For years, the Federal Trade Commission aggressively discouraged M&A activity, arguing transactions only benefitted large players. The tale of American robotics company iRobot is a cautionary tale about how misguided this view is. The last few years have shown us that overly restrictive regulatory enforcement can stifle innovation and harm companies and startups that would benefit from strategic acquisitions. 

An American Innovator Searching for Growth

After iRobot was created by MIT roboticists and became a global leader in consumer robots, the company agreed in 2022 to a strategic acquisition by Amazon. At the time of the proposed merger, then-iRobot CEO Colin Angle said, “Amazon shares our passion for building thoughtful innovations that empower people to do more at home, and I cannot think of a better place for our team to continue our mission.” The merger, however, faced strong opposition from regulators, who claimed it would lead to anticompetitive practices, and was ultimately terminated. Last week, the Roomba-maker announced it is set to go out of business after its acquisition was abandoned due to opposition by overly-zealous merger enforcement.

The Need for a Balanced Approach to M&A

Mergers and acquisitions help companies to access new sources of capital, technology, and operational expertise, increasing efficiency and spurring innovation. This access helps develop economies of scale, enhances competition, and ultimately benefits consumers with better products and lower prices.

— A Competitive Enterprise Institute (CEI) report highlights how that is the case:  “Consumers benefit from the expertise and economies of scale that “Big Tech” can bring to imperfect, obscure, or fledgling products,” and “The preponderance of economic evidence finds little harm from M&A activity in the tech sector, and recommends a continued liberal allowance of such purchases.”

iRobot is a clear example. The company – creators of the revolutionary Roomba device – could have benefitted from Amazon’s scale and supply chain efficiency to grow. Amazon’s resources would have also given iRobot the cushion to innovate in the fast-paced world of robotics. Blocking the merger prevented these potential benefits, leaving iRobot vulnerable to pressures, especially from overseas competitors, that ultimately led to its decline.

Blocking Mergers Can Lead To Unintended Economic Consequences

A pioneering American company is now on the verge of disappearing. Startups bring innovation and deliver new products to market, and should have the opportunity to grow and expand through partnerships with more established firms, and with additional regulatory barriers preventing mergers with other companies, long-term success is far more difficult.

— Lazar Radic, Professor of Law at IE Law School, explained that contrary to the intention of antitrust regulation, “a merger that was blocked due to dubious vertical integration concerns is likely to result in concrete consumer harms on the RVC market.” 

— In a statement, the International Center for Law & Economics (ICLE) explained that when a company is already in a fragile financial position, the addition of regulatory overreach can be devastating: “It is imperative that regulatory bodies carefully weigh the potential long-term effects of their decisions on both innovation and market stability.”

— Director of Competition Policy at the ICLE, Dirk Auer, further pointed out that while we will never know if the merger could have hindered competition, “any such effect would have been minor compared to the loss of competition that will likely occur if iRobot goes bust-especially given that it is the main western player in this space.” 

Amazon and iRobot were forced to abandon the merger after European regulators announced they would block the deal. Shockingly, the FTC at the time stated it was “pleased” the transaction had failed, despite the consequences of job loss and reduced innovation.

— By hollowing out the innovation ecosystem in the US, the agency is providing a pathway for Chinese competitors, like Ecovacs Robotics to overtake the market.

— In a statement, CCIA outlined the consequence of the failed merger, an unforced error that will only hurt American companies and jobs, and benefit Chinese companies: “While there was no plausible risk to competition from a U.S. retailer acquiring a struggling U.S. vacuum maker in a sector overtaken by dynamic Chinese manufacturers, the abandonment of this deal resulted in a loss of American jobs and further ground being conceded in the market to Chinese companies.”

— As CCIA President Matt Schruers explained, there is a real risk of iRobot being sold for parts to Chinese competitors: “This news of iRobot’s potential demise is unfortunately not surprising. This result should serve as a cautionary tale for the incoming FTC that efforts to block low-risk mergers will mean US job losses and companies like iRobot being sold for scrap – possibly to Chinese competitors.” He added in a separate comment that, “By blocking this deal, the FTC ensured the droids mapping American homes are likelier to be made in China.”

Moreover, when acquirers fear excessive regulatory interference, startups and mid-sized tech companies are most vulnerable to this uncertainty. Investors are less likely to back firms that cannot attract larger companies as potential buyers, limiting growth opportunities for the entire sector.

— This is even more critical today as U.S. venture capital fundraising sees a sharp investment decline, which means there are fewer opportunities for innovators to find capital and resources.

Consumer Welfare Should be the Gold Standard for Evaluating M&A Activity

As we have discussed before, the FTC’s mandate should be rooted in consumer protection; M&A activity should be assessed on the basis of whether it will ultimately improve or worsen outcomes for consumers. A careful cost-benefit analysis of the iRobot transaction would have shown the immense potential in growing an American innovator – instead, regulators relied on careless assumptions about the state of retail to prevent the merger. 

Rather than continuing to apply novel and untested theories of harm that do not put consumers first, the FTC should return to prioritizing consumers and analyzing in each case what is best for them. The FTC’s current leadership has indicated it is interested in returning to this more disciplined approach to M&A.