The New Zealand Commerce Commission (Commission) has declined to grant clearance to AlphaTheta Corporation's proposed acquisition of local software developer, Serato.
Auckland-based Serato produces DJ and music production software that integrates with DJ hardware made by various brands, including AlphaTheta's Pioneer DJ range. In addition to Pioneer DJ hardware, Japanese business AlphaTheta offers rekordbox DJ software.
This is the first merger clearance application declined by the Commission in more than six years.
Nature of competition concerns considered
While the Commission's written reasons for the decision are yet to be published, the Statement of Unresolved Issues, published in May, coupled with yesterday's media release announcing the decision to decline clearance, indicate that the Commission's concerns related to:
- a significant lessening of competition in the market for the supply of DJ software, on the basis that the parties were close competitors to each other in that market (and remaining competitors or new entrants could not replace that lost competition);
- the merged entity foreclosing its DJ hardware rivals' access to Serato's DJ software, which the Commission considered an important input given its popularity with DJs; and
- the merged entity accessing its DJ hardware rivals' sensitive information through their use of Serato software, risking these rivals innovating less, or ceasing integrating with Serato (and in both cases, becoming less competitive).
The definition of the DJ software market was a key point of contention in the Statement of Unresolved Issues. While the parties submitted that mobile DJ applications will constrain the merged entity as they become increasingly substitutable for laptop DJ applications, the Commission disagreed and considered mobile apps to be outside the relevant market but sought further evidence from the parties on this issue.
Preliminary observations
- The Commission's final commentary on its assessment of the competitive constraints provided by mobile DJ applications going forward will be of particular interest, given that the assessment of likely future competition is a topical issue for transactions involving fast-changing technology markets.
- The origins of this clearance application is worth noting. The Overseas Investment Office (OIO) approved the foreign direct investment (FDI) element of the acquisition subject to the Commission confirming it did not have any competition concerns with the transaction. Once it became aware of the transaction, the Commission then encouraged the parties to seek formal clearance. If the Commission has concerns that a transaction substantially lessens competition in a New Zealand market and the parties proceed with the transaction without seeking clearance, it has the ability to open an investigation, which is a public process, and take enforcement action (which may include seeking a court injunction to prevent the transaction from completing).
- Another interesting element of the decision is that it comes while the UK's Competition and Markets Authority (CMA) is still reviewing the transaction as part of a phase 2 merger investigation. Following the CMA's "invitation to comment" on the transaction in January earlier this year, it proceeded to open its own merger investigation on 4 March 2024 (approximately five months after the clearance process was formally kicked off with the Commission). In May, the CMA decided that the transaction may be expected to result in a substantial lessening of competition in the UK, and referred the case to "phase 2" (a process reserved for more complex cases and akin to the Commission "Statement of Unresolved Issues" phase).
- It is understood that less than 1% of Serato's global revenue is in New Zealand, reported as being less than half a million,1 and described by Serato itself as "vanishingly small".2 Given the live review process in the UK, where Serato is understood to have a much more significant presence, and the target's low New Zealand turnover, it is notable that the Commission was willing to "go first" and potentially prevent a global transaction before other regulators have fully considered the competitive effects of the transaction in their jurisdictions.
In addition to the industry specific aspects of yesterday's decision, the Commission's decision serves as a reminder of the increased engagement between the OIO and Commission on transactions that might impact competition in New Zealand and that there is no de minimis threshold in New Zealand, meaning the Commission has jurisdiction to review transactions that are likely to substantially lessen competition, regardless of how modest the New Zealand revenue of the target is.
What's next?
The parties have the option of contesting the Commission's decision. Appeals may be made to the High Court by giving notice of appeal within 20 working days after the date of the NZCC’s decision,3 or within such further time as the Court allows. On the other side of the globe, the UK CMA's published timetable indicates a target of November 2024 for its decision.4
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