Big Tech Acquisitions: M&A and Competition Policy

M&A plays a key role in a modern economy,¹ and competition authorities monitor M&A activity to help ensure they are procompetitive and do not result in excess market power and anticompetitive behavior. Companies can engage in M&A activities for a variety of reasons. For instance, companies might want to acquire new technology and capabilities, enter a new market, or reach a certain scale. M&A activity can affect the competitiveness of a market in a number of ways. For instance, a merger can increase the efficiency of the combined firms by allowing them to leverage each other’s technology to create better products and services for consumers, or it can result in the new firm gaining excess market power that it abuses to the detriment of consumers. Competition authorities can review M&A activity to determine the net effect and assess whether to use its powers to block a merger or acquisition or seek other remedies to address any potential harmful effects.

Congress grants the Federal Trade Commission (FTC) and Department of Justice (DOJ) authority to enforce U.S. antitrust laws, which includes the ability to review M&A activity² and take enforcement action where the effect “may be substantially to lessen competition, or to tend to create a monopoly.” For a merger or acquisition that raises competition concerns, the relevant competition authority can try to block it through litigation, or allow it to go through if certain negotiated conditions are met; for example, a merger could be allowed if the firm agrees to sell off certain parts of its business.

Large technology companies’ M&A activity over the past decade and the effects on competition have become a major flashpoint in current antitrust debates about large digital platforms. In 2020, the House Subcommittee on Antitrust majority staff published a report on “competition in digital markets,” reviewing activity by major tech companies, including their acquisitions. For instance, the report noted major acquisitions, including Facebook’s acquisition of Instagram in 2012, Amazon’s acquisition of Quidsi (Diapers.com) in 2010, and Google’s acquisition of DoubleClick, in 2007. The report expressed serious concerns about acquisition strategies in the technology sector stifling competition, however, the report’s critics argued it misunderstood the role acquisitions play in fostering innovation.

Two academic papers have received considerable attention on the topic of M&A and are both cited by the House report. The first is a paper by Colleen Cunningham, Florian Ederer, and Song Ma, focused on what they call “killer acquisitions.” These are acquisitions by incumbents designed to discontinue innovation projects and take out potential competitors. The paper looks at the pharmaceutical industry and finds that “acquired drug projects are less likely to be developed when they overlap with the acquirer’s existing product portfolio, especially when the acquirer’s market power is large because of weak competition or distant patent expiration” and that these “acquisitions disproportionately occur just below thresholds for antitrust scrutiny.” While this paper focused on the pharmaceutical sector, the House report expressed concerns about “killer acquisitions” in the technology sector, given certain acquisitions it analyzed.

The second is a paper by Sai Krishna Kamepalli, Raghuram Rajan, and Luigi Zingales focused on what they call a “kill zone.” The paper describes kill zones as an area where venture capital (VC) firms do not want to finance startups, since the startup is unlikely to succeed against an incumbent digital platform that can make major acquisitions in this space. The paper provides a model for how acquisitions by incumbent platforms may deter early adopters from trying a new platform, hurting the new platform’s prospects, and argues that the “drop-off in venture capital investment in startups in sectors where Facebook and Google make major acquisitions suggests this is more than just a theoretical possibility.” The authors end by stating, “it would be wrong to conclude from our analysis that all acquisitions from incumbent platforms should be prohibited, since there is a trade-off between static efficiency (the consumer welfare created by mergers) and dynamic efficiency (incentives to innovate)” and argue “that mandating interoperability eliminates this trade-off, increasing welfare.”

Critics disagree with the House majority report and whether “killer acquisitions” and “kill zones” are major concerns in the technology sector. For instance, Joe Kennedy of the Information Technology and Innovation Foundation (ITIF) argues, “Concerns that large Internet companies are impeding competition by engaging in ‘killer acquisitions’ or creating ‘kill zones’ through market dominance are vastly exaggerated… Acquisitions serve useful purposes such as motivating investments in new companies, obtaining workers with key skills, and putting technology in the hands of those that can develop and scale it the fastest” and contends that “Antitrust agencies already have the powers they need to stop problematic acquisitions.”

Our post will not take a side in this debate and simply state that a holistic review of these topics is appropriate to ensure sound public policy. The collection and release of relevant data and information can help better inform expert analysis and debate. In September 2021, the FTC released a report on select acquisitions made by large technology companies. Specifically, the report focused on acquisitions by Alphabet (the parent company of Google), Amazon, Apple, Facebook (now Meta), and Microsoft that were not reported to federal antitrust authorities because they were not required to under the Hart-Scott-Rodino (HSR) Act. The FTC report provides valuable data and insights into M&A activities by large technology firms and can help inform some of the debates around market competitiveness and competition policy.

Congress ultimately makes the antitrust laws competition authorities enforce. Policymakers are currently exploring whether existing antitrust laws need to be modified, and if so, how. There are at least five major areas of debate right now about antitrust law as it pertains to M&A. First, are existing laws appropriate or do they need to be modified? Second, should any potential changes to existing law apply broadly or target large digital platforms? Third, should the language to “substantially lessen competition” in the Clayton Act, used to gauge the legality of a specific merger or acquisition, be changed? Fourth, should more rules be added to block or more strictly scrutinize M&A activity that reaches a certain threshold based on criteria such as market share or firm size? Fifth, what criteria (such as price, quality, choice, innovation) should be used when evaluating the net effects of M&A activity, and is the consumer welfare standard (a legal standard that focuses on consumer harm) appropriate?

The debate will continue around whether existing laws are appropriate or need to be changed. For those in favor of modifying the existing antitrust laws, several bills exist, including the Competition and Antitrust Law Enforcement Reform Act by Sen. Amy Klobuchar (D-MN), the Tougher Enforcement Against Monopolists Act by Sens. Mike Lee (R-UT) and Charles Grassley (R-IA), the Trust-Busting for the Twenty-First Century Act by Sen. Josh Hawley (R-MO), and Platform Competition and Opportunity Act of 2021 by Rep. Hakeem Jeffries (D-NY-8) and the companion bill by Sens. Amy Klobuchar (D-MN) and Tom Cotton (R-AR). These bills take various approaches to answering the questions in the previous paragraph about M&A and differ on how much they deviate from the status quo.

M&A plays a critical role in the economy, and smart competition policy is vital to ensure M&A activity is pro-competition. Several issues highlighted in this post, such as the various proposals in Congress, warrant further exploration. The FTC was correct in collecting and providing data about non-HSR acquisitions by the largest technology companies to help researchers and policymakers better understand the nature of some of these acquisitions. An evidence-based approach to analyzing the competitive effects of acquisitions by large technology companies is necessary to inform policy and enforcement action.

^{1 A merger is when two companies join to form a new company with a new ownership and management structure, but often including management from both companies. For instance, AOL merged with Time Warner to form the company AOL Time Warner. An acquisition is when one company fully acquires or takes over another company. For instance, Facebook acquired Instagram and made it a subsidiary under the Facebook umbrella.
2 For more details on the merger review process, please see the FTC webpage, “Premerger Notification and the Merger Review Process”}