What are killer acquisitions and what impact do they have on startup exits?

Within the startup ecosystem, an exit is typically the culmination of years of investment, technological development and value creation. Traditionally, a sale to an established industry operator, commonly referred to as a trade sale, has been regarded as the fastest and, in many cases, the most profitable route for founders and investors.

n recent years, however, competition authorities at both European and national level have intensified their scrutiny of a particular category of transactions: so-called killer acquisitions. This increased scrutiny is directly influencing how divestment strategies are structured and executed in innovation-driven sectors.

What are killer acquisitions and why do they concern competition authorities in the context of startup exits?

From a legal and economic perspective, the defining feature of a killer acquisition is that the startup represents either a potential competitor or a source of innovation that has not yet translated into significant revenues. Accordingly, concerns regarding such transactions do not arise from a static assessment of the market as it currently exists, but rather from a counterfactual analysis of how the market might have evolved absent the transaction. Among other considerations, authorities may assess the likely impact that the startup’s organic and sustained growth would have had on the market, a trajectory that may be curtailed or eliminated altogether following completion of the exit.

These transactions typically occur in sectors where innovation constitutes the principal competitive parameter (e.g. technology, biotechnology or artificial intelligence applications). In such cases, the value of the target does not lie in its current turnover or other financial metrics, but rather in its intangible assets, including data, intellectual property, R&D capabilities and potentially disruptive development pipelines.

Competition authorities are concerned that the elimination of such emerging competitors may reduce potential competitive pressure, thereby harming innovation in the medium to long term and, ultimately, consumers, even where there is no significant horizontal overlap between the acquirer and the target at the time of the transaction. In addition, authorities may examine potential anticompetitive vertical effects, particularly where the transaction affects access to data, technology or platforms capable of distorting adjacent markets.

Against this backdrop, it is unsurprising that competition authorities closely scrutinise acquisitions of young, R&D-intensive businesses possessing significant strategic value despite lacking a substantial market share. Not every acquisition of a startup constitutes a killer acquisition. However, concerns may arise where the purchaser acquires the business not for the purpose of developing it, but rather for objectives such as:

• Acquiring a patent that benefits, or generates synergies with, its existing production process;
• Eliminating a substitute product and/or competitor from the market altogether;
• Halting, wholly or partially, or otherwise interfering with the investment that the startup may be receiving.
  

Which regulatory framework applies to killer acquisitions?

Under Spanish law, merger control is governed by Articles 7 and 8 of Law 15/2007 of 3 July on the Defence of Competition (the Ley de Defensa de la Competencia or “LDC”). Pursuant to this legislation, a transaction must be notified to the Spanish National Commission on Markets and Competition (Comisión Nacional de los Mercados y la Competencia – “CNMC”) where, as a result of the transaction, either of the following alternative thresholds is met: the combined market share resulting from the transaction reaches or exceeds 30% of the relevant product and geographic market in Spain; or the aggregate turnover in Spain of all parties involved exceeds €240 million, provided that at least two of those parties individually generate more than €60 million in turnover within Spain.

It is precisely at this point that the challenge posed by killer acquisitions becomes apparent under the Spanish merger control regime. The LDC exempts from notification transactions in which the turnover in Spain of the acquired undertaking or assets does not exceed €10 million, unless the parties hold an individual or combined market share of 50% or more in an affected market. This exemption constitutes the principal route through which killer acquisitions may escape review in Spain. Originally intended to reduce the administrative burden associated with transactions of limited economic significance, this exemption aligns closely with the typical profile of a startup: high valuations based on technological potential, but relatively low revenues and market shares. Consequently, many acquisitions involving startups with significant disruptive potential effectively fall outside the CNMC’s prior review jurisdiction.

At EU level, Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (the “EU Merger Regulation” or “EUMR”) provides, under Article 22, a referral mechanism allowing one or more Member States to request that the European Commission examine a transaction affecting trade between Member States, even where the transaction lacks an EU dimension. Between 2021 and 2024, the Commission adopted a broader interpretation of this provision, particularly following the Illumina/Grail case, enabling it to accept referrals of transactions that did not meet either the EU thresholds or the national thresholds of the referring Member State. The stated objective was to ensure oversight of killer acquisitions that might otherwise have escaped administrative review altogether.

