The Competition and Markets Authority (CMA) has provisionally cleared PayPal’s $2.2 billion acquisition of Swedish fintech company iZettle after completing an in-depth, Phase 2 review. The CMA’s decision comes amidst mounting pressure on antitrust authorities to scrutinise deals involving digital and tech more intensely and sustained interest in fintech.
The CMA’s decision is welcome news for UK fintechs, investors and deal-makers, but contains a few important messages which clients in the financial services and fintech sectors should keep front of mind.
1. Be ready to defend deal valuation and rationale
National competition authorities across Europe are increasingly interested in deal valuation. In the UK, where there is currently no deal value threshold for merger review, the recent Furman report indicated that it could in future be appropriate to introduce a transaction value threshold in order to capture deals not otherwise caught by the existing share of supply or turnover tests.
PayPal announced its $2.2 billion proposed acquisition just nine days after iZettle revealed it intended to float its shares for an expected $1.1 billion, triggering CMA concerns about a possible “killer M&A” motivation. While PayPal ultimately convinced the CMA, the authority investigated closely whether the additional $1 billion valuation was evidence of an attempt to eliminate an emerging rival or whether it already ‘priced in’ PayPal’s assumption of a less competitive market post-merger.
Regardless of whether formal changes to the jurisdictional tests are made, parties should expect to spend more time justifying their deal rationale and valuation, particularly in cases where an incumbent player acquires an emerging or disruptive competitor. In light of recent developments like the Open Banking regulation, the formal launch of the Financial Conduct Authority's (FCA) cross-border regulatory “sandbox”, and the continued appetite for emerging technologies, we expect to see more acquisitions fitting this profile. To mitigate the risk of extensive information / document requests and possible delays during the review period, merging parties (and their financial advisors) should carefully set out a consistent deal rationale from the outset.
2. An alternative view of the world – the counterfactual in dynamic markets
In merger review, the starting point for the authority’s assessment is the “counterfactual” – i.e., what the competitive landscape would look like if the merger did not take place. Historically, merging parties have struggled to convince the CMA (and, indeed, the European Commission) to adopt a counterfactual that is different from the current, pre-merger situation.
However, in a number of recent cases involving financial services and digital markets, the UK authority has shown that it is – slowly – becoming increasingly willing to consider alternative counterfactuals. In PayPal / iZettle, the CMA considered a range of forward-looking evidence in order to assess how the payment services industry was likely to develop in the coming years. More specifically, the provisional findings conclude that, absent the merger, PayPal would have had a number of credible options to improve its offline payment services capabilities and pursue its omni-channel strategy, while iZettle’s expansion into online payments would have remained relatively less developed and its omni-channel services would have developed only at a slow rate. In other words, the counterfactual recognises that – even without the merger – PayPal would have likely become a stronger player by pursuing alternative options.
While this line of argument remains an uphill battle, parties would be well-advised to consider submissions on alternative counterfactual scenarios in dynamic sectors (such as fintech), provided they have robust internal documents and (some) industry support to support their propositions.
3. Convergence and dynamic competition in the payment sector
Digital markets have seen unprecedented levels of change in recent years. To date, competition authorities have generally adopted a cautious approach and defined markets in the payments sector along narrow lines, with distinctions being drawn between “traditional” banks and emerging disruptors. In PayPal / iZettle, the CMA defined a single market for offline payment services in the UK, i.e., encompassing both “traditional” POS providers and start-up mobile (mPOS) providers. In addition to the merging parties, the relevant market therefore included established players such as Worldpay and Barclaycard as well as recent entrants like SumUp and Square.
These findings set a helpful precedent and are a clear validation of the case the industry has – over the past years – often put to regulators regarding convergence in the payment services and fintech space.
4. Dynamic entry and expansion
Finally, while recent competition policy reports acknowledge that the fintech and digital sectors are rapidly – and continuously – growing and evolving, recent cases suggest that the CMA continues to place limited weight on the constraint posed by anticipated entrants or the ongoing expansion of alternative business models and new product propositions.
In PayPal / iZettle, the parties argued that the entry and expansion of new payment technologies – such as tap-on-glass, which allows consumers to pay by tapping their contactless card on the merchant’s phone, QR codes, and marketplace payment apps (such as Deliveroo and Uber) – would further constrain the merged group. While the CMA noted that these alternatives “could become established” in the future, it dismissed the effect of these emerging players as not sufficiently timely and effective to constitute a significant constraint, at least at present.
This appears to be somewhat of a recurring theme and suggests that the bar remains high when it comes to convincing the CMA to attach appropriate weight to the threat imposed by new entrants and rivals’ expansion into alternative product / service areas.