Mergers and acquisitions (M&As) are not just financial transactions—they’re a driving force behind innovation, efficiency, and growth in today’s economy. For startups, M&As offer the opportunity to scale faster and earn financial returns, while for larger companies, acquisitions can increase innovation and produce lower prices for consumers.

Mergers and acquisitions create incentives for entrepreneurs to take risks on innovative ideas

Surveys show that approximately half of all startups view acquisition as the most realistic long-term goal. Founders see M&As not as a stifling process but as an opportunity for rapid scaling.

— Famed tech entrepreneur Kevin Systrom highlighted how being acquired allowed his company to expand its reach to billions of users much faster than it could have on its own​. The prospect of being acquired creates incentives for entrepreneurs and early investors to be able to take on heightened risk with groundbreaking new technologies. 

— Being acquired is an especially important option because startups are struggling to find sufficient capital in the current business environment. Since 2022, funding from IPOs has consistently declined ($24.9 billion globally in Q3 2024 compared to $54.6 billion in Q1 2022). Furthermore, venture capital fundraising has declined sharply amid high interest rates. It reached a six-year low in 2023 and declined 60%. 

— IPOs for startup firms are considerably high risk, particularly at lower valuations. Between August 2002 and March 2020, approximately 40% of startups that were valued under $50 million at IPO, and 31% of those that were valued at under $100 million, failed.

— Studies have shown how nascent technology firms often rely on acquisition as an exit strategy, treating them as their most reliable source of market growth and income generation.

Mergers and acquisitions allow for a more efficient use of resources

Combining the assets of two firms can increase productivity and returns without the need for large additional capital investments, according to a study from the Federal Trade Commission (FTC) itself. 

— The FTC study examined 5,000 ownership changes in the energy sector and found that power plants became 4% more efficient in output within five to eight months after being bought. 

— Research by Zeke Hernandez, a professor at the Wharton School of Business, backs up the FTC’s study by finding that mergers promote resource efficiencies in a multitude of concrete ways: combining machinery, patents, people, and networks that each company has cultivated. 

Increases in innovation

M&A activity is also a key driver of innovation, particularly in technology. A study focusing on the U.S. technology industry in the Journal of Economic Dynamics and Control revealed that mergers and acquisitions increased innovation in significant ways.

— M&A transactions led to an increase in research and development (R&D) spending both by the acquiring company and its competitors. Rival firms reacted to acquisitions by ramping up their own R&D investments to stay competitive, anticipating their rivals gaining an edge. This dynamic benefits consumers by intensifying competition and accelerating innovation, which leads to products and services that are better than what they would have been otherwise.

— In R&D-intensive industries, mergers generate an average estimated increase in R&D spending of between $9.27 billion and $13.52 billion per year, and an increase of between 1,430 and 3,035 patent applications per year, according to a 2023 study by NERA Economic Consulting and the Chamber of Commerce.

Blocking M&As can detrimentally affect innovation, consumers, and employees

Over-enforcement of merger review could create a cascading ripple that hinders innovation and negatively affects employees and consumers. This is because there isn’t an adversarial relationship between bigger technology companies and smaller ones, as the Biden Administration DOJ and FTC asserted in recent years. Instead, successful technology companies support startups and smaller companies, often in the shape of M&As. As such, an over-enforcement of merger review can have unintended and detrimental consequences: 

— Amazon’s acquisition of iRobot was scrapped over concerns from regulators at the start of last year. iRobot was then forced to cut 31% of its staff as it struggled to function as an independent company. 

— Illumina, a biotechnology company, decided to spin off Grail, its cancer research unit, prompted by a prolonged battle with the FTC. The value of Grail then plummeted, as traders valued the cancer-test developer at a significantly lower price compared to what Illumina paid for it. The end result was funding for Grail’s lifesaving cancer research declined, decelerating the race to develop treatments for cancer. 

— Last year, Spirit Airlines filed for bankruptcy. As part of its financial recovery, Spirit announced plans to cut its October-through-December schedule by nearly 20%. This came only 10 months after a federal judge blocked a proposed $3.8 billion sale of Spirit to JetBlue Airways, on grounds of “protecting customers.” Instead of being acquired by a better functioning company that could make better use of Spirit’s resources, the judge’s ruling drove Spirit Airlines bankrupt and reduced competition. 

Leading tech companies often provide the platforms, tools, and investments that enable smaller tech companies to innovate and grow. 

— Google’s advancements in artificial intelligence have led to industry-wide progress. The Biden Administration DOJ’s efforts to block Google’s AI investments reflect a fundamental misunderstanding of this symbiotic relationship and risk undermining innovation in a field critical to the future of technology. These proposals include:

— A ban on AI investments and partnerships, forced divestment of AI investments, restrictions on AI product integration, mandated data sharing, and compulsory access to search and AI results.

Takeaway: Mergers and acquisitions are a key component of a healthy, competitive, and innovative economy

Mergers and acquisitions are not just beneficial for the acquiring and target firms—they enhance the overall economy. By incentivizing entrepreneurs, reallocating underutilized resources, and encouraging innovation, M&As serve as a catalyst for growth and dynamism in the economy.