Merger Reviews and Regulatory Hurdles
Adobe announced its proposed acquisition of Figma on September 15, 2022. The transaction came under intense scrutiny in many jurisdictions, in particular from US, UK and EU regulators.
The deal triggered a merger filing requirement under Hart-Scott Rodino Antitrust Improvements Act of 1976. The DOJ issued a Second Request for information to Adobe and Figma, signaling a thorough examination was underway. The investigation reportedly focused on the interactive product design market, where Figma was seen by some as a market leader. In February 2023, rumors circulated that the DOJ was preparing to file an antitrust lawsuit to block the deal, citing concerns that the merger could reduce choice and innovation in the broader design software sector. All signs pointed towards an increasingly uncertain outcome for the transaction in the US.
In the EU, Adobe’s merger with Figma did not meet the turnover thresholds for review under the EU Merger Regulation (“EUMR”). However, on February 15, 2023, the EC claimed jurisdictions to assess the transaction due to referral requests from Austria and Germany under Article 22 of EUMR. The petition was subsequently joined by numerous EU Member States.
In August 2023, the EC launched an in-depth investigation into the acquisition. Concerns were cited in the market for interactive product design software where Figma is a market leader and for digital asset creation tools where Adobe holds a leading position. Following a two-month investigation, the EC sent a Statement of Objection (“SO”) to the parties. The SO historically has been a challenging hurdle, leading to the collapse of many deals.
In the UK, the CMA proactively initiated a merger review process in May 2023 despite the fact that the transaction did not meet the statutory turnover-based threshold. By June 30, the CMA had warned Adobe of a potential Phase-II investigation, unless Adobe proposed satisfactory solutions to their concerns. The CMA’s investigation focused on potential harm to innovation and choice for designers. On November 28, the CMA’s provisional findings were released, suggesting that the acquisition could significantly lessen competition, raising further doubts about its path to regulatory approval.
The CMA and EC deployed similar theories of harm in their assessments of this transaction. Specifically, Figma is a recognized market leader in the interactive product design tools market, and Adobe’s Adobe XD, which was discontinued before the merger announcement, held a minor presence. Both agencies claimed that the merger would result in a reduction in competition and innovation because Adobe could effectively remove itself as a significant market player in this space after the merger was consummated.
On the flip side, Adobe is a dominant player in two creative design software markets. These include vector editing tools and raster editing tools, where Adobe excels with its flagship products Photoshop for vector editing and Illustrator for raster editing. Figma, while not offering a standalone product, provides creative design features within its screen design product. The acquisition raised concerns about Adobe eliminating Figma as a key future competitor, potentially leading to lessened innovation within Adobe’s own suite of creative design software.
These concerns align with the potential competition theory laid out in the 2023 Merger Guidelines. Although DOJ never filed a lawsuit, earlier reports indicated that the its Second Request was motivated by Figma’s leading position in the interactive product design tool market. This focus of scrutiny mirrored the apprehensions of the European regulators.
Similar Theories, Different Deals
The Adobe / Figma merger stands out as a notable instance amid the growing application of potential competition doctrine. But efforts of competition agencies to contest and demonstrate their claims have yielded mixed results.
At the end of 2020, the FTC initiated a lawsuit to reverse Meta’s acquisitions of Instagram (2012) and WhatsApp (2014), alleging these deals were made to neutralize important competitive threats and thereby fortified Meta’s monopoly in the market for the personal social networking services (“PSNS”). The district court dismissed the FTC’s initial complaint, stating that the FTC failed to provide substantial evidence to demonstrate Meta’s monopoly power in the PSNS market. In response, the FTC filed an amended complaint in August 2021. The amended complaint survived a second motion to dismiss in January 2022 And the lawsuit is currently ongoing.
The saga between FTC and Meta is not limited to the claims revolving around PSNS. In August 2022, FTC tested a potential competition theory by challenging Meta’s acquisition of Within, a virtual reality (“VR”) app developer. The FTC’s complaint centered on the claim that there was a distinct market for “VR dedicated fitness apps.” In this market, Within’s Supernatural was deemed as a primary player, while Meta’s Beat Saber was considered a potentially competing fitness app. The FTC argued that the acquisition would eliminate Meta as a potential competitor in this market, thereby reducing competition.
The FTC’s case was largely based on the premise that Meta, given its resources, ability, and incentive , could eventually enter the dedicated fitness app market to compete against Within absent the merger. It further alleged that Meta’s acquisition of Within would prevent Meta’s future market entry, thereby reducing competition. However, the court found the FTC’s arguments overly speculative and not sufficiently grounded in substantial evidence.
Putting aside FTC’s mixed results against Meta, it scored a victory in December 2023 when challenging Sanofi’s proposed acquisition of an exclusive license to a Maze’s therapy in development for treatment of Pompe disease (“MZE001”). FTC’s complaint was steeped with the nascent competition theory. Sanofi was identified as a monopolist in the market for pharmaceutical treatments for Pompe disease (“Pompe Drugs”). Maze’s MZE001 had completed its Phase 1 clinic trials in February 2023 and not yet started Phase 2 trials. FTC asserted that the deal would eliminate an important threat from MZE001.
For example, MZE001 is a pipeline product showcasing promise to receive Food and Drug Administration (“FDA”) approval. Sanofi dropped the deal with Maze after FTC’s challenge. This is also a notable case in that FTC sought to block a deal involving a pipeline product having only completed Phase 1 trials and being relatively far from FDA approval. It also underscores that potential competition theory has played a significant role in US antitrust agencies’ merger reviews.
2023 Merger Guidelines Are Shaping Potential Competition Theory
The 2023 Merger Guidelines have clarified and explained key considerations for evaluating potential competition in mergers. It outlines two key aspects: (1) the removal of an objectively likely market entry (APC), and (2) the reduction of existing competition pressure (PPC).
In the APC scenario, the focus is on competitive benefits from a firm entering the market. To build a case under the APC theory, agencies will attempt to demonstrate a reasonable probability of market entry and the likelihood of that entry driving procompetitive effects. In the PPC scenario, the focus is on subjective perception that a firm could enter a market and the response of potential rivals to that subjective belief.
However, while the 2023 Merger Guidelines lay out the agencies’ rationale and application of potential competition theory, the success of this analytical framework will largely be determined through the litigation of future merger challenges. Abandoned deals like Adobe-Figma, though counted as wins for the agencies, do not establish new precedent.
