Merger crackdown risks VC funding going overseas

Gilbert + Tobin competition law partner Elizabeth Avery slammed the proposal as “draconian” last week, while Clayton Utz partner Kirsten Webb said it was likely to mean some unproblematic mergers would be blocked.

Ms Avery on Sunday warned there would be “a big economic impact on investments” by venture capital firms if the reforms went ahead.

“If the onus of proof is reversed, and it’s really hard to get a deal through to a strategic buyer, venture capital’s money will go elsewhere,” she said.

“Basically, the ACCC is posing a barrier to exit and if venture capital sees that that barrier exists, they’re not going to invest. So that will deter investment in Australia, and it will mean less mergers happen in Australia for sure.”

She said it was “very difficult” to prove a negative, noting each of the four times this year the ACCC had required parties to prove a merger would not substantially lessen competition had resulted in the watchdog’s rejection.

Another Gilbert + Tobin lawyer, Simon Muys, warned it was particularly important barriers to exit were not introduced when the economy was in a state of flux.

Hindering growth

A report from the government’s innovation adviser last week said a lack of mid-sized firms – those emerging from series B capital raisings or higher – was stymying innovation. This threatened to hold back Labor’s ambition to grow new onshore industries and capabilities to reverse a long-running decline in innovation and sluggish productivity growth.

”The outcome we need right now is the scaling of small businesses into medium-sized businesses. This will build sovereign capability and economic complexity in Australia,” said Andrew Stevens, chief executive of Industry, Innovation and Science Australia, which wrote the report.

Ms Pounder said it was from the series B stage and onwards where Australia had the most significant shortfall in investment capital available, and where there was a risk that making it harder to realise investment returns through mergers would make the situation worse.

”That is the really fundamental opportunity test for us as an economy in the next few years, if we want to have more dynamism, if we want to have more innovation and new sources of productivity. When we think about major reform here, we need to be cognisant of that,” she said.

“So anything you do that makes it less certain or less attractive, to bring capital into the market, in our view, is actually the thing that is most likely to have a detrimental impact on competition and economic dynamism.”

Government analysis of mid-sized businesses showed of 56,252 operating in 2020-21, 79 per cent stayed mid-sized, 17.5 per cent shrank into small businesses, and just 0.6 per cent grew into large businesses.

Speculation a problem

The ACCC has cited the energy transition and technology transformation as key reasons mergers need more scrutiny. But Mr Muys said companies needed to be able to move quickly to invest in these changes.

“In a highly dynamic economy that’s transitioning, you need maximum flexibility for firms to be able to enter and exit to be able to grow and shrink and move,” he said.

Ms Pounder warned against any moves to make the competition test more speculative and based on how a company might be able to compete in the future.

“If there were changes to the merger test, or to the definition of the substantial lessening of competition test and that turned it into a more speculative test ... I think that would be really problematic,” she said.

“I think, the challenge of changing some of the definitions for substantially lessening competition [is] when you’re applying them to emerging technologies and emerging firms. It’s actually very hard to predict which ones will have that effect until some of those effects start to actually emerge.

“I think one of the benefits of the test at the moment is it is fairly evidence-based and fairly rigorous from a quantitative perspective.”