By Melvin Ng, Law Writer at the KCL Mergers & Acquisitions Society
Deal Background
Facebook announced last May that it will be acquiring Giphy in a deal worth $400 million. Giphy is an animated picture platform that was founded in 2013. It has a built-in library of GIFs that can integrate with other apps. Facebook did attempt to acquire Giphy back in 2015 but was declined; Giphy instead pursued partnerships with other social media companies and, as a result, raised $17 million.
The acquisition makes sense as it was reported that 50% of Giphy’s traffic comes from apps owned by Facebook, which includes Messenger, WhatsApp and Instagram. Half of this traffic originates from Instagram alone. Instagram’s Vice President of Product, Vishal Shah, was particularly receptive to this acquisition: “GIFs and stickers give people meaningful and creative ways to express themselves“. Shah was also open to the idea of making further investments into Giphy’s technology, which allows other developers and API partners to have the same access to Giphy’s API.
CMA Investigation
A deal of such magnitude did raise eyebrows among senators in the US Congress. Republican Senator Josh Hawley, a staunch critic of Big Tech in the US, was particularly scathing the deal where he claimed, “Facebook keeps looking for even more ways to take our data“. Such a view warrants concerns considering how Facebook’s acquisitions of other social media platforms, such as Whatsapp and Instagram, in recent years. As Giphy provides services to a wide variety of platforms, including Twitter and TikTok, Facebook will have data from GIF searches, posts around the internet, and how people use them. The more data Facebook has, the more it can build a product which results in anti-competitive behaviour. The more people drawn into using these services, the less power an individual will have in opting out of this corporate data exploitation model because no equivalent service exists. In this regard, there could be lesser competition in the supply of video clips and animated images.
The CMA, in January, announced investigations into Facebook’s acquisition of Giphy to determine if the acquisition does “result in a substantial lessening of competition“. While both companies are headquartered in the US, CMA has the authority to investigate mergers when a business being acquired has an annual turnover of £70 million in that particular country, or when the combined businesses have at least a 25% share of any ‘reasonable’ market. The investigation would stall Facebook’s ability to integrate Giphy into wider parts of its business, despite the acquisition having already taken place.
In order to complete a merger assessment under UK law, the CMA will be required to conduct both Phase 1 and Phase 2 investigations. Both the investigations aim to determine if there is a realistic prospect of a substantial lessening of competition (SLC). However, the former is conducted by the CMA, while a panel of independent members will do the latter. The CMA applies different thresholds in finding a SLC: in Phase 1, the CMA would consider if there is a realistic prospect of a SLC; while a Phase 2 assessment is based on the balance of probabilities. If the CMA does conclude that the acquisition amounts to a SLC, Facebook could be required to divest all or part of the Giphy to a suitable purchaser who can provide effective competition.
Future Regulatory Measures?
The CMA announced last December that they will be looking into setting up a new division called the Digital Markets Unit tasked with creating a new code to govern the behaviour of tech giants. This unit will enable the CMA to curb the powers of tech giants, which entails ordering them to take certain actions to achieve compliance and also imposing financial penalties for non-compliance. Tech giants could potentially be required to be more transparent about customers data and give consumers a choice on receiving personalised advertising. As the CMA claimed that this unit will be targeting platforms funded by digital advertising, Facebook and Google will likely fall under it. In fact, according to eMarketer, both Google and Facebook have a combined share of almost two-thirds of the UK’s digital ad spending. Dominance over the advertising market should not be undermined, as this could allow companies to freely manipulate the types of advertisements shown which could significantly diminish competition in the market. Failure to curtail this dominant position would prevent new entrants to the market, while at the same time being able to charge a much higher price for the services it offers. Once this unit is successfully established, start-ups and other small businesses could be given greater access to the market and an opportunity to compete on equal grounds.
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KCL Mergers & Acquisitions Society
The KCL M&A Society (KMA) was founded with the goal of providing students with valuable information and opportunities regarding the field of Mergers & Acquisitions. KMA aspires to provide students with a platform to learn and improve their skills whilst delving into the synergies of law and finance.