The UK’s Competition and Markets Authority, CMA, the nation’s antitrust regulator, has taken the rare step of reversing a major tech company acquisition. The body ordered Meta (previously known as Facebook).
In May last year, Meta bought Giphy, the popular GIF platform, reportedly for $400 million. Meta planned to integrate the GIF into Instagram, one of its popular products.
The CMA had started an investigation into the acquisition. It believed the deal would prevent other social media companies like Snapchat and Twitter from using Giphy’s extensive GIF library. As evidence, Meta had already halted Giphy’s paid ad partnerships with other companies.
Meta contended CMA did not have any jurisdiction over the acquisition as Giphy did not have any registered presence in the UK, but CMA defended its position:
“While both Facebook and GIPHY are US-based entities (and prior to the Merger, GIPHY’s revenue-generating activities were limited to the US), the important question for the CMA is whether the Merger may have an impact on competition in the UK. This link to the UK is established by meeting one of two jurisdiction tests: (i) the turnover test (based on the target’s turnover in the UK), and (ii) the share of supply test (requiring that the Parties together supply at least 25% of a particular good or service supplied in the UK, and there is an increment to the share of supply).
“Facebook and GIPHY are both active in the UK, and provide services to UK users. In this case, we conclude that the Merger has resulted in the creation of a relevant merger situation on the basis of the share of supply test, as the Parties overlap in the supply of apps and/or websites that allow UK users to search for and share GIFs, in which the Parties have a combined share (by average monthly searches) of [50-60]% with an increment of [0-5]%.”
In its preliminary report, CMA explained how it determined the acquisition would lead to a substantial lessening of competition, SCL. The body examined both parties’ internal documents that show how they run their businesses and how they viewed their partners and rivals in the ordinary course of business. CMA pored over almost 300,000 records.
CMA also spoke with other market participants in the industry to understand how GIF supply works.
The body found that social media and messaging platforms have a very limited choice of alternatives to Giphy. The only other viable option is Tenor, which Google owns, but its offering was nowhere near Giphy in terms of quality and quantity, meaning Giphy is a dominant player in the niche industry.
CMA considered what would happen if Meta had not bought Giphy. Contrary to Meta’s claim that Giphy would have become significantly weakened, the regulator found that the GIF company would have continued its supply to multiple social media platforms as it had been doing before the acquisition. It would also innovate, develop its product and services, and generate revenue as it continued to look for new ways to monetize its services.
Meta admitted its main reason for acquiring Giphy was to ensure its continued access to GIF, which CMA said the social media giant could ensure without buying up Giphy.
CMA contended that Meta would have increased its already significant market share unfairly:
“Our view is that this strategy would have the effect of strengthening Facebook’s significant market power in social media, and reducing the competition that it faces from others. On the basis of the evidence we have seen, we therefore conclude that the Merger will result in an SLC in social media as a result of vertical effects, in the form of input foreclosure.”
To remedy the situation, CMA decided the acquisition should be reversed:
“As noted above, we have decided that the sale of GIPHY is the only effective remedy to the SLCs that we have found. While divestiture of the acquired business is not an uncommon outcome when the CMA finds an SLC, divestiture of the GIPHY business poses particular challenges arising as a consequence of the completion of the Merger, and Facebook’s related actions, namely the termination of GIPHY’s revenue function and team, the transfer of almost all GIPHY staff on to Facebook employment contracts and the transfer of GIPHY’s back office functions to Facebook. These actions took place prior to the CMA issuing its Initial Enforcement Order holding the Facebook and GIPHY businesses separate and mean that, in several respects, GIPHY is in a significantly weaker position than it was pre-Merger.”