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7. The regulatory threat

In an attempt to quantify the level of regulatory risk in digital/tech M&A, we analysed the number of transactions that were withdrawn between announcement/signing and completion. This phase of the deal process is when antitrust considerations – and increasingly foreign investment rules – come into play, with proposed acquisitions being assessed for their impact on markets, consumers, jobs, innovation and national security.

Our study shows that over the nine-year period, digital/tech acquisitions were not disproportionately affected – less than 1 per cent of deals were withdrawn across both our digital/tech and non-digital groups. However, these transactions are significant when considering their size. The 37 digital/tech transactions that were withdrawn, for example, were worth more than $250bn in total – more than 22 per cent of announced deal value. And had more state-owned companies (particularly from China) been included in our study (see Part 3), the number of withdrawn deals would almost certainly have been higher.

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Looking at the digital/tech deals in our analysis that were withdrawn, some were hostile takeovers that ultimately failed (for example, Emerson’s proposed $29bn acquisition of Rockwell Automation, which was rejected by investors). But others were stymied for different reasons, such as Broadcom’s attempt to buy US chipmaker Qualcomm for $117bn. President Trump prohibited the bid – which accounts for almost half the value in our list – at the recommendation of the Committee on Foreign Investment in the United States. CFIUS was concerned that Broadcom might cut Qualcomm’s R&D budget, threatening US leadership in 5G (and by extension US national security) by boosting Chinese rivals such as Huawei.

Why the regulatory landscape is getting harder for digital acquisitions

While relatively few digital/tech acquisitions in our study were withdrawn, the M&A regulatory landscape for this type of deal is becoming more challenging. The US has recently passed a law that will, among other things, expand CFIUS’s jurisdiction to explicitly cover minority foreign investments in businesses involved in ‘critical infrastructure, critical technologies or sensitive personal data’. This was accompanied by changes to US export control rules that will limit outbound transfers of ‘emerging and foundational’ tech. These reforms are yet to be implemented, and it is likely to take CFIUS many months to develop a workable process. However CFIUS is required by law to have the new regime up and running by February 2020.

Other countries including Germany, Austria and the UK, either introduced tech-specific foreign investment regimes around the cut-off point for our study or are currently doing so. As with the US it will take some time for the effect of these reforms to be felt, but they will make acquiring digital/tech assets more complex and require buyers to place more emphasis on regulatory considerations early on in the M&A process.

Looking ahead

We can also expect more digital/tech deals to be challenged by antitrust authorities in Europe given their rising cost outlined in Part 1. The EU – following similar reforms in a number of member states – is considering proposals that would enable the Commission to scrutinise bids based on deal value rather than the target’s turnover, the traditional trigger for merger control filings. The move reflects the concern that digital/tech businesses can have a powerful position in a particular market without necessarily making much money, and therefore that new tools are required to preserve competition and protect consumers.

Data and merger control

Partners Rafique Bachour, Bruce McCulloch and Kaori Yamada look at how authorities around the world are adapting their tools for the 21st century – and what this means for M&A.