BYJU'S KILLER ACQUISITION: CCI'S KNIFE AGAINST A GUNFIGHT
This post is authored by Swetha Somu and Sanigdh Budhia, second-year students of B.B.A. LL.B. (Hons.) and B.A. LL.B. (Hons.) respectively, at Gujarat National Law University, Gandhinagar.
The pandemic has increased the demand for ed-tech services hence incentivizing ed-tech start-ups to go on an acquisition frenzy in order to expand their portfolios and to attain economies of scale. BYJU’s too indulged in a series of acquisitions of different-sized ed-tech start-ups resulting in almost 60% of its total acquisitions from the year 2021. Great Learning, itself being a BYJU's-acquired platform, has recently acquired Blume Ventures-backed recruitment platform Superset. This behaviour of BYJU’s is similar to the “copy, acquire, kill” strategy used by Facebook. Facebook (now, Meta) has indulged in this strategy in all these past years to expand its business. Its approach towards mergers and acquisitions have always been to “neutralise the competitor” and to integrate rival’s products with Facebook’s products. Just like Facebook, BYJU’s has also been engaging in this “acquire and kill” strategy in order to become a market leader in the ed-tech sector.
This article analyses how BYJU’s is turning into a monopoly by making killer acquisitions while testing the capability of the Competition Act 2002 ("the Act") in monitoring such acquisitions. Further, the article compares the stance of killer acquisitions under the Indian Competition Act with the EU Merger Regulation ("EUMR"). The authors conclude by suggesting how the anti-competitive behaviour of dominant entities doing killer acquisitions could be tackled under the Act.
2. ACQUISITION: BYJU’S STRATEGY TO DOMINANCE
One major acquisition made by BYJU’s in 2021 is Aakash Educational Institutions ("Aakash"). The Competition Commission of India ("CCI") had approved the acquisition of Aakash stating that no possibility of appreciable adverse effects on competition existed. However, there is a threat of abuse of dominance as BYJU’s is India’s most valued and rapidly expanding ed-tech company at $18 billion. The online market of BYJU’s can be termed as the ‘relevant market’ as per CCI’s definition in Fast Track Call Cab Pvt. Ltd. v. ANI Technologies Pvt. Ltd. BYJU’s is currently holding a dominant position in the market of ed-tech with 2.4 million subscribers, the most with any ed-tech platform. Further, it is currently valued at $18 billion, the most for any ed-tech company in the world. The acquisitions undertaken by it gives it the potential to abuse its position by driving other players out of the market, hence violating Section 4 of the Act. Further, through its acquisition spree, with the recent one being a recruitment firm, there are risks of negative externalities such as ‘market tipping’ which might occur as a result of the “network effects” created.
“Network effects” is a scenario where the value of the product depends on the number of users/buyers/consumers using it. So, the larger the user base, the larger the value of the product, hence greater the “network effects” are. BYJU’s is creating the scenario of “Indirect network effects” where the increase in value of its acquired ed-tech start-up (complementary product) in turn increases BYJU’s (original brand) value. Eventually, this is leading to the “market tipping” in the ed-tech sector as BYJU’s is strengthening its dominant position. Moreover, when the existence of market tipping is being used to establish a monopoly in the market, it is imperative to check if the dominant firm has the potential to cause anti-competitive effects and regulate the same before there is any abuse.
Therefore, the more ed-tech start-ups BYJU’s acquires, the stronger its “network effects” will be. This will lead to the market tipping towards BYJU’s and subsequently hindering other competitors to attract users, hence impeding effective competition.
3. KILLER ACQUISITIONS VIS-A-VIS INDIAN COMPETITION ACT
Killer acquisitions are generally understood as the practice of well-established firms acquiring ‘nascent’ competitors or start-ups. Such acquisitions are described as ‘killer’ because post the merger, the innovative projects of the start-up are subsumed into the acquirer, thereby pre-empting the emergence of future competition. Start-ups or nascent businesses are vital in competitive markets. They are a major source of new products and ideas, as well as of innovation and unconventional business structures. They can help break up oligopolistic markets, forcing current market leaders to reform or quit, and at the same time, they ensure that markets minimise inequality. Well-established firms and market leaders see start-ups as a threat. Hence, they acquire such start-ups.
Killer acquisitions raise certain concerns for the antitrust regulators as such acquisitions can kill both product and innovation. It can also hamper future competition in the market as firms that have the potential to become strong, fair competitors are acquired at a nascent stage by the current market leader in the process of killer acquisitions. It is more or else like the phrase “nip in the bud”. In such a scenario it becomes important to regulate such acquisitions.
