Wednesday 15 September 2021 4:52 pm

Sunak says investors have nothing to fear over tougher tech M&A regulation

Chancellor Rishi Sunak said proposals from the UK’s competition watchdog for tougher scrutiny of M&A deals in the startup industry are reasonable and not intended to discourage early investors in UK tech companies.

“I don’t think people need to be that anxious about it,” he told reporters at a tech event in London.

“No one should come away from that thinking we’re somehow against this activity,” he said. “In fact we are passionately supporting tech investment.”

Sunak was pressed on the issue after a new survey by startup body the Coalition for a Digital Economy (Coadec) revealed that over half (55 per cent) of investors in UK startups said they would significantly reduce the amount they invest in the country’s early stage companies if the ability to exit was restricted.

A further 23 per cent of investors said they would stop investing in UK startups altogether if the proposed tougher takeover regulation was introduced.

It came after the Competition and Markets Authority (CMA) recommended that the Digital Markets Unit (DMU) – the new public body launched by the government in April and tasked with regulating the UK’s powerful digital sector – is given expanded powers to investigate M&A deals in the sector.

But the proposed reforms were simply “a case of having a broader sense of whether an acquisition is going to be more beneficial than harmful for the UK,” the chancellor said.

In 2019, an expert panel led by Obama’s former chief economist Jason Furman consulted the government on digital competition and published a report that claimed: “Over the last 10 years the 5 largest firms have made over 400 acquisitions globally. None has been blocked and very few have had conditions attached to approval, in the UK or elsewhere, or even been scrutinised by competition authorities.”

The CMA’s potential reforms are designed to prevent tech giants swooping in on smaller firms and stamping out competition in a way that may be harmful to the rest of the UK market, the chancellor insisted, saying: “Making sure we have competitive markets, it’s useful to look at the stats.”

Currently, the CMA intervenes in mergers or acquisitions “on balance of probabilities”, for example if there is a greater than 50 per cent likelihood that an acquisition will lead to a substantial lessening of competition (SLC).

But the DMU has proposed lowering this bar to a tougher new criteria of a “realistic prospect” of SLC.

Focusing on tech giants

This, Coadec argues, goes further than the proposals made by Furman’s Digital Competition Expert Panel to introduce a “balance of harms” approach that takes into account the scale of a merger and the startups involved, as well as the likelihood of harm.

By clamping down harder than this, the DMU “threatens the foundations of the tech ecosystem”, Coadec said in the new report, arguing that in fact it made it harder for the UK’s startups to compete with Tech Giants – the opposite to what Sunak implied.

Coadec’s survey also found that 70 per cent of investors felt the UK’s watchdog only thought about tech giants when designing competition rules.

If the watchdog goes ahead with its proposed tougher takeover rules, Coadec estimates that venture capital invested in UK companies could drop by £2.2bn and dent UK economic growth by as much as £770m.