For a de minimus threshold for mergers

I've spent the last couple of days at the Competition Law and Policy Institute's annual workshop.

Webb-Henderson's Lucy Wright made a good case for a de minimus threshold for merger controls. Small mergers could have a safe harbour, or mergers in markets of insufficient NZ importance.

If we need to set a monetary threshold for a market of insufficient NZ importance, there's an obvious benchmark.

Same day as that session at the CLPINZ workshop, Terry Allen, former Chair of Serrato, had a piece in the Post. You'll remember Serrato. I've sometimes pointed to it as example of how the NZ Commerce Commission destroys value by chasing nth order issues when first-order issues are left by the wayside. 

Allen writes of their NZ startup:

In fact, Pioneer liked Serato software so much that when the company ran a sales process, it was the preferred bidder. Its offer not only valued the company at around $175 million, it also promised to establish a global music laboratory in Aotearoa and to grow the headcount of the chirpy little music company.

It was all going swimmingly until the Commerce Commission pulled the plug mid-2024.

The commission’s concern was that Pioneer’s parent company, AlphaTheta Corporation, already held a significant share of the global DJ hardware market.

Serato was a major player in the DJ software market. In the commission’s view, combining the two could “substantially lessen competition” in the DJ software and related hardware market — even though the New Zealand market for such products is tiny, accounting for well under 1% of Serato’s sales.

The merger review took a year and cost the commission more than $500,000 to investigate, according to the National Business Review. Legal and advisory bills for both Serato and Pioneer were well north of $1m.

The decision meant the reported $175m-plus deal was dead in the water, Serato remained independent, and the promised music lab never left the drawing board.

The Commerce Commission decision did four things. First, it cost the commission over half a million dollars and both Pioneer and Serato over a million in professional fees.

Second, it took the commission a full 12 months to make a call — effectively hitting the pause button mid-track for a year. Tacked onto pre-marketing and then running the process a second time the all-up time was more like three years. An eternity in a fast-moving tech environment.

Third, it made it jolly challenging to run the company on a daily basis while its future ownership was debated and delayed. We were lucky to have a top-flight management team keeping the home fires (and DJ decks) burning.

And fourth, it forced the company to run a whole new sales process but limit the participants to financial buyers rather than trade buyers — effectively narrowing the field to private equity.

I've heard reasonable-sounding arguments that NZ ComCom stuffed this one up in part by defining the market improperly. While Serrato's software is great for hip-hop artists, it's not as popular for artists that don't use scratch. Define a market narrowly enough and weird things happen. 

Allen points to the more fundamental issue:

In today’s world, an increasing number of Kiwi companies build and sell digital services, and are global from day one.

While the commission understood that Serato’s New Zealand revenue was a wafer-thin slice of the whole, the mere existence of any local sales meant it had to run the merger through its standard domestic-competition lens.

The second is that under-resourcing of the commission means even straightforward matters can take a year to determine. In the world of global M&A, that’s an eternity — enough time for opportunities, buyers and market conditions to change completely.

Both of these things need to change if we want New Zealand to continue to grow globally significant tech companies and realise top-dollar sales when their founders exit.

Otherwise, we risk sending an unhelpful message to the world: if you want to buy a Kiwi tech success story, prepare for a year in regulatory limbo, big legal bills, and the real chance the deal won’t happen at all.

Meanwhile, a message to local founders is base your company overseas and only sell your services to foreigners.

That’s not the kind of remix New Zealand should be famous for.

Set a de minimus standard such that if the NZ market is trivially small, it isn't worth the Commission's time. 

So that venture capital won't be scared of backing NZ startups for fear that NZ ComCom will block their reasonable exit if the play pans out and a large international company wants to buy their startup. 

How to define the threshold for the de minimus standard for a market of insufficient NZ importance? A number bigger than the market for hip-hop DJ software in NZ seems like a reasonable starter.