In a new Competitive Enterprise Institute (CEI) study, technology policy expert Jessica Melugin writes that concern about “killer acquisitions” – a market leader purchasing a would-be competitor only to shut down the threatening product – and “kill zones” – killer acquisitions harming competition at-large by deterring investment in that same product area – have prompted calls for increased regulatory scrutiny of merger and acquisition activities in the tech sector.
Melugin notes in the report, M&As Are A-Okay: How Mergers and Acquisitions Help Entrepreneurs and Drive Innovation, that U.S. Senator Elizabeth Warren (D-Mass.) introduced legislation to prohibit mergers above a certain size, while the Federal Trade Commission (FTC) under Chair Lina Khan is rewriting rules for mergers with the aim of deterring the practice.
But the economic evidence does not support new regulations to prevent or curtail mergers and acquisitions. Rather, that evidence aligns with the positive experience of tech entrepreneurs and investors in the marketplace.
Melugin’s review of recent mergers in the tech industry finds:
- Facebook eliminated WhatsApp’s download and subscription fees, producing the consumer benefit of reduced cost and raising its user base to 2 billion today.
- Facebook, with its superior resources, transformed Instagram’s glitchy and unprofitable app—with only 13 employees and 30 million users—into a profitable photo sharing service enjoyed by more than 2 billion people, prompting some to brand it “one of the best business acquisitions in the history of Silicon Valley.”
- Bain & Company’s Technology Report 2021 analyzed all acquisitions of $300 million or more, totaling $150 billion, by Alphabet, Amazon, Apple, Facebook (now Meta), and Microsoft from 2005 to 2020. The report concludes that “most big tech M&A spending actually benefits consumers and doesn’t hamper competition.”
- A 2019 survey of startups found that half the respondents thought being acquired was the most realistic long-term goal for their company.
“There is insufficient evidence of market failure in merger and acquisition activity in the tech sector to justify government interaction,” said Melugin, Director of CEI’s Center for Technology and Innovation. “In fact, government should instead remove its already-present distorting regulations before taking any other action. Making mergers and acquisitions impossible or cost prohibitive would harm the cycle of investment, scaling, innovation, and profitability that has both served American consumers and made the United States a global tech leader.”