ICYMI: Hamstringing M&A Could Backfire On U.S. Innovators And Consumers
New expert commentary from an event hosted by the Computer & Communications Industry Association (CCIA) ahead of the ABA meetings this week made it clear that restricting M&A would harm innovators and consumers.
The event featured keynote remarks by FTC Commissioner Noah Phillips. Moderated by Krisztian Katona, Vice President of Global Competition and Regulatory Policy for CCIA, the panel discussion included Diana Moss, President of American Antitrust Institute; Aurelien Portuese, Director at Information Technology and Innovation Foundation; Christopher Yoo, John H. Chestnut Professor at the University of Pennsylvania Law School; and John Yun, Associate Professor of Law at Antonin Scalia School of Law.
Highlights of the event included:
— The U.S. remains a global innovation leader today, in part thanks to already active and robust M&A enforcement.
— Making it hard for exits through M&A would risk stifling innovation and harming consumers.
— M&A enforcement should remain fact-based and balanced while focusing on consumer welfare.
The U.S. remains a global innovation leader today, in part thanks to already active and robust M&A enforcement.
The American venture capital and startup ecosystem benefits consumers, businesses, and investors while making the U.S. the “envy of the world,” explains FTC Commissioner Noah Phillips. “[M]y view is that the American capitalist economic model has been a success. It’s been a success for consumers. It’s been a success for workers. It’s been a success for businesses. It’s been a success for investors who reap the benefits of putting their money into those businesses. The VC model, the venture capital model, and the startups it supports are the emblem of that success and the driver of that success. We should be proud to live in a country where anyone with an idea can bring it to market. The startup ecosystem in the U.S. is unique and has made us the envy of the world.”
Merger enforcement intensity has doubled from 2000 to 2020 and transactions between $50 million and $200 million are most likely to be reviewed, debunking claims of lax merger enforcement, reminds Aurelien Portuese, Director at Information Technology and Innovation Foundation. “The second claim of lax merger enforcement: We’ve never reached such lax merger enforcement. That’s the main claim that is underpinning calls for merger reform. Again the ITIF has looked at the data with respect to the number of enforcement actions as a share of reportable mergers. Actually, the merger enforcement intensity has doubled from 0.5% in 2000 to 1% in 2020. So it’s very puzzling to say that we have a very lax merger enforcement where from 2000 to 2020 the merger enforcement has doubled. Then there’s a question of, well, merger enforcement is not targeting those small transactions. Again, transactions between $50 million and $200 million are those transactions that are most likely to be reviewed and to be subject to enforcement actions by antitrust agencies.”
— Portuese continued: “The assumption that all mergers work and we have reached unprecedented levels of mergers, and that concentration has never been as concentrated as now, I think, is unfortunately not backed by evidence.”
Leading tech companies are not merging or acquiring at a different rate than the broader technology sector, reminds Christopher Yoo, John H. Chestnut Professor at the University of Pennsylvania Law School. “[According to a recently released paper by Ginger Jin, former director at the FTC’s Bureau of Economics], their big punchline, conclusion, is basically that in fact the top big tech companies are not merging or not acquiring companies at a different rate than the tech sector more broadly. And so there is a difference between the tech sector and other sectors, which is understandable, given the vitality, different parts of it, but they actually look at that and see, is there evidence there that these companies are acquiring more? The answer was no.
Making it hard for exits through M&A would risk stifling innovation and harming consumers.
Making short-term changes to M&A enforcement could result in negative consequences in the startup ecosystem that are “not that hard to anticipate,” notes Commissioner Phillips. “One of the things that I believe, and which I believe that history, including recent experience, shows us and bears out very clearly, is that short-term policy changes can have negative consequences that are unintended and unanticipated. But when it comes to our topic here, venture capital and antitrust, I would submit that some of the negative consequences are not that hard to anticipate.”
