‘Killer Acquisitions’ Reexamined: Economic Hyperbole in the Age of Populist Antitrust

Jonathan Barnett is a Professor of Law at USC Gould School of Law. This post is based on his recent paper forthcoming in the University of Chicago Business Law Review. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, Darius Palia, and Ge Wu; The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian; and Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk. 

Antitrust and competition regulators in the United States, the European Union, the United Kingdom, and other prominent jurisdictions have recently emphasized the risk posed to competitive markets by so-called “killer acquisitions.”  According to this assertion, which has been adopted by much of the policy and scholarly literature, leading technology platforms—commonly known as “Big Tech”—regularly engage in serial acquisitions of startups to suppress competitive threats posed by small innovators.

These claims have already had palpable effects on the merger review process.

Policymakers in the US and the EU have advocated lowering or shifting the burden of proof in merger review, or lowering or eliminating the reporting threshold, to challenge more easily acquisitions of startups by large technology platforms.  In May 2023, the European Union’s Digital Markets Act went into force, which requires the largest technology platforms to report all acquisitions of firms in digital markets.  In June 2023, the FTC (with the “concurrence” of the Department of Justice) released proposed revised pre-merger notification requirements, which require notifying firms to disclose all acquisitions during the preceding 10 years in markets where the merging parties had “horizontal overlaps” (regardless of firm size).  In August 2023, the FTC and the DOJ released proposed revised merger guidelines, which raise concerns about the competitive risks posed by incumbent acquisitions of “nascent” competitors.

Given the far-reaching implications of the killer acquisition theory for merger review, M&A transactions, and the startup/venture-capital ecosystem, it is critical to examine carefully the empirical foundation for these theories.  In a forthcoming article in the University of Chicago Business Law Review, I do just that.

This inquiry raises serious concerns that legislators and regulators have embarked on a course of action that has an insufficient factual foundation in the digital markets on which competition policymakers have focused.

In stark contrast to the confidence with which policymakers and some commentators make assertions concerning the prevalence of killer acquisitions, the bulk of the empirical literature and other available evidence indicates that incumbent/startup acquisitions in information and communications technology (ICT) markets do not typically reflect an anticompetitive suppression strategy.  Rather, these transactions are usually a mechanism though which an acquiring platform—which (as I show in another paper) often faces competition from other platforms in the same or adjacent technology markets—enhances its functionalities by assembling, refining, and integrating new applications developed by smaller firms.  In general, incumbent/startup acquisitions in platform technology markets appear to be part of an iterative process through which large firms outsource R&D (or supplement internal R&D) by running a perpetual auction for complementary technologies developed by smaller firms.  This is true not only of Big Tech (commonly understood to encompass Apple, Alphabet, Amazon, Meta, and Microsoft) but, since at least the early 2000s, other regular players in the M&A tech market such as Cisco, IBM, Intel, Oracle, and Yahoo!.  In a virtuous cycle, this steady stream of startup acquisitions by technology leaders supports the investment expectations of venture capital funds, which are therefore willing to invest capital in emerging companies that have a high risk of failure.

The killer acquisition thesis derives from an empirical study by Colleen Cunningham, Florian Ederer, and Song Ma, posted in working paper form in 2018 and published in 2021.  The study carefully analyzes a large sample of acquisition transactions in the pharmaceutical industry and provides evidence that a small but significant percentage (approximately 5.3% to 7.4%) of those acquisitions may be motivated by intent to purchase and shut down a potential or actual competitor.  The subsequent body of commentary concerning killer acquisitions has generalized this finding to digital markets, supporting the now-common assertion that Big Tech platforms repeatedly use acquisitions to neutralize potential challengers.  Notwithstanding the rapid adoption of this theory among policymakers and some scholars, several empirical studies (in particular, two studies by Tiger Prado and Johannes Bauer, and Ginger Zhe Jin, Mario Lecesse, and Liad Wagman, respectively) that have tested this assertion against large transaction samples in ICT markets have generally failed to find supportive evidence.  Rather, as also found by other studies of smaller transaction samples in ICT markets, startup acquisitions by large platforms appear to be motivated typically by objectives to acquire complementary technologies or human capital to maintain a competitive posture against other platforms that operate in digital environments with porous market boundaries.  In other cases, technology platforms appear to use serial acquisitions as a strategy to refine existing technologies or enter new markets, which may increase competition in those markets or enable the platform to develop new or improved services.  As I show, Google used serial acquisitions to assemble the components of its Google Workplace suite, which now constitutes a robust competitor to Microsoft’s long-standing leadership in the office productivity software market.

Currently available evidence supports concerns over potentially anticompetitive acquisitions in a small but meaningful portion of the biopharmaceutical M&A market (although, as I explain, even in that segment it is important to take into account interpretive ambiguities on a case-by-case basis).  Any broader assertion is unreasonably speculative, especially in innovation markets that rely on a continuous flow of technological development.  Making policy on the basis of hypothetical market failures does not simply result in a costly diversion of enforcement resources to illusory sources of competitive harm.  Raising regulatory barriers to acquisitions across-the-board through higher reporting thresholds, expanded disclosure requirements, and lower probative burdens, coupled with difficult-to-predict enforcement actions by regulators, may impede and deter efficient platform/startup transactions.  In turn, this implicit “M&A tax” runs the risk of discouraging VC investment predicated on the ability to monetize the small number of successful investments through sales to leading platforms.  Critically, as documented by Susan Woodward, a large majority of VC-backed startup exits are executed through acquisitions, not initial public offerings, which are generally unsuitable for earlier-stage firms.

Regulatory skepticism toward platform/startup acquisitions risks turning competition policy on its head.  Rather than exposing incumbents to greater competitive discipline, increasing the transaction costs and legal risks associated with platform/startup acquisitions may lead platforms to shift funds toward internal innovation while constraining startups’ ability to secure the risk capital that fuels the development of new technologies in robust innovation ecosystems.

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