Margrethe Vestager is going after takeover deals like Illumina-Grail and Facebook-Kustomer with the aim of preserving competition and fostering innovation among small companies. Ironically, she may be doing the opposite.
Entrepreneurs, venture capitalists and others across the startup community say the increased uncertainty engendered by the EU competition chief’s more aggressive approach to so-called “killer acquisitions” — where a larger company acquires a small player to prevent future competition — actually threatens to dampen entrepreneurial activity by adding more unpredictability to an already complex sector.
Vestager launched the more aggressive approach earlier this year as a way to ensure competition when traditional rules aren’t enough, in particular regarding deals involving innovative firms with little or no revenue but high competitive potential. The idea is to prevent big companies in sectors like tech and biotech from buying up small players in anticompetitive ways.
One of the first deals to come under the ramped-up antitrust regime is gene-sequencing giant Illumina’s agreement to buy Grail, a startup that makes cancer-detection blood tests. While Grail generates no revenue in Europe, antitrust officials are worried that Illumina’s takeover will complicate access to its gene-sequencing technology for rival developers of cancer tests.
But the new aggressiveness, while based on the idea of helping innovative startups to compete, risks backfiring on those same innovators, as it is adding more uncertainty and potential problems for the sector, ranging from access to capital to increased costs. While the European Commission says startups can alleviate their uncertainty “by proactively engaging” with Brussels, the fear remains that it could even end up hindering the innovation it seeks to preserve.
“This new approach could be a game changer for startups,” said Giovanni Stracquadaneo, co-founder and chief operating officer of GenomeUp, an Italian startup that has developed a digital platform powered by artificial intelligence to support the rapid diagnosis and treatment of rare genetic diseases. GenomeUp, which doesn’t use Illumina’s DNA-sequencing technology, works with genetic laboratories and hospitals, including Rome’s Bambino Gesù, one of Europe’s main pediatric hospitals.
“Many in the biotech sector are following it closely, as it could have big consequences on the strategies of innovative companies like ours,” said Stracquadaneo, whose company is hoping for just the type of acquisition that the European Commission is targeting.
The exit strategy is an important element for nascent companies, and it is key to attracting investor capital. So a shift in the antitrust landscape could have a big impact. Selling a startup to an established player is one of the most common exit strategies for founders and investors in innovative startups, the other big one being getting on the markets through an initial public offering.
Alarm bell
“People take on risks in this business expecting that, if and when things work out, they can monetize and capitalize on their success, but without restriction,” said Alberto Gómez, vice chairman of Spanish Venture Capital and Private Equity Association ASCRI.
So this is an alarm bell for him. Restricting exit strategies increases the risks of an innovative project, which means investors could think twice about putting money into cutting-edge enterprises, reduce investment or direct their money to other sectors, said Gómez, who is also managing partner of venture capital firm Adara Ventures.
The fear is that this could throw a spanner in the works for a sector that has seen robust activity this year despite the continued coronavirus pandemic. European startups raised €48.3 billion in the first six months of this year, according to data from Dealroom, already exceeding the roughly €38.7 billion they attracted for the whole of 2020. This reflects a strong global trend, but growth in the European region has been stronger than in the U.S. and China, when compared with the first half of last year.
It’s essential to strike a balance between competition and innovation, said Massimo Della Ragione, a professor at Milan’s Bocconi university. “Otherwise, we risk sacrificing innovation on the altar of competition’s sake,” he said.
“It is a topic that is being debated over and over,” said Jessica Mohaupt-Schneider, a Germany-based lawyer with law firm CMS who regularly advises tech and biotech startups. It’s difficult to forecast the ultimate impact, she said.
Competition enforcers in Brussels are looking at Illumina’s Grail takeover, as well as Facebook’s deal for customer interaction platform Kustomer, under the rather obscure Article 22 of the EU merger regulation. The Commission has opened in-depth investigations into both transactions.
Article 22 can be used to vet acquisitions that don’t meet traditional thresholds for an EU merger investigation but are nonetheless deemed to pose significant competitive risks. This is seen as a tool to tackle “killer acquisitions,” where big companies swallow up promising small enterprises to avoid future competition.
“I sympathize with the worry that big businesses could buy up green innovators, and kill their new ideas, while those companies are still too small for the mergers to have to be notified,” Vestager said last month.
The European Commission in March encouraged national authorities to make more use of Article 22 to refer potentially anti-competitive deals to Brussels, even if the takeover target has no current revenue in Europe. Illumina, which contends that the Grail deal is pro-competition, has challenged in court Brussels’ authority to scrutinize the transaction. It also closed the acquisition despite the ongoing EU investigation, sparking the ire of Vestager.
“If Article 22 is allowed to play out this way, that means that any merger between any two companies anywhere in the world, even if neither of them have business in Europe, is now under the jurisdiction of the European Commission,” Illumina Chief Executive Francis deSouza told POLITICO in an interview in August. “We don’t believe that’s how this was intended.”
Article 22
The Commission told POLITICO that it decided “to make use of its powers under the Article 22 referral system” as it became clear that some deals with important competitive implications were not reviewed by EU or national authorities as they didn’t meet traditional thresholds. The new guidance issued this past spring “provides indications when such a referral may be appropriate,” it said.
“This is the case, in particular, when acquired companies despite having low turnover have an important competitive potential or are important innovators,” the Commission said, adding that it works closely with member states to identify transactions that should undergo this scrutiny.
“To the extent that uncertainty may remain as to which transactions may be subject to the Article 22 referral process, these can be alleviated by proactively engaging with the Commission,” it said. “The Commission stands ready to pragmatically engage with stakeholders early on to provide informal guidance on a case-by-case basis,” it said, adding that some companies have already approached it as they carried out their preliminary analysis.
“Ultimately, companies involved in such transactions will benefit from the EU merger control regime, as they will receive a decision providing legal security, under the EU Merger Regulation,” the Commission said.
There is disagreement over the amount of clarity being provided.
“These very vague principles complicate merger control assessments in M&A involving startups,” said Mohaupt-Schneider, the CMS lawyer. It could make it more complex to establish who has jurisdiction between national authorities and Brussels, for example, she said.
Time is another important factor in a field as dynamic as innovative startups, said Matthias Kromayer, managing partner at MIG Capital AG, a venture capital company with a big focus on biotech and pharma tech. And this situation may lead to more time passing between signing and closing a deal, which implies opportunity cost for management.
Many agree that it is too early to fully grasp the potential consequences; and that much depends on how the Commission deploys its new attitude on startup acquisitions.
“We’re worried about how the Commission will use this new approach,” Stracquadaneo of GenomeUp said. “It’s like a sword of Damocles hanging over us.”
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