No “killer acquisitions” in sight (yet)… recent experience with the German merger control transaction value threshold

Occasionally companies pay significant purchase prices for businesses with rather limited revenues:

“When Facebook announced its plans to acquire WhatsApp in February 2014, WhatsApp's founders attached a purchase price of $16 billion: $4 billion in cash and $12 billion remaining in Facebook shares. This price tag is dwarfed by the actual price Facebook paid: $21.8 billion, or $55 per user.

Facebook agreed to pay $19.6 billion—adding $3.6 billion to the original price as compensation to WhatsApp employees for staying on board at Facebook. However, Facebook share prices soared to $77.56 from $68 by the time the regulatory approval process concluded in October. By then, the agreed upon 184 million Facebook shares inflated the final sale price by an additional $1.7 billion.

WhatsApp’s six-month revenue for the first half of 2014 totaled $15.9 million and the company incurred a staggering net loss of $232.5 million, though the majority of that loss was for share-based compensation.”

(https://www.investopedia.com/articles/investing/032515/whatsapp-best-facebook-purchase-ever.asp)

In most countries, merger control thresholds link to the revenues which transaction parties generated in the last completed financial year. Hence, Facebook/WhatsApp was an eye opener to the German government as it showed a potential enforcement gap in the face of new business models of the digital world. And indeed, Facebook/WhatsApp escaped jurisdiction in most EU Member States (but ultimately still ended up with the EU Commission for review).

Therefore, in 2017, Germany – alongside Austria – introduced a transaction value threshold in its merger control rules. Since then, transactions above a certain valuation (EUR 400m in Germany; EUR 200m in Austria) and provided certain further conditions are met, need to be notified with the respective regulator. 

More specifically the requirements in Germany are:

1. the combined aggregate worldwide turnover of all the undertakings concerned was more than EUR 500 million
2. in the last business year preceding the concentration
   (a) the domestic turnover of one undertaking concerned was more than EUR 50 million [as just amended by last week’s reform of the German Competition Act] and (b) neither the target undertaking nor any other undertaking concerned achieved a domestic turnover of more than EUR 17.5 million [as just amended by last week’s reform of the German Competition Act]
3. the transaction value exceeds EUR 400 million; and
4. the target undertaking has substantial operations in Germany.

The scope of the provision is intentionally narrow and the main aim is to examine transactions in which large, established companies strengthen their market position through the takeover of young, innovative companies with a high economic value. Specifically as regards the German regime, it is supposed to relate to transactions in the digital sphere but also potentially other sectors like pharma (e.g. concerning pipeline products). As there was little experience in terms of transaction value thresholds in Europe, the German and Austrian authorities published a joint guidance for the application of the threshold in 2018.

The German Federal Cartel Office (“FCO”) has now published some details on its experience with the new rule:

• Since 2017 the FCO has dealt with a total of 60 cases under the transaction value threshold.
• Thereof, 34 informal applications (typically to gain additional legal certainty), of which in 29 cases, the FCO informed parties that no formal fling was required – mostly due to a lack of local nexus and in the remaining five cases recommended a formal notification.
• A total of 31 cases (including the five from above) were formally notified. This resulted in 19 clearance decisions, 10 withdrawn filings (again including 6 cases without a local nexus and also including one referral application to the EU Commission) and two pending cases.

Interestingly, almost half of the cases related to the pharmaceutical sector and only four cases to the technology sector. Seven related to large real estate properties (not yet generating a rent) and six to other sectors. No case was referred to an in-depth (Phase II) investigation and the FCO explicitly confirmed that it did not identify any “killer acquisition”.

Despite this experience, the FCO strongly favors to keep the transaction value threshold in German merger control rules. It expects a certain signal effect to market participants to carefully assess (and potentially drop) “killer acquisitions”. Further, it remains to be seen whether mid- to long-term cases emerge which could not have been assessed under the more conventional turnover based rules (with the recent increase in thresholds, this may actually become more relevant). Finally, the Ministry of Economics will assess whether the transaction value threshold alone is sufficient in terms of protecting digital markets from tipping.

What companies should bear in mind

1. In very particular circumstances, filings within the EU may be required based on the transaction value in Germany or Austria.
2. The transaction value under this threshold does not equal the purchase price, rather it takes into account a range of further criteria which need to be assessed.
3. Past experience shows that, in particular, the local effects test is a key item in the assessment since a majority of the cases assessed to date had no sufficient local nexus to ultimately warrant a filing.
4. This threshold is relevant in Germany (Austria having taking a broader approach) in circumstances in which the target operates a business for which turnover is not (yet) a good expression of its market position or competitive potential (e.g. pipeline products, multisided-markets, emerging technologies).