Dec 3, 2021 7:00 AM

Meta’s Failed Giphy Deal Could End Big Tech’s Spending Spree

There was a time, not so long ago, when Meta’s big-money deal to acquire Giphy would have been waved through. No more.

Shredded American dollar on a blue background

Instagram? Sure! WhatsApp? Go nuts. But don’t mess with GIFs. That’s the strange position taken by Britain’s competition watchdog in choosing to block Meta’s takeover of GIF repository Giphy. Meta, the UK’s Competition and Markets Authority (CMA) ruled, must now sell all the GIFs—just 19 months after it reportedly paid $400 million for them. It’s a bold move—and a global first.

Never before has a tech giant been ordered to press undo on a completed deal rather than pay a fine or make promises about how the newly merged businesses would operate. Meta, the parent company of Facebook, isn’t pleased. A spokesperson says the company disagrees with the decision and that it is considering all options, including an appeal. Usually a cautious bunch, lawyers agree that the CMA’s decision is a significant moment in the global regulatory wrangling of Big Tech, as it means deals that slipped through in the past may now have a new bar to clear. “There's been a realization that quite small deals over the years have not been scrutinized very extensively,” says Richard Pepper, a partner at the law firm Macfarlanes.

That realization means regulators everywhere will now be on high alert for what the legal world calls “killer acquisitions”—where an established company buys an innovative startup in an attempt to squash the competition it could pose in the future. The CMA’s decision is also significant because Facebook’s Instagram takeover was waved through by its predecessor, the Office of Fair Trading, back in 2012, in what was the most high-profile probe into the deal outside the US. “The same worldwide enforcers that allowed Facebook to suck up Instagram and WhatsApp are now very wary of even small purchases by the major platforms,” says Eleanor Tyler, a legal analyst at Bloomberg Law, a legal research company. “What this shows is a change in attitude, and that's critical.”

Compared to some of Meta/Facebook’s other well-known acquisitions, Giphy is small fry. WhatsApp cost it $19 billion in 2014, Oculus VR was $2 billion, also in 2014, and Instagram just $715 million in 2012. But regulators are starting to take the attitude that smaller acquisitions can also damage competition. “I think of serial acquisitions as a Pac-Man strategy,” Rebecca Slaughter, US Federal Trade Commissioner, said in September. “The collective impact of hundreds of smaller acquisitions can lead to a monopolistic behemoth.”

Giphy might not be the whole game, but it’s arguably a crucial pellet for Pac-Man, or Meta CEO Mark Zuckerberg, to gobble up. When anyone on any major social media or messaging platform—TikTok, Twitter, Tinder, Slack, or iMessage—wants to send a GIF, they are almost always using animations from Giphy or its main rival, Google-owned Tenor. In a blog post, Meta said it bought Giphy to help users on Instagram “express themselves.” The CMA said the deal could result in another side effect: giving Meta power over its competitors to either deny them precious GIFs or to demand data in exchange.

This concern, however, only formed half of the CMA’s argument. While cautioning about reduced competition between social media platforms, the regulator simultaneously warned about its impact on a market which doesn’t yet exist. The CMA said Giphy had the potential to rival Facebook in the UK advertising market if it had not been bought. “Before the merger, Giphy had launched innovative advertising services which it was considering expanding to countries outside the US, including the UK,” the watchdog said in a statement, citing GIFs that Pepsi and Dunkin’ Donuts had created to promote their brands.

“This is the interesting bit,” says Peter Broadhurst, a competition partner at law firm Crowell & Moring, who labels the CMA’s targeting of a deal involving two US companies as “expansionist.” “Giphy wasn't generating any revenue in the UK,” he says. “But the CMA found evidence, not particularly strong evidence by the sound of it, that it might have tried to sell advertising in the UK at some point in the future, and they felt 'that's enough for us.'” The decision also shows that the UK regulator, emboldened by Brexit, is ready to assert itself on the global antitrust stage, says Pepper. “In the UK, we have an unusual regime that gives the CMA quite a broad set of powers to intervene in a lot of transactions, and it has been using those powers, following Brexit in particular, to respond to smaller deals.”

The decision isn’t a total surprise, either. The CMA has been carrying out an in-depth probe into the Giphy acquisition since April 2021. In September 2021, Facebook responded to the investigation’s provisional findings by questioning Britain’s jurisdiction over the deal in a document published by the UK government. “The facts, in the present case, are simple,” Facebook said. “Facebook and Giphy do not compete in the UK, and there is no overlap in relevant commercial activity giving rise to a competition concern.”

Meta is now facing a growing trend where mergers are being flagged by countries to which the deal has no significant connection, believes Tyler. She adds that the European Union and its member states are also beginning to look at deals taking place far beyond their borders, pointing to Austria’s referral of Meta’s acquisition of customer service platform Kustomer to the European Commission in March 2021. “The US is having a difficult time enforcing against mergers and possibly, as a result, a lot of other enforcers are looking at how they can keep market harm from occurring,” Tyler says.

For a regulator in one country to block a deal where the companies involved are rooted in another is unusual but not unprecedented. In 2001, the European Union blocked Boston-headquartered General Electric’s proposed acquisition of another US conglomerate, Honeywell. In 2018, a Chinese review scuppered plans of US semiconductor company Qualcomm to swallow Dutch rival NXP. In May 2021, airline software companies Sabre and Farelogix failed in their appeal against the CMA’s decision to block their merger, even though Farelogix had no UK customers or turnover.

But the CMA has faced criticism about whether it has picked the right target for its new strategy. A widely accepted definition of a killer acquisition is when a giant company acquires a startup or nascent competitor, a criteria some don’t believe eight-year-old Giphy meets. “It’s not clear that this is a killer acquisition, because Giphy is not a startup,” says Nicolas Petit, law professor at the European University Institute, a teaching and research institute in Florence, Italy. “It's not even clear that, unlike Instagram, Giphy is a direct competitor to Facebook. Giphy offers a product which complements the suite of advertising products that Facebook has, but it's not a product that can substitute a social network.”

Petit suggests the British regulator is compensating for a decision that “has been described as the biggest mistake in competition policy made during the past decade”—the CMA’s decision to approve Facebook’s purchase of Instagram in 2012. Back then, Instagram was valued at $500 million and had around 30 million users. In 2018, when Meta last reported monthly users for the app, that number had mushroomed to above 1 billion. In 2019, anonymous sources told Bloomberg that Instagram brought in more than $20 billion in advertising revenue that year. In short: Is it too little, too late?

“I think the CMA has developed a very precautionary approach against incoming transactions involving Facebook,” Petit says, adding that competition watchdogs around the world are under pressure to show they are not asleep on the job. “We might say this change in approach is not only informed by evidence that these transactions are problematic, but also trying to make up for that mistake of the past.”

Updated 12/7/2021 4:00 pm ET: A previous version of this story incorrectly stated that Nicolas Petit called the CMA's approval of Facebook's purchase of Instagram the biggest mistake in competition policy in the past decade. He was describing what had been said of the CMA's decision.