By Isaac Ng, Law Writer at the KCL Mergers & Acquisitions Society
The Deal
In November last year, Facebook announced that it had reached an agreement to acquire Kustomer, a budding supplier of customer relationship management (CRM) services. Although the details of the deal were not disclosed, sources close to the deal said it reportedly valued Kustomer at slightly over $1 billion.
The acquisition would enable Facebook to utilise Kustomer’s pioneering omnichannel platform to integrate its messaging tools, WhatsApp and Messenger onto a single screen, allowing businesses to better coordinate customer communication from various platforms. Additionally, Facebook would be able to capitalise on Kustomer’s artificial intelligence (AI) function to automate repetitive chat functions and streamline customer interactions. As such, Facebook’s implementation of Kustomer’s product would critically provide a more seamless and efficient method of managing customer communications. This might help Facebook expand on the 175 million people who contact businesses via WhatsApp every day, as more businesses will be able to engage effectively with customers. Additionally, the addition of Kustomer’s services would complement Facebook Shops, further entrenching Facebook’s business users. In return, Kustomer stands to benefit by attracting the patronage of businesses that currently utilise Facebook’s apps for customer communication. Additionally, Kustomer can tap into Facebook’s wealth of resources and expertise to enhance its product through innovation, and further differentiate its CRM services from more established ones in the market.
Antitrust Challenge From the CMA
Following notification, the Competition and Markets Authority (CMA) launched a Phase 1 review on 30 July to assess whether the acquisition would give rise to a realistic prospect of a substantial lessening of competition (SLC) in any market in the UK. The markets assessed included online display advertising, CRM services and business to customer (B2C) messaging.
Firstly, the CMA examined if the acquisition would grant Facebook access to more user data, substantially adding to its data advantage in online display advertising. The main concern was that this would raise the barriers to entry for other competitors in the market. Although it was acknowledged that Facebook did have significant market power and would expand its collection of user data, the claim was dismissed as such concerns would be mitigated by Kustomer’s relatively small size, as well as the ability of Facebook’s rivals to gain access to similar data. Furthermore, there were no complaints about the deal from Facebook’s rivals, which contributed to the conclusion that the acquisition would be inconsequential to competition in online display advertising.
Secondly, the CMA examined if Facebook would restrict or even prevent other CRM providers, who are rivals with Kustomer, from using its messaging channels. This was again rejected as the CMA reasoned that it would be in Facebook’s best interests not to do so. Such would cause it to lose revenue generated through licensing fees and limit its access to data. Furthermore, Facebook’s business customers can easily make the switch to bigger CRM suppliers such as Salesforce and Oracle.
Thirdly, the CMA considered whether, following the acquisition, Facebook would prevent other B2C messaging services from integrating with Kustomer and thus reduce the ability to compete. This was refuted by the fact that B2C messaging providers do not necessarily need to integrate with CRM providers in order to expand their reach to business customers. Moreover, these businesses would be able to find alternative CRM providers if Kustomer were not an option.
Finally, the CMA considered whether Facebook could offer Kustomer on a free or freemium basis by cross-subsidising Kustomer software with advertising revenues, thereby raising barriers to entry in the CRM market. The CMA rejected the idea of a cross-subsidy, claiming that acquiring Kustomer would instead grant Facebook economies of scale that helps it lower prices. However, this was deemed harmless to competition due to Kustomer’s minute size relative to its more established counterparts in the CRM market.
The CMA thus concluded that the acquisition would not give rise to a realistic prospect of a SLC, thereby ending its inquiry.
The European Commission’s Antitrust Probe
After receiving notification of the acquisition, the Austrian authorities, joined by 9 other Member States, referred the deal to the EC under Article 22 of the EU Merger Regulation (EUMR). The EC then launched a Phase II investigation in August this year, to determine if the deal would create a “concentration which would significantly impede effective competition in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position” under Article 1 EUMR. It has since extended its deadline to December, underlining the significance of its intention to conduct a thorough, full-scale investigation of the deal. The EC’s concerns mirror the first two components of the CMA’s assessment, namely that Facebook may reinforce its data advantage and reduce the competitiveness of the markets for the supply of online display advertising, and that Facebook may foreclose access to its messaging tools by Kustomer’s rivals.
