by Adrian Bowles
With all the mergers and acquisitions (M&A) in the tech sector recently, I think it is important to consider the impact of M&A on innovation. In the US, acquisitions are regulated in order to promote, or at least not stifle, competition. But is this really panning out?
How can we ensure that M&As aren’t stifling innovation in the tech sector? One way to start is by examining US laws.
Understanding the US Code
15 USC Title 15 Section 18 No person engaged in commerce or in any activity affecting commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no person subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another person engaged also in commerce or in any activity affecting commerce, where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.
Fair enough. For acquisitions in the tech sector, the critical legislation to consider is The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) which triggers a government review if either of two conditions are met:
If the value of the transaction exceeds Threshold A (currently $90 million) or if the larger party has assets or revenues in excess of Threshold B (currently $180 million) AND the smaller party has assets or revenues in excess of Threshold C (currently $18 million).
If either condition is met, notice must be given to the Federal Trade Commission and the Department of Justice and the parties must wait for approval before they can proceed with financial transactions or operational changes.
Effects on Innovation
HSR was intended to prevent monopolies through aggregation and arguably it does that reasonably well. Unfortunately, it also promotes the acquisition – without oversight – of startups before they pass the thresholds and trigger a HSR review. My concern is that in a hot market, HSR rewards the giants snapping up startups and assimilating them before they hit the thresholds. That has a stifling effect on innovation (if there was no innovation, Goliath, Inc. would not be buying David & Co.).
It also has an anti-competitive impact on the market overall as mid-tier firms have fewer resources available to take out these startups. The largest firms are already the beneficiaries of most government incentives (viz Amazon, receiving massive concessions from states even as politicians at the national level call for their breakup), they shouldn’t be incentivized by HSR to scoop up the innovators at start-ups, too.
How We Can Solve This Problem?
We don’t need to scrap HSR to promote innovation, but I do think it makes sense to consider a refinement. For argument’s sake, consider a modest proposal I will immodestly call the Bowles Act Defending Against Stifling Suitors (which could be added to HSR). Without constraining purchase price, however:
- The acquiring firm may not have assets or revenue in excess of 100X those of the acquired firm.
- This regulation would not apply if the larger party to the acquisition has less than 20% of the current market and there are at least 3 competitors in the market with larger shares or revenue.
Here’s something to think about as power becomes consolidated in the hands of the few, at the expense of the many. The biggest tech firms of the past few decades–Amazon, Facebook, and Google – all experienced rapid growth powered by innovation. Would we be better off if they had sold out to the giants of the last century?