Serato Audio Research Limited (Serato) is a classic kiwi tech start-up story, starting in a garage before taking the global DJ software market by storm (even featuring in Eminem's lyrics). Serato's founders were close to a multimillion-dollar exit in a deal with AlphaTheta Corporation (AlphaTheta). AlphaTheta owns the most popular DJ hardware brand (Pioneer DJ) and competes inthe DJ software market with Serato. The proposed deal was valued at more than $100 million.

The Commerce Commission recently declined AlphaTheta's application to acquire Serato. The decision was published on 13 August 2024.

Serato has confirmed that the deal is dead, and it does not intend to appeal. The founders are understandably disgruntled.

The New Zealand tech industry is up in arms, arguing that the Commerce Commission's decision will stifle the growth of early-stage tech companies in New Zealand and potentially force them offshore, because of the concern that regulatory hurdles may block future exits.

Other commentators have criticised the Commerce Commission for declining a deal that's fundamentally a good-news story for New Zealand's tech industry, citing the relatively small impact on competition for New Zealanders compared to (say) competition concerns in the grocery, construction and electricity industries.

It's unsurprising that the decision has garnered plenty of interest. It's been a while (at least six years) since the Commission declined a clearance application.

Commerce Commission Chair John Small has responded to these concerns on the NBR's Back in Business podcast with Simon Shepherd. The podcast covers a number of interesting points and perspectives:

• Is it time to consider a de minimis threshold for New Zealand's merger control regime? Serato's New Zealand sales revenue in the DJ software market for 2023 was only $365,000. Small fry compared to the daily revenue of New Zealand's supermarket giants, and the extra $2.5 - $3 million a month Fletchers is spending due to high energy prices.
• Was the Commission simply doing their job, applying the law as it is required to do?
• John Small says the biggest problem is that Serato was trying to sell to its closest competitor, and this created competition risks that were significant enough to block the deal. Namely, Serato and AlphaTheta combined had the potential to shut out other DJ software companies. In that context, the Commerce Commission Chair argued it's wrong to say that the decision will have a chilling effect on all exit deals.
• Did the Commission take too long to decide on the merger (9 months plus)? The statutory timeframe is 40 working days, however in practice this is often extended.
• Serato says the delay shows that the Commission was out of its depth, and doesn’t understand the technology and the market.
• Certainly, 9 months is a long time to be in limbo in the fast-paced tech industry. Not to mention the costs involved (reported to be over $800,000 in legal costs for Serato), on top of wasted internal management time.
• Is the effect of the decision "massively chilling on tech investment", and can you restructure your way around the problem?
• John Small is concerned about people saying the lesson here is to go and incubate your company somewhere else – he says that's not the solution. Other countries also have merger control regimes.

Lessons

The decision emphasises the Commission’s rigorous approach to merger control. New Zealand businesses should be aware that any mergers or acquisitions involving New Zealand entities may be closely examined for their impact on competition in the market.

It's essential to plan for this and seek legal advice at the outset of the sale process. Companies must consider how their transactions might affect market dynamics (considering horizontal and vertical effects) and be prepared for potential regulatory challenges, no matter how small the local market is (unless we introduce a de minimis threshold).

Robbie Paul, CEO of Icehouse Ventures, suggests that this issue could be avoided by NZ tech companies offshoring their parent company. He talks on NBR's Back in Business podcast about private equity funds doing a portfolio review to see if their strategy of growing tech companies in New Zealand could hamper future sale efforts.

John Small isn't so sure. As noted above, overseas countries have their own merger control regimes.

Anthony Harper's view: There are limits to the efficacy of arestructure. The Commerce Commission can still seek orders under s47A and 47B of the Commerce Act in relation to upstream acquisitions (in a similar way that the United Kingdom Competition and Markets Authority (CMA) was launching a phase 2 investigation of the AlphaTheta/Serato deal). We don't expect to see New Zealand companies restructuring for this reason alone, given the remedies available to the Commerce Commission for upstream acquisitions, and because most overseas countries have merger control laws of their own.

Our team of legal experts is dedicated to helping businesses anticipate and overcome regulatory challenges. Whether you’re planning a merger, acquisition, or restructuring, Anthony Harper offer the strategic advice and support you need.

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