On Tuesday, Visa called off its $5.3 billion acquisition of Plaid, a fintech startup that provides the “plumbing” that connects banks to payment and personal finance apps like Paypal, Venmo, Robinhood, Coinbase and Betterment.
The deal fell apart after the Department of Justice (DOJ) slapped Visa with an antitrust lawsuit. The suit alleged that the merger would create a monopoly on debit transactions and accused Visa of actively trying to eliminate a “competitive threat to its online debit business before Plaid had a chance to succeed.” Both companies agreed that litigating the suit would take too long, with a trial scheduled for June.
The legal culprit behind the Visa-Plaid annulment is a piece of antitrust law called “nascent competition” — a concept that’s more and more often getting in the way of conglomerates’ best-laid plans to buy buzzy startups. Nascent competition helped tank Procter & Gamble’s buyout of DTC razor brand Billie last week, as well. The issue was also at play in the FTC’s successful intervention into a $1.37 billion merger between Shick-owner Edgewell and shaving brand Harry’s last year.
What is nascent competition?
In the past, the biggest antitrust challenges to mergers have been about regulating companies’ market shares, by stopping two big companies from fusing or breaking up giants. For instance, when courts stopped AT&T from purchasing T-Mobile in 2011.
However, nascent competition is based on the idea that even very acquisitions can be anti-competitive, given young companies’ outsized role in innovation. The concept makes it illegal for a dominant corporation to buy a budding competitor that may eventually capture substantial business, especially one that has a unique or disruptive product, technology or business model.
Historically, the larger total market share a merger creates, the more likely an agency would be to push back. Mergers that upped a company’s number less than around 2% were usually safe, according to a JDSupra. Billie, which had raised only $35 million at the time of its buyout and Harry’s, which had a 2.6% market share weren’t going to make P&G or Edgwell the Standard Oil of shaving, which had a 90% market share when it was broken up.
Antitrust agencies, led by the FTC, have been developing the law behind nascent competition in recent years. The idea is based on the similar concept of “potential competition,” which makes it illegal for companies to buy competitors that haven’t entered the market yet.
Impact across industries
We’re now seeing the results of this new nascent competition crackdown across industries. Early last year, a major genetic sequencing firm Ilumina tried to buy bio PackBio, a peer with “no more” than a 2.5% market share. The companies mutually terminated their merger after the FTC filed a complaint.
In 2018, CDK, one of the biggest management systems for car dealerships, was blocked from buying out Auto/Mate, a small car dealership services company with a share under 2%. In each case, the FTC argued that the smaller represented a crucial innovator and future competitor to their buyers.
The increasingly aggressive application of nascent competition is a part of a larger antitrust crackdown being carried out by the DOJ and FTC. The push is a response to the consolidation over the past few decades of almost every industry, from fashion and cosmetics, to food and agriculture, to entertainment and tech. The latter, of course, has been the most public target of antitrust.
This summer, both agencies opened investigations into Apple, Google, Amazon and Facebook, condemning their growth as anti-competitive. In December, the FTC called for Facebook’s purchases of Instagram and WhatsApp, which it bought as small but rapidly growing firms, to be unwound on the basis of nascent competition.
What does this mean for Visa and Plaid?
When it came to Plaid, the DOJ argued that Visa’s buyout would contribute to “higher prices, less innovation and higher entry barriers for online debit services.” The cancellation is a blow to both Visa and Plaid. The deal would have doubled Plaid’s most recent private valuation and given it a seat at the table of the biggest credit card network in the U.S. In turn, Visa would have diversified its payment capabilities and added one of the fastest growing fintech companies to its portfolio.
Visa is adamant that its strategy wasn’t monopolistic. The company said in a press release that it’s “confident” it would have won the the suit because “Plaid’s capabilities are complementary to Visa’s, not competitive.” Yet the DOJ alleged that Visa CEO Al Kelly described the deal as an “insurance policy” to neutralize a “threat to our important US debit business.”
While Plaid’s services are very different from Visa’s, the lawsuit alleged that Plaid and the apps it powers could one day make credit and debit cards obsolete. By gaining control over what’s currently the backbone of the fintech industry, Visa would be able to slow the growth of, or find new ways to profit in the rapidly changing payments sector.
Plaid Chief Executive Zach Perett says Plaid is in good shape to continue forward as an independent company, especially thanks to the boost many of their partners, which include online shopping or buy now pay later apps, have seen during the pandemic. Visa will keep the minority stake in Plaid it had before the deal was proposed.
What does this mean for DTC buyouts?
New levels of antitrust scrutiny may propel existing shifts in the DTC playbook. For the last decade — and especially since Unilever bought Dollar Shave Club for $1 billion in 2016 — a buyout has been the gold standard for ambitious brands and savvy M&A executives. Plenty of startups never envisioned being profitable mass product companies, and rather planned from the beginning to raise capital, grow at a loss and make a timely exit with legacy corporations.
The playbook was already changing. Young brands, like DTC alcohol startup Haus, were committing to profitability from the get-go after watching over-hasty IPOs like Casper, fallouts with investors like Brandless, or messy acquisitions like Walmart and Bonobos. The threat of the DTC and DOJ scrapping your deal anyway — at least if your company is too innovative or successful — is only making Warby Parker’s or Glossier’s model of staying independent and growing slowly towards IPOs as niche leaders look more appealing. Buying a DTC has also become a less obvious choice for conglomerates, given the pandemic’s impact on balance sheets, consumer spending, and brick-and-mortar brands’ e-commerce growth.
Nascent competition doesn’t mean we’ll never see another Unilever-Dollar Shave or Petsmart-Chewy. Lululemon’s acquisition of Mirror, as well as Bayer’s purchase of vitamin startup Care/Of this summer proved that. But deals between big brands and little ones might start to look different, taking place earlier in the startups’ life cycles, between companies with less similar services or products, or in the form of different kinds of partnerships.
