Australian tech giant Canva has bought a startup dubbed “the next Canva”, as the federal government moves ahead with major reforms to merger laws partly targeting tech firms buying smaller rivals.

Software design tech firm Canva announced this week it had acquired fast-growing generative AI design startup Leonardo.AI in a deal reportedly worth well over $100 million.

Leonardo.AI, which has been described as the “next Canva”, provides a generative AI-powered platform that can make images and 3D models from a written prompt.

It’s a major acquisition and a significant moment for the Australian tech and startup sector, with one of the country’s most successful tech firms buying up a younger up-and-coming firm.

But the competition watchdog may have its eye on the proposal, with the Australian Competition and Consumer Commission (ACCC) saying it may review the acquisition.

Under the current mergers regime, companies are not required to notify the ACCC of a planned acquisition before it takes place, with the competition watchdog launching its own reviews of these deals and its decisions eventually determined by the Federal Court.

Canva did not notify the ACCC of its acquisition of Leonardo.AI, and the watchdog is now considering whether to launch its own review of the deal.

Merger crackdown

The news comes just after the federal government unveiled draft legislation for its proposed major reforms to Australia’s mergers and acquisitions scheme which will move the regime from a judicial enforcement model to an administrative system.

If passed by Parliament, the new scheme will require all planned acquisitions above a certain threshold to be reported to the ACCC before it takes place, with the competition watchdog then able to make the final decision.

If the ACCC moves to block an acquisition, this decision can be challenged through at the Australian Competition Tribunal.

Treasurer Jim Chalmers said the reforms would make the merger approval system “faster, stronger, simpler, more targeted and more transparent”.

“Our laws will simplify and speed up the process for mergers that are in the national interest and give the regulator stronger powers to identify and scrutinise transactions that pose a risk to competition, consumers, and the economy,” Chalmers said.

The new single mandatory and suspensory administrative system for acquisitions will place the ACCC as the first instance administrative decision-maker, which will apply a “substantially lessening of competition test” to determine whether an acquisition should go ahead.

‘Stifling’ innovation

There have been widespread concerns within the tech and startup sectors in Australia that these proposed reforms may “stifle” innovation and impact the ability of smaller companies to achieve exits by being bought by larger firms.

Rampersand co-founder and CEO Paul Naphtali said the changes could lead to an “oligopolies outbreak”.

“Part of having a healthy ecosystem is having M&A [merger and acquisition] activity – having a strong level of companies in Australia buying innovative companies, improving their products and services, and creating opportunities for better outcomes for the economy and for Australia,” Naphtali told ABC RN Breakfast.

“If we’re going to make that harder and put friction in the system, that’ll make companies in Australia really think twice and hesitate in buying innovation and bringing that in for Australia. That’s not good for the economy.”

Naphtali said there should be carve-outs in the new scheme for startups and companies offering innovative products.

“If we stifle innovation and stifle the ability for these startups to be bought here in Australia, then that’s actually counter to the intent of the legislation,” he said.

Under the new scheme, all acquisitions above certain thresholds, which will be determined later in regulations, must notify the ACCC before it takes place.

This threshold will be based upon turnover, transaction value, and market concentration.

The ACCC will then conduct a phase one investigation taking up to 30 days.

If it reasonably suspects the acquisition will substantially lessen competition, the ACCC can opt to launch a more in-depth second phase investigation, which will see it issue a notice of competition concerns to all parties before making a final determination within 90 business days.