Killer acquisitions: the CMA and the iZettle/Paypal merger

21.06.2019

Background

Last week the CMA announced that it had cleared Paypal’s takeover of iZettle, a rival in the mobile payments industry, after an in-depth phase 2 investigation. PayPal is a well-known company providing payment services for small businesses whilst iZettle sells card readers and their accompanying software.

As part of the investigation, the CMA considered whether PayPal’s acquisition of iZettle was a ‘killer acquisition’ – in other words, was Paypal buying a small rival who had the potential to become a threat in the future in order to take them out of the market. This was identified as an issue in the Digital Competition Expert Panel’s report published in March this year (known as the Furman Report). Strategic recommendation B of the Furman Report follows on from a discussion of the threat of killer acquisitions and suggests that the CMA should more frequently challenge mergers that could impact future levels of innovation and competition.

How and why they looked at the valuation

The Furman Report also proposed updates to the Merger Assessment Guidelines to draw more attention to the relevance of the transaction value relative to the market value and to excessively high valuations. In this case, PayPal paid $2.2 billion for iZettle, a company who had recently been valued at $1.1 billion. The large price disparity between these two figures was a concern for the CMA; if it could not be justified it would suggest that PayPal were in effect paying a premium to take out a future rival to their business.

To answer the question of whether this high price was evidence of a killer acquisition, the CMA investigated PayPal’s internal documents as well as their deal model. They were attempting to understand PayPal’s justification for their valuation. By doing this the CMA could then say whether the overall consideration was valid or not.

The CMA’s final report suggests factors that they will deem significant in evidencing a killer acquisition going forward. They mention cost savings and increased sales volumes brought about by synergies between the two companies as evidence of the consideration being justified. In addition they found no evidence of plans to shut iZettle or increase prices post-merger. It appears that the benefits of synergies between the companies brought about by the merger is a strong justification for higher valuations and we will have to wait and see whether future cases rely heavily on this reasoning as well.

Comment

PayPal/iZettle is the first time the CMA have seriously considered the possibility of a killer acquisition theory of harm, but it is very unlikely to be the last.  Of interest in this case was the degree of analysis of internal documents to really drill down to understand the deal rationale.  With the increasing use of e-discovery and predictive coding tools, it is to be expected that similar deep dives into the weeds of a company’s internal documents will be a feature of these types of transactions going forward.

Stephen Smith - Partner, Competition

Stephen Smith

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Jamie Cox

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