Making it harder for founders and investors to exit via acquisitions would deter future venture investments, startup growth, and job creation, warns Commissioner Phillips. “There are two critical impacts here. One is on VCs, they have less of an incentive to invest. And their incentives for founding and growing businesses also lessens. Acquisitions help them power their returns, which allow them to raise new funds to invest in more companies. Slowing down this key driver of dynamism in our economy is not a good idea. But perhaps even more critical is the impact on the founders themselves. We want to make it more, not less attractive to, start new companies, Right? Otherwise great ideas, along with the dollars and the jobs and all the good things that they create, will go elsewhere maybe to other countries.”
Imposing merger presumption prematurely would risk chilling pro-competitive effects of M&A, underscores Portuese. “I’m just not sure we’re there enough to add that presumption. Maybe at some point, we will be, maybe we miss some. But if we put on presumptions prematurely, I worry that you’re chilling that procompetitive fact that you could also get just as legitimately as possibly an anti competitive fact, both are valid.”
Making it impossible to exit through acquisitions only because of the size of the acquirer would “decrease the rate of expansion of startups” and “harm consumers,” warns Portuese. “I think it’s very important to look at the growth of startups, but to presume to be illegal a small set of transactions only because the acquirer is supposed to be large, I think, will decrease the rate of expansion of startups and will harm consumers. I think we need evidence-based analysis based on the reality or likelihood of anticompetitive effect, also the risk of monopolization. But these very tiny transactions sometimes are part of the expansion of startups.”
M&A enforcement should remain fact-based and balanced while focusing on consumer welfare.
Antitrust regulators need to be “very humble” in approaching the technology sector, which has continued to power innovation and job creation, underscores Commissioner Phillips. “We make mistakes, we are fallible people and, anytime regulator or enforcer tells you they are infallible, that is a scary thing in itself. Given that we are fallible, given that our vision into the future is not perfect, and given that we are talking about one of the sectors of the U.S. economy that was, is, and will remain a source of jobs, a source of innovation, a source of economic distribution and virtue, I think we need to be very humble as we approach some of these things.”
Antitrust laws have always been generalist and should not defer to a particular business model, cautions Diana Moss, President of American Antitrust Institute. “First of all, I don’t think antitrust should defer to any particular business model. Right. So we’ve talked a lot, we’ve heard Commissioner Phillips talk about the VC and startup model, the importance of startups in the economy, and say in digital tech, to be specific. But antitrust historically has never deferred to a particular business model, right? The antitrust laws are generalist, and they are designed to be applied with precision to different markets and different business models.”
Current antitrust proposals miss many “highly acquisitive” technology companies and should not only focus on the top five companies, highlights Moss. “We got a whole swath of up-and-coming digital ecosystems that are flying under the legislative radar. Bills that just target the top five, are missing all of these highly acquisitive, highly acquisitive firms. And Christopher referred to our report earlier, that are really acquiring their way to be the next generation of large digital platforms. And so if we are going to develop policies for the digital sector, we are going to have to look at all players in the sector, not just the top five.”
Asymmetry of treatment of acquisitions, rooted in identity-based antitrust, is “a path for lower welfare and growth,” warns Yun. “I think that asymmetry of treatment of acquisitions rather than looking at the data on the ground, the facts in the market, just doing a standard antitrust analysis that we’re all familiar with, and many of you in the room are familiar with. Abandoning that for identity-based antitrust, I think, is just a path for lower welfare and growth in general.”
Yoo cautioned against making assumptions about M&A in the technology sector and advocated for more analyses on the consumer welfare effects of M&A. “But it’s too easy to simply talk about big tech sectors and assume that there are certain behaviors without actually analyzing them. And the real thing that the challenge for us is, even if those facts are true, the ambiguity of the theory laid out initially by John and by Diana, under our antitrust law, it’s about effects and consumer welfare. And in the end, we’ve got to get down to that analysis to make it work. And under the conventional approach, we have to prove cases and that someone has to go to the court of law and establish that those effects are proven. And as of right now, the evidence doesn’t seem to bear that out.”