Will Competition law enforcement stifle the acquisition of tech start-ups? – Germany’s New Test

The New “Transaction Value Test” is about to be introduced [1] into the German Competition Law framework and the reason for its introduction is probably due to the new era of data mining in businesses.

The opinion expressed in this blog post does not constitute legal advice and is provided for interest only. The views expressed do not constitute the views of my employer. 


Pictured above: German Skyline (Copyright-free).

In order to understand the significance of this Transaction Value Test one needs to understand the South African position. Briefly, the South African Competition Act of 1998 relies on the Turnover and Asset Value Test (whichever is greater) to determine whether a merger between firms needs to be notified to the Competition Authorities, who will then reject or approve the merger (usually with certain conditions). These thresholds are small, intermediate and large mergers, with only the latter two requiring notification.

To give some perspective, in South Africa, intermediate mergers are  those mergers where the combined annual turnover or assets (whichever is greater) of the acquiring firms and the target firms is valued at or above 560 million Rand and the annual turnover or assets (whichever is greater) of the target firm is valued at or above 80 million Rand.

Put differently, if the target firm has a low turnover/asset value, it can bypass a full merger review.

The new era of tech companies, in isolation, appears to possess these characteristics. For example, the modern trend is that of data mining. Data mining can be described as the process by which a firm collects the personal information of its users whilst they consume their services. The firm does not necessarily generate a turnover but derives its value from the data it collects.

This is where the Whatsapp/Facebook merger is relevant. Whatsapp had the ideal platform to “mine” vast amounts of data in return for little or no money (depending on your OS). However, when coupled with an online advertising firm, the free network/app has the potential to contribute financially to the acquiring firm through the commercialisation of the personal data. For example, Facebook can use that data to improve its advertising algorithms online. It is relatively well-known that the Facebook/Whatsapp merger almost escaped full review under the EU merger regulation because of this “Turnover Test” loophole.

Therefore, it can be argued that this new Transaction Value Test is aimed at catching the acquisitions of start-ups, most probably tech start-ups, without any or significant turnover. Unfortunately, this introduction may have one significant downside which may have a particularly burdensome impact on the South African M&A space, if introduced here. The New Transaction Value Test in Germany does not only apply to tech markets. In fact, it has the effect of applying to any target start-up that has the potential to generate future earnings growth for the acquiring entity. It seems quite likely that an acquiring firm would discount the purchase price of the target firm due to this risk of a full merger review. In addition, an introduction of this test into the South African competition law framework would increase the number of merger notifications and subsequent reviews with the effect of burdening the M&A market in SA and overloading the Competition Commission.

[1] Ninth amendment to the Act against Restraints of Competition (ARC).


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