Regulators in M&A

Over the last few years, there have been a vast number of M&A deals that have drawn regulatory attention. A famous example, the $26 billion T-Mobile and Sprint merger, first announced in April 2018, was finally closed following a lengthy two-year approval process. More recently, Nvidia’s planned $40 billion Arm acquisition, the most significant M&A transaction to date in the semiconductors industry, has also received scrutiny from critics. This article will lay out the reasoning behind such regulatory investigations, explore a few interesting cases that were subject to such inquiries and examine the Nvidia-Arm acquisition in more detail.

Why do these laws exist?

Regulatory laws exist in the M&A space to protect the competitiveness of the market. In the UK, such regulation is overseen by the Competition and Markets Authority (CMA), a governmental department responsible for mitigating against and minimising anti-competitive activity. For instance, if two companies with a significant market share in the same industry decide to merge, it could lead to an unfair intensification of competition in the market, having a detrimental effect on the rest of the market players. This was the primary concern for T-Mobile and Sprint’s merger. The newly merged entity would have an extensive combined market share, allowing them to use their new dominant position to push out the competition. Regulations also serve to protect consumers, as healthy competition in a market encourages innovation which benefits consumers, and staves off bad practises such as price gouging, a situation when a seller increases their price to a level much higher than what is considered reasonable or fair.

The rise of ‘killer acquisitions’

However, not all of the M&A activity attracting regulatory responses are between major parties. While smaller acquisitions tend to fly under the radars, they can also carry legitimate concerns. A common type of acquisition that falls under this category are ‘killer acquisitions’, which originated in the pharmaceutical industry. Killer acquisitions involve the acquisition of nascent firms with a valuable product, typically in the early stages of the firm’s development. Large incumbents tend to do this to extinguish potential competition in the future, resulting in the reduction of innovation within the market. In an extreme example, a pharmaceutical company with a monopoly in the market for a particular disease might purchase a small rival which is developing a competing drug with new technology. The intention behind the purchase would be to discontinue the development process once the target is acquired. With no competing products in development, the company can raise its prices for this drug because patients will have to pay for it. Not only do the consumers suffer from a financial perspective, but they would also potentially lose out on a new treatment method that could be more effective. Long development cycles, high capital expenditures, and substantial profit margins in the pharmaceutical industry make this type of acquisition attractive from a financial perspective. Still, this sort of acquisition is very unlucky to be approved by regulators due to the concerns above.

More recently, killer acquisitions have been found within the tech space, with companies such as Google and Apple making a huge number of acquisitions annually. As regulations regarding killer acquisition have tightened over the years, the vast majority of tech acquisitions nowadays are outside of the acquirer’s domain. In a publication by Charles River Associates [1], all 409 acquisitions made by GAFA (Google, Apple, Facebook, Amazon) between 2009 and March 2020 were examined. Only 33 acquisitions have been in the acquirer’s core business (e.g. online retail for Amazon, search and online advertising for Google), while the rest have been in adjacent industries or completely new fields. Increasingly, it has become common for these tech giants to buy up small players in the market that they want to enter as a complement to their product, such as Apple’s purchase of voice assistant Siri. However, this gives rise to another phenomenon that reduces the market’s competitiveness – a reverse killer acquisition. In this instance, if companies are incentivised to buy up smaller companies in a sector that they want to go into rather than innovate themselves, competitiveness is lost in the market.  While this is a theoretical concept for now, and it is extremely unlikely that deals are blocked due to this reason, it is a possibility that regulators are open to exploring this issue further if this kind of behaviour becomes more commonplace in the future.

The Nvidia-Arm deal

Nvidia is an American multinational technology company founded in 1993, most famous for its market-leading GeForce graphic cards for both the gaming and professional market. It also produces integrated circuits for the mobile and automotive market and has a footing in the gaming industry with handheld game consoles such as Shield Portable and its cloud gaming service GeForce Now. The firm has several competitors in the chipmaking industry, including well-known players such as Intel, Apple, AMD and Qualcomm.

The target of acquisition, Arm Holdings Ltd, is a British semiconductor and software company founded in 1990. It designs CPUs and infrastructures, dominating the market in such sectors. Nowadays, the vast majority of all mobile devices, from smartphones, tablets to mobile TV run on the ARM infrastructure, and Arm licences their design as intellectual property to manufacturers. Currently, Arm is owned by SoftBank, a Japanese conglomerate holding company with an acquisition value of $32 billion [2] (dating from 2016). This acquisition did not trigger any anti-trust regulations at the time, as SoftBank did not own any other firms in the chipmaking industry.

Looking into this deal in more detail, regulators are concerned that Nvidia could potentially raise prices, lower quality or withdraw IP licensing once it acquires Arm, which would affect consumers as ARM-based infrastructures are so ubiquitous. The deal is currently under pressure, with regulators in the UK and EU opening investigations, and the US Federal Trade Commission demanding additional information to ensure competition rules aren’t breached. There are also concerns that the Chinese regulatory agency will not approve the deal, as Arm only has a minority stake in Arm China. In contrast, the majority stake is held by a private equity firm linked to the Chinese government. [3] Competitors of Nvidia, such as Intel and Qualcomm, have also been lobbying anti-trust officials in attempts to block the deal.

Future outlook

The deal is still at a preliminary stage, and the investigations have just begun. Nvidia and SoftBank have set an 18-month timeframe for the deal to complete to account for regulations. It is really up to Nvidia to convince all the regulatory agencies to let the deal proceed, and with all the scrutiny it has already received, it has a long road ahead.