However, this approach suffered a significant setback. In its judgment of 3 September 2024 in joined cases C-611/22 P and C-625/22 P, Illumina and Grail v Commission, the Court of Justice of the European Union (“CJEU”) annulled both the General Court’s judgment and the Commission’s decisions accepting referrals from several Member States. The CJEU held that the Commission may not accept referrals from national authorities that, under their own domestic legislation, lack jurisdiction to review the transaction in question. This ruling substantially limits the Commission’s ability to use Article 22 as a corrective tool against killer acquisitions and restores a greater degree of legal certainty for parties to transactions that fall below all applicable national and EU thresholds.

What impact does scrutiny of killer acquisitions have on startup exits?

This regulatory landscape, although still evolving, has direct consequences for exit planning. First, execution risk has become almost as important as valuation. A strategic buyer may offer a higher nominal purchase price, but if that buyer presents significant antitrust concerns, due to its size, dominant position or history of serial acquisitions within the same market, a lower offer from a financial investor may ultimately be more attractive because of its lower regulatory risk profile.

Secondly, competition law analysis should be incorporated from the earliest stages of negotiations, irrespective of whether notification thresholds are met, particularly given that developments such as the Towercast doctrine permit ex post review of certain transactions. Thirdly, transaction documentation should be strengthened by incorporating Hell or High Water clauses requiring the purchaser to take all necessary steps to obtain the relevant regulatory approvals regardless of the circumstances, together with extended long-stop dates and conditions precedent linked to the receipt of such regulatory clearances.

Several warning signs warrant particular attention during due diligence and SPA negotiations. While none is determinative in isolation, collectively they may indicate that the purchaser places greater value on eliminating the startup as a competitive threat than on developing its business. This concern is particularly acute where the purchaser already holds a dominant market position or controls infrastructure that is difficult to replicate, as the startup may represent a future threat rather than an existing competitor.

Similarly, attention should be paid where the startup competes primarily through innovation, data, network effects or intellectual property rather than current revenues, since these factors often underpin defensive acquisitions. Another potential indicator arises where, following completion, the purchaser intends to integrate the technology but not continue funding the product or team responsible for its differentiation, suggesting an intention to neutralise rather than develop the acquired business.

In particularly sensitive transactions, it may be advisable to explore alternative structures, such as staggered acquisitions, minority investments prior to a full or controlling acquisition, earn-out mechanisms linking part of the purchase price to the achievement of post-completion technical or commercial milestones, or maintaining the option of an initial public offering as an alternative route to liquidity. In the case of earn-outs, it is essential to define contractually the purchaser’s obligations concerning the development of the acquired technology, thereby preventing passive post-completion management from being construed either as a breach of agreed milestones or, worse, as evidence that the transaction was intended to suppress the target’s innovation.

Where an exit is structured from the outset with competition law considerations in mind, the objective is not to prevent the transaction but rather to establish a robust evidential framework capable of withstanding scrutiny by the relevant authorities. In this context, the distinction between a straightforward exit and a potentially problematic transaction often lies in the contractual structure, the traceability of its economic rationale and its ability to demonstrate that the acquisition creates value without distorting or slowing competition within the market.

Accordingly, transaction documentation should, among other matters, provide for the precise identification of the affected markets and the startup’s role as a potential competitor, a detailed description of the efficiencies expected to result from the transaction and their causal link to it, and commitments relating to the continuation of the product line, technical team or development milestones where the rationale for the deal is genuinely growth-driven. Depending on the sector concerned, additional mechanisms may assume particular importance, including information-sharing safeguards, clean team arrangements, restrictions on access to competitively sensitive information where immediate integration is not possible, and provisions governing reversal, divestiture or purchase price adjustments in the event of delays in obtaining regulatory approval or the imposition of structural or behavioural remedies.

Conclusion: Killer acquisitions as a central consideration in startup exit planning

Killer acquisitions have evolved from a largely academic concern into a central consideration in the structuring of startup exits, particularly in R&D-intensive sectors. Recent case law has refined the application of Article 22 EUMR and restored a measure of predictability to transactions falling below the applicable notification thresholds. Nevertheless, the broader regulatory and policy framework continues to point towards increasingly sophisticated and diversified scrutiny of transactions identified as potentially problematic. Rather than becoming simpler, the enforcement landscape is moving towards greater complexity in both regulatory interpretation and competition law enforcement.

At our firm, we advise founders, investors and acquirers on M&A transactions in technology and innovation-driven sectors, incorporating competition law analysis from the earliest stages of negotiations in order to identify and mitigate regulatory risks that might otherwise jeopardise either the successful completion of the transaction or the value ultimately realised upon exit.

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