Mergers and acquisitions in tech have come under intense scrutiny in recent years. Some fear that Big Tech companies like Google and Facebook have been able to protect their market positions by acquiring smaller would-be competitors and stifling competition as a result.
The canonical example of this is Facebook’s acquisition of Instagram in 2012. At the time, Instagram was largely viewed as a photo-filtering app with a social network component. It has since grown into one of the most popular online social networks, second only to Facebook itself in popularity. Other acquisitions seen as troublesome, in retrospect, include Facebook’s acquisition of WhatsApp and Google’s acquisitions of Doubleclick and Waze.
And it’s not just Big Tech. Academic research suggests there have been ‘killer acquisitions’ in the pharmaceuticals industry, whereby an incumbent buys smaller firms that are developing drugs that might compete with the incumbent’s own version, then shuts down development of the alternative after the deal is done.
These kinds of fears have led the British government to consider changing the standard by which tech mergers can be blocked. At the moment, the Competition and Markets Authority (CMA) can review mergers that raise competition concerns and block them if they think they are more likely than not to lessen competition ‘substantially’. Under the new proposals, the rules would change for certain Big Tech companies that have been determined to have ‘strategic market status’ – a new designation that covers the likes of Google, Facebook, Apple, and Amazon, and perhaps Uber and Mastercard some day. For these firms, any acquisitions that have a ‘realistic prospect’ of reducing competition – defined in law as being “greater than fanciful, but less than 50%” – would be blocked.
This may sound like a neat solution to the problem. It falls short of a full ban on acquisitions by these companies, but gives the CMA almost unlimited power to block deals it doesn’t like.
But while it might make life easier for the CMA, it would come at a serious cost to competition. As I argue in a new paper out today, the problem with these proposals is that mergers and acquisitions can often be good for competition. It’s far from clear that the net effect of a severe curb on M&A involving Big Tech will strengthen competition – including the competition felt by the likes of Google and Amazon themselves.
This is because businesses often use M&A to move into new markets so they can compete with incumbents there. The tech sector is filled with examples of this. Google bought Android in 2005, and used it to build an open source alternative to iOS. Without Google’s entry into the market, it could have been years before the iPhone had a serious competitor, allowing Apple to charge higher prices and work less hard to improve its own offering. Apple itself bought Beats by Dre partially because Beats had a fully functional music-streaming platform, which it turned into Apple Music so it could take on Spotify. In cloud computing, all of the biggest players – Amazon, Microsoft, and Google – have used acquisitions to build their offerings and compete more intensely with each other.
What’s often missed is that these kinds of deals can enable entry into new markets more easily. Walmart had struggled for years to build a worthy e-commerce rival to Amazon, because, for all of Walmart’s strengths, digital was not one of them. Walmart bought the promising e-commerce startup Jet.com in 2016 and used its software and developers to build Walmart.com into something that people actually want to use. It has grown spectacularly since then, strengthening the competition Amazon faces.
Similarly, in 2017 Disney took over BAMTech, a company that had its roots in Major League Baseball video streaming. Disney used this expertise to develop Disney+, now a major competitor to Netflix and Amazon Prime Video.
There are plenty of other examples of this, where an acquisition has helped a big company grow into a new market. Some in government have an idealised notion that competition should only come from plucky little start-ups, and that it’s not really worth thinking about competition between big corporations. But that’s unrealistic. If Google faces a serious challenger in Search in the near future, it’s much more likely to come from another Big Tech company, like Apple, and one which may use acquisitions to speed up the development of its own product.
In that case, moves to curb acquisitions by Big Tech companies could, perversely, end up protecting Big Tech incumbents from each other. And the proposed rules do nothing to avoid this. Imagine if we could say, with accuracy, how likely an acquisition was to reduce competition or increase it. Suppose we find one that we judge to have an 80% chance of strengthening competition, but a 20% chance of reducing it. Under the current rules, the deal would be passed and competition would likely increase. Under the Government’s proposals, even a deal like this would have to be blocked. It’s only if you dismiss the pro-competitive effects that mergers and acquisitions can have that this kind of standard makes sense.
The wider effects of this kind of regime are also worrying. Getting acquired by a Big Tech company is an important way for startup entrepreneurs and their investors to ‘exit’ their firms and actually make a return. It is an attractive alternative to the other major exit strategy, which is to make an initial public offering (IPO) on the stock market – no easy feat. In 2019, almost as many UK startups (eight) were bought by Microsoft, Google, Facebook, Amazon, and Apple alone as managed to make it to IPO (nine). Removing that exit route will make the UK a harder place to start a tech firm, and get us less startups setting up in the first place, making our tech sector less dynamic, and less competitive.
Working on competition policy in both the UK and the US, I fear that many in the UK government have misjudged the likelihood that the Americans will follow suit with similar rules. Some I have spoken to in government assume that it is just a matter of time before the US curbs mergers in a similar way, pointing to bills in Congress that have made such proposals. What they may not realise is that less than 5% of bills brought forward in Congress usually make it into law, and these proposals would require bipartisan support that looks less and less likely.
Among regulators and civil servants, there is a prestige in being ‘first’ to do something, despite the obvious advantages in waiting to see what rules like this actually do in other countries. But if the US does not bring in similar rules, the UK will be at even more of a disadvantage in attracting talent and investment in tech – and may serve as a warning to others of the risks of this kind of policy.
That said, the theories of harm that the Government identifies are by no means trivial. It is vital that the CMA be alert to those risks and that it uses evidence and existing law to stop mergers that bear those hallmarks. But the CMA is not omniscient, and erroneously blocking good mergers comes at a significant cost. Tilting the playing field so that the CMA does not have to prove its case comes with serious costs, and may mean digital markets become less competitive as a result.
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