is that it hampers innovation. Social media thrives on innovations and experiments. They can provide innovative and new services and make the consumer experience more enjoyable by entering into various M&A deals with different kinds of companies. But these regulations have the potential to shape the relationships of social media platforms as per the convenience of the Regulator. 

Nevertheless, the Digital Markets Act marks a significant step towards regulating social media giants by preventing abuse of their power. 

References

• https://itif.org/publications/2021/05/24/digital-markets-act-european-precautionary-antitrust
• https://www.bruegel.org/2021/02/regulating-big-tech-the-digital-markets-act/
• https://www.linklaters.com/en/insights/publications/2020/december/european-commissions-digital-markets-act-proposal-regulating-systemically-important-digital
• https://www.institutmontaigne.org/en/blog/digital-markets-act-new-role-competition-authorities

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