Recent trends in antitrust merger enforcement have brought into sharp focus the acquisition of nascent or potential competitors in the technology and life sciences sectors. These deals include so-called “killer acquisitions” in which a larger established player acquires a new or nascent competitive threat to shore up its allegedly dominant position, as well as acquisitions where a buyer could enter a new market organically but chooses instead to acquire its putative potential competitor. Although such transactions have long been of concern to antitrust enforcers, mounting criticism in recent years has called into question the ability of established antitrust enforcement approaches to adequately identify and protect against competitive harms in these circumstances. These concerns have prompted a remarkable shift in enforcement policy under the Biden administration, first expressed in President Biden’s July 2021 Executive Order 14036, subsequently crystallized in the form of a series of aggressive merger investigations and enforcement actions, and most recently by the adoption of the 2023 FTC and DOJ Merger Guidelines.
The primary result of this shift in policy is increasing uncertainty for tech and life sciences companies who pursue non-organic growth opportunities, even for deals that would have been unlikely to raise concerns under the more traditional antitrust approach of prior administrations. These effects in turn raise troubling questions about the impact of the government’s new approach on incentives to invest in new technology and research, and a potentially corresponding dampening of innovation. However, the current FTC and DOJ have had mixed results with this approach, suggesting that for the time being good deals can still get done, but parties to deals involving potential competition issues should be prepared for greater scrutiny going forward.
Background: Killer Acquisitions, Nascent Competitors, and Potential Competition
A nascent competitor is a firm that has the potential to become a serious threat to an established incumbent. A killer acquisition occurs when the incumbent, often viewed as having a dominant position in the relevant market (and thus a unique incentive to protect its position), acquires the nascent competitor. Similar concerns may exist, for example, if the acquirer is an established and well-resourced company poised to enter or expand into the relevant market who instead opts to buy what is usually a smaller incumbent. To the extent such transactions are viewed as eliminating significant likely future competition between the two companies, they may be characterized as “reverse killer acquisitions.”
Antitrust authorities may identify two principal harms that can result from acquisitions involving nascent competition: (i) loss of innovation, and (ii) loss of actual or perceived potential competition between the acquirer and the target. The harm posed by loss of innovation often applies where market evolution is unpredictable, but where innovation is found to play a key role in that evolution, and the contemplated transaction is determined to have a likelihood of eliminating incentives to compete via innovation.
Under the “potential competition” doctrine regulators must analyze the potential for meaningful future competition between the parties. This type of harm is most often identified in instances where there is “actual” potential competition, which entails a significant probability of future competition because that competition is imminent or is reasonably expected to occur (typically determined by examining the company’s development pipeline, business plans, incentives, resources, roles in adjacent markets, etc.). Potential competition also includes instances of “perceived” potential competition, where the incumbent takes the threat of entry by the buyer seriously enough that it influences the incumbent’s current competitive behavior (e.g., keeping prices low in order to deter entry).
Pushing the Boundaries of Potential Competition
Social media giant Meta (then Facebook) acquired Instagram in 2012, and WhatsApp in 2014. In the ensuing years, critics of established antitrust enforcement approaches, including most notably Federal Trade Commission (FTC) Chair Lina Khan, cited these two deals and others as emblematic of the failure of the traditional antitrust enforcement paradigm to protect against allegedly dominant players extending and fortifying their positions through the acquisition of nascent competitors. With these two deals as background, the president’s 2021 executive order stated, “[o]ver the past ten years, the largest tech platforms have acquired hundreds of companies—including alleged ‘killer acquisitions’ meant to shut down a potential competitive threat. Too often, federal agencies have not blocked, conditioned, or, in some cases, meaningfully examined these acquisitions.”
In 2020, at the end of the Trump administration, the FTC initiated a still-ongoing suit in federal court to unwind the two Meta deals. Now, Khan as head of the FTC, together with Jonathan Kanter as head of the Department of Justice’s Antitrust Division (DOJ), are building on that effort and working to expand application of the potential competition doctrine in ways they say will prevent repeating the mistakes of the past.
These efforts have most visibly manifested in a number of extended investigations of deals implicating potential competition issues, including some that have resulted in litigation or threatened litigation by the agencies to block the transactions (see below). The mere threat of litigation can lead parties to abandon their deals rather than undertaking the time, expense, and risk of a court challenge—thus avoiding judicial review of the government’s aggressive new application of the potential competition doctrine—even when the parties might have had the better end of the arguments in court. The agencies nonetheless use such abandonments to help build a body of institutional enforcement precedent.
