This article is written by Krati Agarwal, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. The article has been edited by Amitabh Ranjan (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Introduction
In July this year, a merger in the technology sector was blocked by the Chinese Regulatory Authorities for the first time. This merger was proposed between the two biggest live-streaming gaming companies in China, namely, Huya Inc. and DouYu Inc. The deal was proposed as early as 2020 by Tencent, the organizer of this merger. This came as a shocker to the world, as China has always favoured mergers in the Technology sector for economic gains and rarely disallowed one. The merger was blocked on anti-competitive grounds by the State Administration for Market Regulation, the Competition Regulator of China. This article will discuss the reasons for blocking the merger, its implications and also see what China has in store for its technology sector.
Why did China block this merger?
Chinese Authorities have openly allowed mergers and acquisitions of entities operating in the technology sector since the boom of technology a decade back. This has allowed the Technology sector to go unregulated and freewheeling the antitrust laws. The most recent example of such acquisitions is Alibaba’s purchase of Cainiao in 2019, Ele.me in 2019, Tencent’s purchase of SuperCell in 2016. Collectively there have been 14-billion-dollar acquisitions by the country’s three titans in the Technology sector Alibaba, Tencent and Baidu. This incident sets a precedent as many excerpts from around the world have called it the “end of a shopping spree for tech companies”.
Huya and DouYu are rivals as they operate in the same market and have a history of slapping lawsuits on each other for years. Tencent, being an early investor in both these companies, planned to merge them and control the market.
The Tencent merger was blocked on antitrust grounds. It is important to analyze the shareholding pattern of Tencent in Huya and DouYu to understand this. Tencent is the world’s biggest online gaming publisher with popular games like mobile versions of PUBG, Call of Duty, etc. and enjoys massive market control around the world. It holds a 36.9% stake in Huya and over a third stake in DouYu. The planned merger stipulated Huya controlling the entirety of DouYu’s shares which in turn would have been controlled by Tencent as a whole. If these companies would have merged, Tencent would have been controlling around 70% of the market share in the online game streaming industry of China. Such market dominance is not warranted as it not only leads to monopolistic pricing but also kills innovation.
A giant in any market can significantly control and influence the economy of a nation. It is an undeniable fact that the bigger a company holds shares in a market; the bigger control it has over-influenced the behaviour of the public. The gaming industry as a whole plays a significant part in youths’ lives. The Communist Party in China successfully gave a blow to the potential ruckus Tencent would have made not only on the economy but also on the youth.
Legal standpoint
Competition law regulates anti-competitive practices by the companies that have a tendency to disturb the market and economy. If two or more companies operating in the same market decide to enter into an agreement that can result in anti-competitive gains, such agreements are known as horizontal agreements/arrangements. These arrangements are not allowed under Competition law. This usually happens when two rival companies, who independently have a good market share decide to merge together in order to dominate in the market. Such arrangements are always viewed with scrutiny by the regulator. An example of such can be the merger of Amazon-Flipkart. As they are rivals and hold a significant market, their merger will lead to the domination of the market. Here, Huya and DouYu operated in the same market and were rivals. If the proposed merger would be allowed (as per which Tencent would control Huya which will be controlling DouYu) it would have led to an anti-competitive horizontal agreement.
Another important point to be noted is the aspect of Vertical Arrangement. Vertical arrangements are between two companies operating in a vertical supply chain. An example can be a manufacturer deciding to enter into a sole distributor agreement with its retailers. This is anti-competitive as the retailer can only sell the manufacturer’s products which lead to less variety to consumers. Here, Tencent operates in the upstream gaming market and the two companies in the downstream live streaming market. This merger would have created a vertical arrangement between the entities. As per the Regulator, this arrangement gives a chance to Tencent to engage in foreclosure tactics at both levels, namely, input and consumer foreclosure. Hence, this should be better set aside.
Implications on market
There are positive implications of this decision on the market. Had this merger been allowed, 70% market share and dominance would have been in the hands of Tencent, which would have the power to manipulate prices, products, behaviours and alike. The positive implications of this decision are:
- Competition in the live streaming gaming platform will make sure all the companies operating in this market offer high quality of services for comparable prices or even lower prices than their competitors. This will generally drive down the costs low and benefit the public.
- Competition is directly proportional to consumption. The more easily a gaming service is available, the more will be its usage. Hence, it is advantageous to all the platforms, not only Huya and DouYu.
- It drives innovation. This is based on the principle of differentiation. In order to survive and have an edge in the market, all the companies will continuously try to differentiate their products/services from the others.
- It decreases lethargy and increases efficiency. There is no incentive to do smart and beneficial business if there is no competition in the market. But there is always a drive to do better if there are many players who are constantly trying to drive one’s business down.
What is China planning for Big Tech?
China has suddenly woken up to antitrust issues and has started slamming Big Tech companies fines worth millions for their aggressive mergers in the last decade. China was proactive in competition aspects when a foreign company was involved, but this is the first time a merger between domestic companies faced the brunt. This reflects the attitude of Chinese Authorities to regulate the Technology market with a deeper lens.
This attitude can be highlighted with some recent examples. E-commerce giant Alibaba was fined a billion dollars for an antitrust dispute this year, food delivery giant Meituan has an anti-monopoly probe going on currently. Apart from heavy regulations in competition aspect, China has ruled out its Data Laws this year, aiming to localize all the data of technology companies in the mainland itself, not allowing personal data of any citizen to be used for processing, and has issued heavy compliance mechanism for technology companies to adhere to. This shows a trend towards micro-managing the generally unregulated internet sector/companies.
Conclusion
A healthy economy blooms in a competitive market. Competition not only ensures ample choice for the consumers but also keeps the prices in check. If a company holds a dominant position, then it can easily be assured of its sales and it would stop innovating as it has no competitor to be better from. Thus, the legal basis of controlling competition has its own social and economic reasons.
Competition is the major driver of innovation. After its plan of merger was denied by the authority, Tencent has decided to boost up its own gaming platform app called Penguin Esports by assembling a design and operations team. This can be another positive implication of the merger blockage.
References
- https://variety.com/2021/biz/asia/china-merger-live-streaming-huya-douyu-tencent-1235016402/
- https://www.cbinsights.com/research/bat-billion-dollar-acquisitions-infographic/
- http://competitionlawblog.kluwercompetitionlaw.com/2021/08/22/huya-douyu-and-tencent-china-music-group-a-new-normal-for-chinese-merger-control/
- https://www.thestar.com.my/tech/tech-news/2021/07/19/beijings-decision-to-block-tencents-douyu-huya-merger-deal-marks-end-of-freewheeling-internet-era-in-china
- https://thediplomat.com/2021/08/chinas-personal-information-protection-law-and-its-global-impact/
- https://www.globaltimes.cn/page/202104/1222175.shtml
- https://www.zdnet.com/article/alibaba-slapped-with-record-2-7b-antitrust-fine/
- https://www.gamesindustry.biz/articles/2021-07-06-tencent-driven-douyu-and-huya-merger-blocked-by-chinese-antitrust-regulator
- https://techcrunch.com/2020/08/10/tencent-huya-douyu-merger/
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