Between FY-2015 and FY-2019, about 582 acquisitions were completed in the Indian start-up ecosystem. According to the CCI’s E-commerce Study, in each of the platform/intermediation services, a few big companies are dominant, like Flipkart and Amazon in consumer goods, Make My Trip in accommodation, and Zomato and Swiggy in food services. These five major companies have acquired (or invested in) roughly 40 enterprises in the last ten years. Out of all these acquisitions, only three were reported to CCI.
The reason behind this low reporting of acquisitions is that CCI is currently handicapped in regulating such acquisitions. CCI’s merger enforcement is hampered by (a) high thresholds, (b) the lack of a transaction value threshold, and (c) the lack of residuary power to scrutinise transactions that fall below the thresholds. Currently, under Section 5 of the Act, a merger must be notified to the CCI only if shares, voting rights, control, or assets are above the Act’s threshold limit. Transactions involving nascent acquisitions are usually outside the purview of such high statutory thresholds. This is because in earlier years, organisations in digital markets place a greater emphasis on developing a network than on generating income. Therefore, killer acquisitions fall under the de minimis exemption as the transactions are below the threshold value mentioned under the Act. Since CCI does not have the residuary power to assess non-notifiable transactions like the EU, killer acquisitions have been kept out of the purview of CCI.
Later in 2018, the Government of India established the Competition Law Review Committee ("CLRC") to propose revisions to the Competition Act 2002, recognising these inherent constraints. In its study, the CLRC noted that because businesses in the digital market have lower turnover, they can easily slip under the radar of competition authorities. The CLRC suggested that deal value thresholds should be implemented to detect acquisitions that do not reach the threshold requirement but have the potential to stifle competition. Then, after examining the CLRC’s recommendations, the Draft Competition Amendment Bill 2020 ("Amendment Bill") was introduced. The Amendment Bill gives central government the discretionary power in introducing measures to evaluate combinations after due consultation with CCI. Such a measure could tackle the problem of killer acquisitions but more substantive steps, such as incorporating regulatory guidelines, could be taken after taking inspiration from the EUMR.
4. KILLER ACQUISITION UNDER EUMR
The upsurge of killer acquisitions, predominantly in the pharmaceutical and technology market, prompted the European Commission (“EC”) to induce major procedural reforms to the EUMR. Before the reforms, the EC lacked pecuniary jurisdiction to review transactions in regards to acquisitions under a certain revenue-based threshold thus missing out on the regulation of the acquisitions of nascent competitors. The void was addressed by the EC through the new guidance on how to apply the referral mechanism provided under Article 22 of EUMR.
Article 22 allows the EC to review acquisitions not meeting the EU dimension but having the possibility of significantly affecting the trade and competition within the territory of the Member states. Article 22 was losing significance as concentrations not meeting EU-dimension were taken care of by the national merger controls. However, the rise of innovative markets created an enforcement gap as killer acquisitions were not under the radar of the national merger control for not meeting the turn-over based threshold.
The new guidance emphasises that the EC and National Competition authorities will jointly address acquisitions having the potential to impede effective competition even when the national turn-over threshold for intervention is not met. This will allow the EC to entertain referral requests regarding any acquisition of nascent competitors who may become significant in the future due to their innovations or assets. Thus, killer acquisitions have been taken into cognizance and an attempt to address the anticompetitive effects resulting from it has been taken by the EU through this new guidance.
The pandemic has triggered the growth of the ed-tech sector and BYJU’s acquisition of Superset comes at a time when everything, including recruitment, is being done online. This pursuit of inorganic growth by BYJU’s will help its expansion in the market while also posing a risk of reduction in potential competition as a consequence. The current law under Section 5 of the Act is inadequate to deal with killer acquisitions as such due to its high statutory threshold. However, the suggested modification under the Amendment Bill is very ambiguous such that it will result in the inconsistent use of discretionary power by the government. Even though the Amendment bill lightly touches upon the possibility of reviewing transactions falling below the statutory threshold, it neither provides as to when this power can be invoked nor any set procedure that needs to be followed. Thus, the Indian competition jurisprudence can take inspiration from the new EU guidelines. The incorporation of regulatory guidelines will help CCI in conducting systematic reviews of such transactions while also providing certainty and consistency in its judgement on killer acquisitions. This way, nascent start-ups will be able to flourish and thrive in a conducive environment free of anti-competitiveness.