Newsflash: Wall St. And Startups Raise Concerns Of FTC M&A Overregulation Harming Economy
In the American economy, mergers and acquisitions are a catalyst for economic activity and wellbeing—benefiting consumers, workers, and businesses. However, the FTC is claiming that an aggressive approach to antitrust enforcement will yield benefits for investors and startup founders. But in reality, the opposite is true. Such an approach increases uncertainty for startups—threatening critical funding opportunities, job security, and innovation.
Here’s what you need to know about the risks posed by FTC overregulation of M&A to the startup ecosystem:
FTC Overregulation Of M&A Would Have A Chilling Effect On New Entrants
National Venture Capital Association (NVCA) Senior Vice President of Government Affairs Justin Field points out that restrictions on venture capital investment “make[s] it harder to build the next set of corporate challengers.” “It’s a counterproductive policy. It may feel good in the short term, but driving down returns on investments in corporate challengers makes it harder to build the next set of corporate challengers.”
The Wall Street Journal Editorial Board explains that FTC interventions in mergers like Illumina’s acquisition of Grail rely on “speculative theories,” and increase uncertainty. “A FTC judge in September issued a 203-page opinion rejecting the agency’s complaint that alleged the Grail acquisition would harm potential competitors in the embryonic market for multi-cancer early detection tests. Grail currently has no competitors, and the FTC complaint relies on speculative theories.”
— The Editorial Board adds: “The FTC could have gone to federal court to try to stop the acquisition. Instead it challenged the deal in its administrative tribunal where it no doubt believed it was more likely to win because it almost always does. Yet after losing, it has now overruled its own judge. What was the purpose of the administrative trial if the FTC could ignore the judge’s findings and do whatever it wants anyway?”
The FTC Is Going Beyond The Law To Smother Deals
In discussing regulators’ recent legal challenges that reinterpret existing law, former Obama OMB Director Peter Orszag points out that “that’s not what courts do.” “Remember, the laws haven’t changed. Basically what’s happening is the regulators are reinterpreting existing law. So they may well lose some big cases and there have been a bunch of losses already.”
— Orszag adds: “But the fundamental problem is they are reinterpreting existing law, which is fine. They can go try to do that. But that’s not what the courts do. The courts take the existing law and say, does this meet those standards?”
Former Clinton Deputy Treasury Secretary Roger Altman points out a major shift in regulation of M&A. “It’s been a sea change in the regulatory environment over the past two and a half years.”
— Altman adds: [Antitrust officials have already halted] “a series of business combinations which would have gone ahead in a different environment.”
Brett Buckley, a strategist at WallachBeth Capital, echoes sentiments over the drastic changes in regulation. “The regulatory environment is the most challenging I’ve seen in my career.”
During CCIA’s recent panel, “Merger Control in Dynamic Markets,” Taylor Owings, a Partner at Baker Botts, added that the FTC’s forthcoming merger guidelines will likely express “more skepticism towards efficiencies. “[I]t’s pretty widely expected that the new draft of the merger guidelines are gonna express a lot more skepticism toward efficiencies than has been the pattern and the sort of premise really of the merger guidelines since, since at least 1984”
M&A Plays An Integral Role In Promoting A Healthy Tech And Startup Ecosystem
According to research from Engine and Startup Genome, acquisitions “are critical to the investment cycle.” “Startup exits are critical to the investment cycle in the innovation ecosystem—successful exits provide returns for investors and founders. That fact, or the prospect of it, is what encourages investors to fund startups and can also be part of what encourages founders to launch in the first place. And investors fund new startups with the profits they earn from prior investments, while founders often launch new startups, become investors themselves, or both.”
— The report adds that increases in startup exits are generally correlated with an increase in startup funding: “Of the 14 increases in exits that occur in the selected U.S. ecosystems, 13 are accompanied by an increase in series A in the same year or immediate subsequent year, or about 93 percent of the time. For non-U.S. ecosystems this happens 12 times out of the 13 there is an increase in exits, or about 92 percent of the time.”
Startup founder Nicholas Hinrichsen notes that the acquisition of his company “was 100% aligned with our investors’ financial interests, and helped by “ensuring the best deal for our team.” “Returning capital to investors was important. At the point of the sale, the intellectual property we had created had become very valuable. The technology, however, wasn’t as useful without the team that had built it. Therefore, ensuring the best deal for our team—making sure they had a job that paid well where they could apply what they learned and eventually move on—was 100% aligned with our investors’ financial interests. Everyone on our team of about a dozen were able to join Carvana.”
Jad Antoun, CEO of Proptech Startup Huspy, explains that acquisition provided his company with “significant scale, knowledge, and expertise.” “As I look back on Huspy’s two-year journey, acquisitions have provided us with significant scale, knowledge, and expertise that would otherwise have taken us time to gain. We launched the business to transform the entire home-buying experience in the region, from finding a house, to financing it, and closing the deal. And with the three acquisitions we have done this year, we are well on our way towards our goal.”