Context: Increasing Enforcement of Antitrust Law
Before one proceeds to analyse the likely outcome of the EC’s probe, it is necessary to first understand the underlying trends in antitrust enforcement that contribute to the ongoing investigation. Despite Kustomer’s minute 0.05% market share as a small start-up in the market for CRM services, its acquisition has nonetheless attracted widespread scrutiny, with multiple national authorities seeking a finding of Facebook’s anti-competitive conduct. Even the German Federal Cartel Office (FCO), which did not join the EC referral, initiated ex officio parallel proceedings against Facebook despite the deal not meeting the German turnover threshold. Although the fervent scrutiny of this deal may come as a surprise, this can perhaps be explained by the following factors:
Authorities such as the EC, the CMA and the Federal Trade Commission (FTC) have in recent years adopted an increasingly interventionist approach in enforcing competition law. The CMA issued its first unwinding order in 2019 and has fined Facebook £50 million earlier this month, its highest fine ever imposed for a procedural violation of its merger control rules. In the same vein, the FTC filed two lawsuits against Facebook last year, alleging that it adopted ‘buy or bury’ approach to crush competition, and demanding the unwinding of its acquisitions of Instagram and WhatsApp. The FTC’s approach has since been reinforced by political pressure, with President Biden issuing an Executive Order in July encouraging the FTC to enforce antitrust laws vigorously.
The stricter enforcement of competition law is compounded by the increasing need to specifically regulate the market behaviour of tech giants, such as Facebook, Amazon and Google. This has been fuelled by increasing concerns from consumers and governments that such firms are gaining too much economic power and influence. While the EC has been at the forefront of tech regulations, individual national authorities have joined in this crackdown. France’s antitrust regulator fined Google close to $600 million in July to compensate French news publishers for using their content, and the US Department of Justice sued Google last year for entering into exclusionary agreements requiring it to be the default search engine and prohibiting the preinstallation of any other search service.
Will The EC’s Investigation Be Any Different from the CMA’s?
Turning back to the EC’s investigation, it is obvious that there is a strong push to sanction Facebook and curb its growing influence. Although the Facebook-Kustomer merger would constitute a “concentration” under Article 3 EUMR and threaten to significantly affect competition within the territory of the referring Member States under Article 22 EUMR, the EC will find it difficult to reach the finding that the deal in fact does significantly impede competition in the EU internal market. This is simply because of Facebook’s strategic choice of its acquisition target: Kustomer’s size and market power is a drop in the ocean relative to the massive global market share of CRM providers such as Salesforce, Adobe and Oracle. Furthermore, as similarly argued by the CMA, Facebook’s adaptation of Kustomer’s product and its dealings with Kustomer’s rivals are unlikely to constitute anti-competitive conduct, considering that there is no viable economic benefit it can gain from foreclosure strategies. It is thus unlikely that the outcome of the EC’s investigation would be any different from that of the CMA’s Phase I decision.
A Challenging Road Ahead for Facebook
Even if the EC’s investigation were to be unsuccessful in thwarting Facebook’s acquisition of Kustomer, this will definitely not be the last of its efforts in regulating Facebook’s market behaviour. With national antitrust authorities worldwide becoming increasingly suspicious of Facebook’s expansion and joining in the bandwagon by scrutinising its every move, Facebook’s antitrust and general regulatory woes will only worsen. This is especially so considering the EU’s imminent enactment of the Digital Services Act and Digital Markets Act, as well as the ongoing testimonies of whistle-blower Frances Haugen calling for immediate action to curb Facebook’s harms to society. It is thus of key importance how Facebook will handle such challenges and regain public trust in order to ensure a smooth, unobstructed advancement of its commercial interests.
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.