The analytical framework on potential competition that is favored by the agencies, but that is so far largely untested in court, is most recently embodied in the 2023 FTC and DOJ Merger Guidelines published in December 2023. The Guidelines outline that the agencies will examine (i) whether one or both of the merging firms had a reasonable probability of entering the relevant market other than via merger; and (ii) whether such entry offered a substantial likelihood of ultimately producing deconcentration of the market or other significant procompetitive effects. In analyzing the “reasonable probability” of entry, the Guidelines seem to squarely identify characteristics of Big Tech and Big Pharma (e.g., sufficient size and resources; any advantages the company has that make it well-situated to enter; previous successful expansion into any related or similarly situated markets), attempting to create a what could amount to a “No Merger Zone” around these companies.
A Year in Review: 2023 “Killer Acquisitions”
Below is a summary of three deals in the tech and life sciences industries which the FTC or DOJ opposed in the last year in which agencies alleged advanced theories of harm relating to nascent/potential competition issues. In opposing these transactions, the authorities have pushed the boundaries of the potential competition doctrine, with varying degrees of success.
Meta/Within (FTC): Where Resources Equal Entry
FTC Chair Khan has consistently criticized past FTC leadership for being too lenient with Big Tech M&A activity, and for not bringing the “hard cases” that push antitrust law to what she perceives to be its limits. As such, it was unsurprising when the FTC under her leadership challenged Meta’s acquisition of Within, the developer of a popular virtual reality (VR) fitness app. At the time the FTC challenged the acquisition, Meta did not currently own nor were they currently developing any fitness VR apps. Indeed, the FTC cited no evidence that Meta had the intent to ever enter the dedicated VR fitness app market absent the transaction. Rather, the FTC rested its argument solely on Meta’s ability to enter the market, citing Meta’s financial resources, its employee base skilled in VR app development, and its name awareness as some of the factors proving Meta might
have entered the market for dedicated fitness apps. The FTC further argued that the mere perception by other market players that Meta might enter the market organically created competitive pressures that influenced the market.
Meta ultimately fought this challenge in U.S. District Court and won. The Court concluded that the FTC failed to establish a likelihood that it would ultimately succeed on the merits: “To the extent the FTC implies that — based solely on the objective evidence of Meta’s resources and its excitement for VR fitness — it would have inevitably found and implemented some unspecified means to enter the market, the Court finds such a theory to be impermissibly speculative.” Meta closed its acquisition of Within and the FTC ultimately decided not to further pursue its case. Despite the loss, Chair Khan has characterized the decision as a victory, arguing that the decision dusts off the stale potential competition doctrine and acknowledges that it can apply in modern tech markets. This characterization may go too far, though, as Judge Davila merely stated: “[g]iven the actual potential competition doctrine’s consistent, albeit distant, history of judicial recognition, the Court declines to reject the theory outright and will apply the doctrine as developed.”
Adobe/Figma (DOJ, as well as EC and CMA): Where a Startup Can Do It All
Adobe’s proposed $20 billion acquisition of Figma, a developer of cloud-based collaboration and product design tools, in what would have been the largest acquisition of a private tech startup in history, drew headlines and the attention of antitrust authorities around the world. The deal was subjected to a prolonged investigation, lasting well over a year, by the DOJ, as well as the European Commission (EC) and the United Kingdom Competition and Markets Authority (CMA). Following their investigations, the EC issued a statement of objections to the deal in November 2023 and the CMA followed shortly thereafter and provisionally found that the deal would harm competition.
Generally, the competition authorities asserted that, despite a lack of horizontal overlap between Figma's product design tools and Adobe’s professional-grade raster editing and vector editing software (Photoshop and Illustrator, respectively) Figma acts as: (i) a current competitive constraint on Photoshop and Illustrator, which motivates Adobe to improve these products; and (ii) a future competitor in creative tools that is likely to develop and release raster editing and vector editing tools in the near future, despite assertions from Figma that it had no plans to do so. Authorities supported their assertions with citation to the opinions of third-party market participants and customers’ views of Figma’s ability and incentives to enter the market. Authorities gave little to no credit to Figma’s testimony that it had no such incentive to enter the market to compete with Adobe’s flagship products (due to lack of interest and use by its core customers), and that it lacked the technical expertise and resources to do so.
The authorities further asserted that, because Adobe markets Adobe XD, a product design tool that currently competes with Figma, the deal could essentially also be regarded as a reverse killer acquisition. By such assertion, the authorities rejected evidence that the two companies rarely competed head-to-head, and arguments that Adobe had already planned to fully deprecate its XD product, regardless of the proposed transaction. Instead, the authorities found that absent the transaction, Adobe would have a strong incentive to improve XD and/or develop product features competitive with Figma.
