What They Are Saying: Senate Judiciary Testimony Highlights Value And Nuance Of Tech Acquisitions
This week’s hearing on tech mergers and acquisitions (M&A) by the Senate Judiciary Committee featured testimony from public- and private-sector antitrust experts. In a robust discussion, experts made it clear that:
— Significant restrictions on acquisitions may lead to unintended consequences for smaller firms by reducing innovation and limiting entrepreneurial opportunities.
— For many mergers and acquisitions, “It’s tough to make predictions, especially about the future.”
Significant restrictions on acquisitions may lead to unintended consequences for smaller firms by reducing innovation and limiting entrepreneurial opportunities.
Patricia Nakache, Trinity Ventures: Cracking down on incumbents that “sit adjacent” to new entrants could have unintended consequences. “In my experience, the vast majority of VCs see both sides of this argument: we are passionate about the startups we invest in and want them to get a fair shake in the marketplace as they take on incredible challenges; at the same time we recognize that large incumbents sit adjacent to startups in the tech ecosystem and that action against these companies could have adverse and unforeseen consequences for young companies.”
Nakache further noted: “If the government makes it more challenging for incumbents to acquire these companies, this will have the devastating effect of making it less attractive to launch a new enterprise and for people like myself to fund and partner with those companies. The end result will be harm to the American innovation economy.”
Professor John Yun, Antonin Scalia Law School, George Mason University and former FTC economist: Sweeping regulation not grounded in evidence would have adverse effects on innovation. “Without the discipline of weighing those benefits and costs to correct a perceived market or agency failure, these proposals can lead to unintended consequences and even greater inefficiencies and harm to consumers. One of those unintended consequences could be a negative impact on the rate of innovation—whether in the form of venture capital funding or even entrepreneurial risk-taking in general.”
Balaji Srinivasan, CTO of Coinbase, tweeted back in March 2019 that preventing tech acquisitions would actually reduce competition and harm startups. If big companies “are prevented from acquiring startups, that actually reduces competition. The reason is that if there is less M&A due to legal uncertainty, there is a reduced incentive for angels & VCs to fund those startups in the first place. Just like SOX made IPOs hard, the wrong policy could make it hard to get acquired. And like SOX, there would be unanticipated consequences. No IPOs led to companies staying private and massive expansion of VC. Closing off bigco M&A too might mean turning to crypto for liquidity. A regulation that purports to reduce the power of a large company frequently ends up increasing it, by erecting barriers to entry for startups. Often that barrier is licensing. In this case the barrier would be reduced access to capital.”
Acquisitions are often key drivers for innovation at companies, powering existing and new services for consumers.
Prof. Yun: Review of past mergers, like the oft-cited Facebook-Instagram acquisition, should consider the business prospects at that time, not as the merger stands now. “At the time of the purchase, Instagram had zero revenues and a handful of employees. Since Facebook’s acquisition, Instagram has grown from 30 million users to well over one billion. During the same period, Facebook grew from approximately 900 million users to over two billion users.This substantial expansion in users and output are the complete opposite of what we typically consider an anticompetitive outcome.”
Yun further noted: “To treat the success and associated exponential output expansion of an acquired product as evidence of an anticompetitive acquisition severely twists the meaning of ‘anticompetitive.’ When properly formulated, the central forces driving anticompetitive conduct are reductions in output, quality, innovation, and transfers away from consumers to producers. Facebook’s acquisition of Instagram does not fit this profile.”
Patricia Nakache: “It is critical that policymakers understand that not all M&A is the same. As I stated above, often times an incumbent will acquire a company for its technical talent, for a new product that it can sell to existing customers, or to enter an entirely new business. In these situations, the government should not seek to stifle or slow those transactions.”