Sponsored briefing: Closer scrutiny for tech M&As

NAZALI’s Ayşe Ülkü Yalaz and Nilay Göker Duran on tech M&As in Turkey, the future of the practice and the new regulatory requirement which may affect ongoing and new transactions

Mergers and acquisitions in the technology sector has an increasing trend in Turkey similar with global trends. With a young and tech-savvy population, Turkey has great potential to be an important startup hotspot. With the excellent demographic dynamics, startups have the opportunity to face challenges locally and be expected when they are ready to market themselves internationally.

In 2021, capital raised by the startups in gaming, grocery delivery, fintech, prop-tech and blockchain has reached significant amounts. 2021 was led by gaming, artificial intelligence, deep-tech, fintech and health-tech acquisitions with 52 deals totalling around US$265m in capital raised1. Investment figures show that investments in gaming companies placed at the centre, followed by investments in cyber security, deep-tech, e-commerce, auto-tech and e-commerce enablers. In 2021 the number of deals in Turkey indicates that the gaming sector took the lead, followed by marketplace, deep-tech and SaaS sectors2. Accordingly, SaaS placed at sixth, marketplace at seventh, e-commerce at eighth, agri-tech at ninth and edtech at tenth3.

In 2021 a significant increase concluded even by breaking the records across the world in terms of number of investments, new funds and valuations. In Turkey, startup investment totalling around US$1.55bn was made through 294 deals4 completed at the angel and VC level. 2021 witnessed that even private equity funds were making investments into early-stage startups. Dream Games becoming a unicorn recently raised an investment of US$255m over a valuation of US$2.75bn5. Trendyol, becoming the first decacorn of Turkey, in 2021, had raised US$1.5bn investment which is still Turkey’s largest investment at the maturity stage6. Recently Getir raised an additional investment of US$768m in 2022 over a valuation of US$11.8bn and has now become the second decacorn of Turkey7.

In terms of foreign investment, 44 over 294 deals closed in 2021 were participated in by foreign investors. Due to Getir and Dream Games’ mega-deals, foreign investors participated in 89% of the total investment8.

In terms of startup investment Turkey became one of Europe’s top ten countries and also placed as second in the MENA region which promoted Turkey to the super league. However, Turkey still has a long way to go in terms of investment per capita as Turkey ranks 21st in the Europe region9.

In addition, by the involvement of incubators, techno-parks, accelerator programmes, technology transfer offices under universities, business internationalisation programmes, crowdfunding as well as government aids and incentives mainly via TÜBİTAK through their BiGG programme, support for the startups has reached utmost level and become more specialised in recent years. The foregoing figures indicate that M&A deals in the technology sector, as in other jurisdictions, will be the pioneer of the M&A transactions in the new era of Turkey and will shape our legal practice in the future such as due diligence processes with a focus on tech-specific issues, drafting definitive agreements, representation and warranty sets accustomed to tech deals, sellers/founders’ liabilities considering sector-specific practices and finally recent regulatory requirements introduced for tech deals which should be noted while drafting conditions to closing under transaction documents.

Within this scope, a big debate has been going on with regard to tech M&As in the European Commission and in many countries with respect to competition law enforcement. In addition to the existing turnover thresholds, the transaction value threshold has been introduced by Germany and Austria. The European Commission and some EU member countries now examine the practices in Germany and Austria before taking any immediate action. At this point, Turkey, by following the same approach, reviews its concentration legislation. However, different from the source EU practice (ie, Germany and Austria), in order to resolve the concerns around startup investments, a practice accustomed to Turkey has been introduced by the amendment of the Communiqué Concerning the Mergers and Acquisitions Calling for the Authorisation of the Turkish Competition Authority Numbered 2010/4 (Communiqué)10.

Accordingly, the merger notification threshold that was quite low has been raised, as expected by the enforcement of such amendment package. However, the more notable change within the amendment package is the new notification requirement put into force by the Turkish Competition Authority (TCA) for the M&As in tech industries, that was signalled in the TCA’s market inquiry reports on e-commerce and payment in 2021.

Accordingly, with the amendment made in Article 7 of the Communiqué, the turnover thresholds that must be exceeded for a merger or acquisition to be subject to notification to the TCA are as follows:

a) Total Turkish turnover of the transaction parties need to be 750m TL and the Turkish turnover of at least two of the transaction parties need to be 250m TL separately; or

b) In acquisitions, the turnover of the asset or activity; in mergers, the Turkish turnover of at least one of the transaction parties need to be 250m TL, and the global turnover of at least one of the other transaction parties need to be 3bn TL.

What is novel in this amended notification system is the newly added second paragraph to the same article as follows:

‘In transactions regarding the acquisition of technology undertakings operating in the Turkish geographical market or having R&D activities or providing services to users in Turkey; thresholds of two hundred and fifty million TL in subparagraphs (a) and (b) of the first paragraph are not applicable’

Furthermore, the definition of ‘technology undertaking’ is introduced by the amendment as follows:

‘undertakings operating in the fields of digital platforms, software and game software, financial technologies, biotechnology, pharmacology, agricultural chemicals and health technologies or their related assets’

Accordingly, acquisitions of the technology undertakings are now subject to the Turkish Competition Board’s approval for such transactions to be legally effective regardless of the turnover threshold of 250m TL in sub-paragraph (a). In other words, an acquisition of a technology undertaking by any acquirers that exceed the total threshold of 750m TL set in the sub-paragraph, is subject to a mandatory filing. Taking into account the intention of law-makers, the definition of a technology undertaking should be limited with the companies in the industries listed in the Communiqué. Therefore, any undertaking operating in other industries which are not specifically named in the relevant definition of technology undertaking should not fall under the definition and consequently be captured by the Communiqué.

By means of this amendment, TCA aims to catch two kinds of Tech M&As:

• Killer acquisitions of startup companies that have a very low threshold or that are even still not commercialised but have a great competitive potential which can change market structure.
• Transactions between big tech companies that may not generate any revenue but have great market power in the relevant markets. In such M&As, a significant concern of the TCA is monitoring anticompetitive impacts of ‘ecosystems’ being constructed by big techs or big platforms that encompass different but related markets11.

What is next?

As for the deals in Turkey, which will not be closed until the effective date of the said amendments (ie, 4 May 2022) or the new deals upon the enforcement of the amendments, this new regulatory step must be considered as a condition precedent which may also affect the timeline and merits of the deal (eg, valuation, purchase price adjustments, interim period restrictions). During such evaluations change of control assessment will be the key element and positive and negative control rights should be evaluated carefully to understand whether the deal would be captured by the notification requirement.

Generally, tech M&A activity is expected to remain elevated although inflation rates and market volatility are likely to have a significant effect on multiples and regulatory security will persist as we also observe such reflections in the recent amendments under Turkish legislation.

Special thanks to our competition partner, Metin Pektaş for his valuable contributions