The past week has seen another round of funding for artificial intelligence (AI) startups. For instance, Scale AI, a data annotation platform providing training data for AI models, raised $1 billion, doubling its valuation to $13.8 billion. French startup H secured $220 million in its seed round, which typically does not exceed $10 million; AI-driven translation platform DeepL also obtained $300 million in financing.

Behind these investments, the familiar figures of institutional investors such as the renowned American startup incubator Y Combinator and venture capital firm Accel are still visible, but there is also increased participation from tech giants. For example, in Scale AI's recent Series F funding round, investors included Meta, Amazon, Nvidia, as well as Intel, AMD, Cisco, and ServiceNow. However, from its establishment in 2016 to its Series E round in 2021, the company attracted only pure institutional and angel investors.

The enthusiasm of tech giants for investing in AI startups has attracted the attention of regulatory authorities. Antitrust agencies in the UK, US, and Europe are concerned that this indirect investment method can allow large companies to gain access to startups' technology and innovation without direct control, while avoiding triggering antitrust investigations.

Ninette Dodoo, head of the China antitrust practice at the law firm Freshfields, told First Financial Daily reporters: "Regulatory authorities in the EU and the US are becoming increasingly interventionist, and they have the enforcement tools to legally challenge all merger and acquisition cases."

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Mergers and acquisitions in disguise, but not mergers and acquisitions.

For a long time, antitrust regulators in Europe and America have been very vigilant about direct acquisitions by tech giants, fearing that such transactions could trigger competition issues. For example, in 2020, Meta acquired the animated image platform Giphy for $400 million. The UK's Competition and Markets Authority (CMA) believed that the transaction could reduce competition in the social media and display advertising markets, and Meta was eventually forced to divest Giphy in 2021. Earlier this year, Amazon's plan to acquire the robot vacuum manufacturer iRobot for $1.4 billion was also terminated due to opposition from the EU antitrust authorities.

However, because regulatory scrutiny is often related to direct mergers and acquisitions, tech giants have gradually shifted their focus to a type of cooperation usually referred to as "quasi-M&A," which achieves control over products, technology, or core personnel through cooperation, investment, and "acqui-hires," avoiding restrictions from antitrust regulations due to excessive control.

Microsoft's partnership with OpenAI is a typical case. Since 2019, Microsoft has invested more than $13 billion in OpenAI and can obtain a portion of the profits from OpenAI's profitable subsidiaries. OpenAI uses this investment to engage in research and development as well as to expand its computing capabilities and infrastructure, but it must use Microsoft's cloud computing platform Azure as its preferred cloud service provider, and its technology is also integrated into various Microsoft products.

Microsoft CEO Satya Nadella once said about the relationship between the two companies: "Microsoft is 'below them, above them, and around them' in front of OpenAI." He believes that Microsoft provides infrastructure, while OpenAI builds AI models, and the two companies cooperate and win together, but there is also competition. "They develop applications, we also develop applications, and third parties also develop applications, so competition is inevitable, and some competition is completely vertically integrated," Nadella said.Since the end of last year, the CMA, the European Union's antitrust watchdog, and the US Federal Trade Commission (FTC) have successively disclosed that they are reviewing the relationship between OpenAI and Microsoft to clarify whether this cooperative relationship is a de facto "acquisition" and whether it violates antitrust laws.

CMA Chief Executive Sarah Cardell stated that the CMA is closely monitoring the "cooperative relationships" between tech giants and emerging tech companies, including using merger control powers to assess whether these arrangements fall within the scope of merger rules and whether they raise competition issues.

Dunning told Yicai Global that the EU, the UK, Germany, and other places each have their own merger control rules to determine whether certain investments/transactions should be reported, and the acquiring party must assess whether they meet the applicable filing requirements. If there are uncertain issues, the transaction parties can discuss jurisdictional issues with these agencies.

"However, even if some transactions do not need to be reported for merger control purposes, strategic alliance partners still need to comply with general competition rules, that is, they need to ensure that their strategic alliances do not violate general competition laws," Dunning said.

Strengthening regulatory trends

As leading AI startups become increasingly reliant on the financial and infrastructure support of tech giants, regulatory agencies in the UK and the US are intensifying their scrutiny of the relationships between large tech companies and AI startups.

In April of this year, the CMA announced in a statement that it would initiate a "call for comments" on the relationships between Microsoft and Mistral AI, Microsoft and Inflection AI, and Amazon and Anthropic to assess whether they comply with UK merger rules and explore the impact of these transactions on competition.

Among them, Amazon invested $4 billion in Anthropic in March of this year. Although the former did not obtain a majority stake in the latter, similar to the cooperative relationship between Microsoft and OpenAI, Amazon requires Anthropic to use Amazon Web Services (AWS) as its primary cloud service provider.

In the same month, the founder and main team members of startup Inflection AI were "poached" by Microsoft and joined Microsoft's newly established division, Microsoft AI. GlobalData Senior Analyst Beatriz Valle believes that "Microsoft does have a history of acquiring smaller rivals to curb competition, which is another way to avoid regulatory scrutiny." High-tech analysis firm MIS Chief Analyst Anshel Sag said that acquiring employees rather than the entire company "seems to be a faster and easier way to obtain talent."

In a report released by the CMA in April, it was stated that the cooperative relationships of major players in the AI foundational model market may exacerbate monopolies through their value chains. In the report, the CMA listed an "interconnected network" composed of more than 90 partnership relationships and strategic investments, involving companies such as Google, Apple, Microsoft, Meta, Amazon, and Nvidia."Although these cooperative relationships may bring competitive advantages, existing technology companies (i.e., tech giants) may use cooperation and investment to protect themselves from the impact of competition," the CMA believes.

In May, the U.S. Department of Justice (DOJ) also announced an increased focus on competition in the AI sector. The department disclosed that it has initiated multiple investigations, with areas of concern including whether AI companies use common executives or board members.

Dunning stated that when regulatory authorities determine that a transaction needs to be reported, they will assess whether there are horizontal, vertical, and/or mixed relationships between the acquirers based on specific circumstances. However, if the regulatory authorities want to block a merger, they must prove that a particular transaction would raise significant competition issues.

However, it is often difficult for European and American regulatory authorities to prove this within the framework of traditional mergers and acquisitions. On May 17th, the CMA stated that, in accordance with the merger provisions of the UK's Enterprise Act 2002, the agency decided not to continue its investigation into the cooperation between Microsoft and Mistral AI.