Ultimately, in December 2023 Adobe indicated that the company did not see a path forward with the regulators and decided to abandon the proposed acquisition.
Sanofi/Maze (US): Where an Early-Stage Clinical Asset Threatens a Monopoly
In December 2023, the FTC filed administrative and federal court complaints seeking to block Sanofi’s proposed acquisition of an exclusive license to a Maze Therapeutics drug (MZE001) being developed to treat Pompe disease. MZE001 has completed a Phase 1 trial but has not yet been tested in Pompe patients.
Challenges to such acquisitions of pharmaceutical pipeline assets have typically alleged either: (i) an elimination of competition in the market for innovation (i.e., both companies were previously innovating in this space in their pipeline, and as a result of this transaction there will be less innovation); or (ii) an elimination of future competition where a drug has completed or nearly completed a Phase 3 trial, readout results look favorable, and entry is imminent post-FDA approval.
In this complaint, the FTC asserted that, rather than competing on the merits, Sanofi was attempting to acquire the MZE001 license to eliminate a nascent threat to its alleged monopoly in Pompe disease therapies. The FTC framed Maze as a threat that Sanofi feared, without acknowledging that Maze had no experience in commercializing a product and that Maze has a focus in developing medicines for renal diseases. Further, the FTC discounted the fact that Sanofi faces new competition from Amicus Therapeutics, whose Pompe disease therapy recently received FDA approval, as well as from a number of gene therapies and other assets in clinical trials and in preclinical development for Pompe disease that could be approved ahead of MZE001. Reflecting the current FTC’s antipathy toward such transactions, the agency did not acknowledge any benefits resulting from Sanofi and Maze partnering to develop MZE001, including Maze’s benefiting from Sanofi’s expertise and resources to increase the odds of eventual FDA approval, and on a faster timeline to the benefit of patients.
Notably, this is the only time the FTC has sought to block a transaction where the alleged nascent competitor had only completed Phase 1 trials, as opposed to deals involving later-stage assets, giving little regard to the fact that final FDA approval of a Phase 1 asset is far from guaranteed, and in any event would not happen for several years. Rather than challenge the FTC’s theory, however, Sanofi abandoned the proposed licensing agreement after the FTC filed its complaint.
A few key themes emerge from these recent examples. First, the antitrust agencies are by and large only “winning” via abandonments and deal deterrence. Existing antitrust law remains intact, so parties with lawful deals and an appetite to hold their ground can still get deals done. Second, agency leadership has a clear agenda, which includes inhibiting Big Tech and Big Pharma companies from undertaking almost any merger. Companies should work with antitrust counsel early in the deal process to prepare to engage with the agencies in the context of this agenda and defend the deal with the support of established judicial precedent and economic evidence. Finally, although the agencies acted to challenge these three deals with little documentary support, the existence of documents suggesting any kind of “killer acquisition” motive behind a deal, no matter who creates them, would all but guarantee at least an extended investigation by the antitrust agencies. As such, implementation of thoughtful document creation protocols is vital to the deal process.
In approaching the next deal, companies should aim to:
- Engage with antitrust counsel early to assess antitrust risk and determine whether regulators may raise a killer acquisition concern as a part of the transaction, and if so, to begin preparing advocacy to defend against such a concern early in the process. Once merging parties submit their Hart-Scott-Rodino (HSR) filings, they only have 30-60 days to prevent a Second Request (i.e., a months-long in-depth investigation by the antitrust agencies). Where a Second Request is likely inevitable, preparing advocacy on key issues early can potentially limit the overall scope and length of the investigation.
- Carefully consider deal terms related to the antitrust process and the amount of risk the company is willing to take on. The current leaders of the antitrust agencies are eager to initiate enforcement actions against companies in the tech and life sciences industries, and companies should proceed with their “eyes wide open” to that reality when assessing deal risk provisions and the transaction’s outside date.
- Further, companies should anticipate increased involvement by other antitrust authorities, driven by the CMA’s Mergers Intelligence Unit investigating otherwise non-reportable deals, and the increased potential for referral of small deals for review by the EC.
- Additionally, companies should be aware that several jurisdictions around the world are implementing, or have implemented, measures to require pre-merger filings for acquisitions of smaller companies or developmental products, with the goal to capture potential killer acquisitions.
- Consult with antitrust counsel to develop and implement careful document creation guidelines. Internal documents play a crucial role in any antitrust inquiry. As a result, carefully documented procompetitive outcomes and benefits arising from the transaction can be very helpful, just as any documents suggesting anticompetitive outcomes (even if written “sarcastically” or containing inaccurate information) can be quite harmful.