The government has opened a consultation on new plans to regulate Big Tech. But the proposals it is considering may end up hurting British startups and entrepreneurs unintentionally.
Under the plans being contemplated, certain companies would be deemed by the Competition and Markets Authority (the CMA) to have “strategic market status” in some activity – like Google in Search and digital advertising, or Facebook in social networking and social media advertising. As well as measures to regulate how companies like Google and Facebook run some of their services, and powers to impose Open Banking-like data sharing on them, the government is looking at plans to make it significantly harder for Big Tech companies to acquire other companies.
These companies would face a new and much stricter mergers and acquisitions regime, in which any deal thought to create a “realistic prospect” of reducing competition would be blocked. This would apply to any deal involving the company at all, even in markets and activities in which they have not been deemed to have “strategic market status”.
What this “realistic prospect” test means in practice is ambiguous. It has been interpreted as meaning a deal that has a “greater than fanciful, but below 50%” prospect of reducing competition, which doesn’t really clear things up either, though “greater than fanciful” indicates a very low threshold. This contrasts with the current threshold, in which only deals the CMA judges to have a greater than 50% chance of reducing competition are blocked. And it implies that many deals that could, in fact, increase competition would be blocked too, because of the “greater than fanciful” chance that they would not.
This could lead to many deals being blocked, and more than the government seems to think. It has argued that since the current merger review process already involves a “realistic prospect” test, for deciding which mergers to subject to in-depth review, we can use that as a proxy to judge how many deals would be blocked. But the CMA has limited resources and, in referring deals to additional scrutiny, is likely not to prioritize deals that do have a “greater than fanciful” chance of reducing competition, but probably still a lot less than 50%. Under the new proposals, without that 50% test, it could be far more trigger-happy in its interpretation of “greater than fanciful”.
This kind of regime could make life tougher for British startups. Acquisitions were the cause of 90% of startup exits in the United States between 2008–18, and half of US startup founders surveyed said that acquisition was a long-term goal for them. Over the past five years, Google, Amazon, Microsoft, Facebook and Apple have bought over three hundred smaller companies between them, including British startups like Shazam and Dataform.
Making these kinds of deals more difficult – or, indeed, impossible – could make it harder for entrepreneurs to exit businesses they have built, deterring them from setting up in the first place or preventing them from starting new ones. It could also make it more difficult to access investment, since venture capital investment in startups appears to be sensitive to takeover rules. Some founders may decide that life is easier in jurisdictions like the United States and set up there instead, hurting the overall startup ecosystem in the UK.
These rules may end up reaching further than just deals involving Apple, Google, Facebook, Microsoft and Amazon, too. “Strategic market status” as described by the government is a broad concept, and could end up applying to companies like Uber, Deliveroo, Visa and Mastercard, and big, gatekeeper-like firms in other markets, especially as more and more of the economy becomes digitalised. That means that the knock-on effects for entrepreneurs of these proposals could be broader than many realise, if they find a would-be buyer unexpectedly deemed to also have “strategic market status”.
There is still some prospect for avoiding these changes. Unlike most of the other proposals being consulted on, the government has been explicit that it is more open-minded about proposals for mergers. And, so far, it does not seem to have heard much from entrepreneurs themselves about whether a stricter mergers regime would be good or bad for their businesses and the wider startup ecosystem. It is easy – and usually accurate – to be cynical about government consultations as a box-ticking exercise. But in this case, there may be some possibility of avoiding the worst outcome on the table. You can read and respond to the consultation here.