The General Court has upheld the European Commission's prohibition of Booking Holdings' proposed acquisition of Etraveli Group, in a judgment that could lead to closer scrutiny of acquisitions by businesses with strong positions in digital and network-effect markets, experts have said.
In Booking Holdings v Commission (Case T-1139/23), the EU's General Court dismissed Booking's challenge to the European Commission's 2023 decision that the transaction would significantly impede effective competition by strengthening Booking's dominant position in the European market for hotel online travel agency (OTA) services.
Booking is principally active in hotel OTA services, while Etraveli specialises in online flight bookings. Although the parties' activities overlapped to some extent in the provision of flight services, their relationship was primarily non-horizontal.
The Commission concluded that Booking was already dominant in hotel OTA services and that acquiring Etraveli would give it control of an important means of attracting customers to its hotel business. Flights can act as an entry point to customers' wider travel arrangements. Information about intended destinations and travel dates may allow an OTA to target customers with hotel offers before, during or after a flight booking.
The Commission considered that the acquisition would support Booking's "connected trip" strategy by enabling it to expand its flight offering and cross-sell hotel rooms. This would strengthen existing network effects and make it more difficult for rival hotel OTAs to attract customers and expand.
Booking argued that by failing to conduct a classic analysis on ability and incentive to foreclose rivals, the Commission had departed from its 2008 guidelines on non-horizontal mergers by instead relying on a novel "reverse leveraging" theory of harm: Booking would use a position in a market where it was not dominant, namely flight OTA services, to strengthen its dominant position in another market, namely hotel OTA services.
This type of leveraging goes the opposite way of what the EU Non-Horizontal Merger Guidelines describe where a dominant position in one market is used as a lever to increase sales in another market - for example, through tying or bundling.
Booking's argument failed to convince the General Court. According to the court, digital markets may have characteristics that were not sufficiently considered when the Non-Horizontal Merger Guidelines were adopted, and the Commission must be able to develop and refine its approach in individual cases.
Alex Stratakis, competition law expert at Pinsent Masons said: "The judgment confirms the Commission's broad flexibility to assess transactions that do not fit neatly within traditional merger theories. This is a global trend. As such, understanding the likelihood of a complaint, as well as the nature and strength of potential objections to a transaction is now even more important for the parties involved."
The court was critical of parts of the Commission's quantitative analysis. It identified errors in the calculation of the expected increase in Booking's share of the hotel OTA market and concluded that the increment attributable to the transaction might have amounted to only a few tenths of a percentage point. It also found that the Commission had not established that hotels would transfer additional inventory to Booking or terminate relationships with competing OTAs, or that the transaction would enable Booking to increase the commissions it charged hotels.
Those findings were not, however, sufficient to overturn the prohibition decision because the court confirmed that the Commission may rely on qualitative evidence if that evidence is sufficiently cogent and consistent, takes account of the relevant information and is capable of supporting the conclusions drawn from it.
While emphasising that the strengthening of a dominant position does not in itself amount to a 'significant impediment to effective competition', the court accepted that such an impediment may arise where a transaction consolidates and perpetuates an already low level of competition, for example, by reinforcing barriers to entry or making markets less contestable – a new theory of harm that the Commission's prohibition decision had introduced as 'entrenchment'.
The court held that the hotel OTA market was characterised by strong network effects, and a substantial gap between Booking and its competitors. Even a relatively small increase in Booking's position could, therefore, reinforce these effects and restrict rivals' ability to expand.
According to the court, the acquisition would also have supported Booking's growth through flights, one of the few remaining channels for acquiring hotel customers that it did not already dominate. This could have contributed to a travel ecosystem that competing OTAs would find ever more difficult to replicate.
Christian Peeters, competition law expert at Pinsent Masons, said: "Traditionally, the review of conglomerate mergers such as Booking's attempted acquisition of Etraveli would have involved a structured assessment of the merged entity's ability and incentive to foreclose rivals, often with the support of detailed economic evidence."
"The novel concepts of 'reverse leveraging' and 'entrenchment' are very different animals. What is more, the court endorsed a prohibition decision that was ultimately carried by qualitative evidence. If upheld, this judgment will challenge merging parties, in particular those that are dominant, to produce contemporaneous internal documents that show why their transactions do not increase barriers to entry and expansion," he said.
The ruling comes as the Commission is finalising its draft new Merger Guidelines, which provide a more detailed assessment of dynamic competition, innovation, investment, efficiencies and entrenchment. It follows the Commission's wider efforts to modernise merger assessment while giving greater recognition to competitiveness, scale and innovation.
Tadeusz Gielas, competition law expert at Pinsent Masons said: "The draft EU Merger Guidelines expressly discuss the 'entrenchment of a dominant position', drawing on the Commission's approach in the proposed Booking/Etraveli merger and other recent cases. The court's conclusions will reassure the Commission in its approach."
Peeters said: "With the Booking judgment EU merger control moves yet another step away from the traditional paradigm that non-horizontal mergers are less likely to raise competition law concerns than mergers between competitors."
"It is in keeping with the impending replacement of the Non-Horizontal Merger Guidelines by the new Merger Guidelines that no longer distinguish between horizontal and non-horizontal transactions," he added.
Stratakis said: "Businesses considering acquisitions in adjacent markets should assess early on whether the target provides data, traffic, technology, content, infrastructure or another route to customers that could reinforce existing market power. Evidence concerning the strength of network effects, the availability of alternative customer acquisition channels, the ability of competitors to expand and the boundaries of any alleged ecosystem is likely to be increasingly important."
Authors:
- Alex Stratakis, Partner at Pinsent Masons
- Christian Peeters, Legal Director at Pinsent Masons
- Tadeusz Gielas, Managing Senior Practice Development Lawyer at Pinsent Masons
