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Fintech case signals increased UK merger scrutiny of tech deals

The decision by the UK's Competition and Markets Authority (CMA) to potentially refer PayPal's completed acquisition of Swedish mobile payments start-up iZettle for an in-depth investigation reflects the regulator's growing scrutiny of acquisitions by larger technology companies of new market entrants, legal experts have said.27 Nov 2018

Alan Davis and Robert Eriksson of Pinsent Masons, the law firm behind Out-Law.com, said the Competition and Markets Authority (CMA) has the power to scrutinise completed deals and intervene if it finds they pose a risk to competition. Its decision to do so in this case suggests other tech deals in the UK in future will also fall subject to more detailed scrutiny, they said.

Davis said: "The chief executive of the CMA recently described the 2012 decision to clear Facebook’s acquisition of Instagram as ‘naïve’, adding that the outcome may have been different had that merger been looked at today. It is therefore likely that the CMA will apply a more dynamic competition analysis to this and other technology mergers rather than a more traditional static analysis."

Eriksson said, though, that whilst the CMA "rightly acknowledges it is difficult to make calls about the future development of new technology", the regulator's actions also ought to be guided by EU case law.

"The Court of Justice of the EU has confirmed that 'a prospective analysis of the kind necessary in merger control must be carried out with great care since it does not entail the examination of past events' but rather a 'prediction of events which are more or less likely to occur in future'," Eriksson said. "In other words, even if past technology merger decisions may have been too lenient, it is important that authorities do not become overzealous in their enforcement, as that could result in a chilling effect on such merger activity, preventing transactions from taking place where they would have generated significant future benefits to consumers."

The legal experts said that businesses that complete mergers and acquisitions before notifying UK authorities of those deals risk being forced to sell off the new parts of their company.

The experts were commenting after the CMA announced plans to open a 'phase two' investigation into PayPal's acquisition of iZettle, unless the parties can offer acceptable undertakings to address the competition concerns. PayPal completed a $2.2 billion takeover of iZettle in September. The CMA said that it has concerns that the deal "has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom".

The CMA said it is concerned that businesses could be forced to pay higher prices, or that they will receive a lower quality service, in the market for the supply of mobile point of sale devices as a result of the deal. It also highlighted the "potential impact" the merger could have in the emerging market for ‘omni-channel’ payment services.

Andrea Gomes da Silva, CMA executive director, said: "While iZettle is a relatively recent entrant to payment services, it has already established a market-leading position in mobile point of sale devices and was well-placed to compete against PayPal in other emerging markets. That’s why we are concerned that PayPal’s takeover could lead to higher prices or reduce the quality of the services available to customers."

Robert Eriksson said: "The UK has a voluntary merger notification system, which means that mergers that meet the UK thresholds do not have to be pre-notified before completion takes place. However, it is often prudent to do so particularly if the merger could result in competition concerns in relation to the UK market, which can be the case even where a target is an international business with the majority of its sales outside the UK."

Alan Davis said: "The risk is that if the international transaction is completed without first obtaining clearance from the CMA in respect of the UK part of the merger, the CMA has powers to investigate the impact in the UK of the transaction and prevent further integration of the merging businesses in the UK pending clearance. Following a 'phase two' investigation, where the CMA concludes that it has serious competition concerns, the UK part of the merger could ultimately be blocked which means that PayPal could be required to sever and divest itself of iZettle’s UK business."