Why the federal government’s merger plans are bad news for startups

Australia’s startup industry is entitled to ask itself what are the government’s expectations when it comes to technology?

While some of the government’s moves around Big Tech have been encouraging, proposed changes to mergers and acquisitions requirements will likely have a chilling effect on dealmaking and investment in our local startup industry. 

What’s happened?

Last month, Treasurer Jim Chalmers laid out some proposed changes that will increase the degree of difficulty when it comes to dealmaking.

Under the proposed changes, deals above a certain yet-to-be-determined monetary and market share threshold will be reported to the Australian Competition and Consumer Commission. The consumer watchdog will then have 15 to 30 days to review it.

If the ACCC decides there’s an issue, it will then have another 90 days to determine if it lessens competition or entrenches market power. The consumer watchdog will also take into account any deals done by either the suitor or target in the three prior years when deciding whether to block the merger.

While there are genuine and real need for such changes at the big-end-of town or in highly concentrated markets, there is potential for spill-over into the mid-market tech sector, particularly if the yet-to-be-determined monetary thresholds are set too low, or for startups who are caught up in a ‘creeping merger’. 

Let’s start off with what this means for founders that are contemplating a deal.

Time and money

This structure is going to cost scaleup founders time. Our industry needs to prepare itself for the possibility of a waiting period of four months, on top of the courtship process, if the deal approaches the ACCC’s risk appetite. That’s a long time to wait.

This structure will also cost founders money. They should prepare to add $50,000 to $100,000 as a line item to prepare for and manage the ACCC’s process.

As a result, it’s more likely that deals at the margins just won’t get done. The benefits of following through on a deal potentially won’t eclipse the additional time and cost associated with it. This raises serious questions about the appropriateness with which these laws are being applied. If a $100,000 expense means the deal doesn’t get done, surely that deal wasn’t that anti-competitive?

Further, there’s significant potential for some scaleups to run out of runway. We’re in an emergent era of strategic alliances and mergers for scaleups. VC funding collapses by 42 per cent in 2023 compared with the year prior. The mood around the traps is that this year is only marginally better. Hopes are also pretty muted for at least the first half of 2025 as well.

With interest rates now expected to stay higher for longer, consumer sentiment will remain diminished and the cost of capital is higher. As a result, founders are increasingly looking at M&A to keep their ventures operating or exit.

These proposed changes make their ‘Plan B’ even harder. Further, it’s also not clear whether flip ups and restructuring transactions will be caught in the new system. The Treasurer’s announcement was also silent on the to-be-announced thresholds, but the proposed levels last year were low.

A good idea, poorly executed?

The government’s main target, market concentration, is a good one.

Australia has one of the most concentrated economies in the world. We need more competition.  

But technology companies are particularly impacted by these changes, despite being, on the whole, often subject to fierce global competition. These are not bricks and mortar operations with entrenched market power. But they will be subject to the same thresholds, information requirements, and waiting periods. And therefore costs.

Further, the clumsy handling of proposed changes to sophisticated investor requirements, which I’ve previously written about for StartupDaily, at best gives the impression of a government that views startups as an afterthought to major policy changes.

Australian tech can build globally minded businesses that employ a lot of people and generate hundreds of billions in wealth. Putting hurdles and waiting periods in front of such events may be useful, but only if carefully targeted. If we don’t want to see world-beaters caught up in this new regime in their early stages, then some reform is in order.

• Anthony Bekker is Managing Director, APAC, of Australian, US and UK technology legal advisory firm Biztech Lawyers.