The antitrust assault on the startup economy

In the age of the internet, unfounded claims can achieve widespread adoption at remarkable speed. Antitrust regulators have apparently fallen prey to this malady.

In the U.S., Europe, the U.K. and other jurisdictions, regulators have adopted the view that acquisitions of startups by large tech platforms are being used systematically to “kill” competitive threats. Other regulators assert that acquisitions by large tech platforms create “kill zones” into which startups are reluctant to enter.

To preempt these adverse effects, regulators have blocked or delayed incumbent/startup acquisitions on contestable grounds.

In 2022-23, the Federal Trade Commission alleged but failed to show competitive harm arising from Meta’s acquisition of Within, the developer of a virtual-reality fitness app that faces several rivals. In 2020-21, the U.K.’s Competition and Markets Authority spent over a year investigating Amazon’s 16 percent equity investment in Deliveroo, a lagging competitor in the country’s food-delivery market. Working virtually in tandem since 2021, FTC and EU regulators have used every avenue possible to block Illumina’s acquisition of Grail, a startup it spun off and now seeks to reacquire to distribute Grail’s early-detection cancer-testing technology. To no avail, Illumina has committed to provide other cancer-diagnostic companies access to its gene-sequencing platform on favorable terms for 12 years.

To provide regulators with more tools to act preemptively against the purported risk posed by so-called killer acquisitions, some legislators and regulators have proposed lowering reporting thresholds and shifting the burden of proof to the largest acquirors to show competitive benefits when acquiring startups. The FTChas broken with long-standing precedent by sending warning letters that it may challenge mergers after the “waiting period” for the agency to investigate has elapsed. In connection with a pending review of the merger guidelines, both U.S. antitrust agencies have expressed concerns over “[t]hreats to potential and nascent competition.”

Policymakers’ zeal to preempt — and, in some cases, unscramble — incumbent/startup acquisitions has cast a cloud over a tech ecosystem that already faces a challenging economic climate. Given these circumstances, it would be assumed that such significant departures from long-standing policy would rest on compelling evidence.

That is not the case.

The only persuasive evidence derives from a study finding that approximately 5.3 percent to 7.4 percent of acquisitions by pharmaceutical companies are likely motivated by an intent to shut down a potential direct competitor to the acquiror’s drug project. Yet even this evidence is limited, since it implies that the overwhelming majority of pharmaceutical acquisitions do not qualify as a killer transaction. Moreover, the pharma market exhibits unique regulatory and technological characteristics, which counsels against relying on findings in this market as the basis for taking policy actions concerning tech mergers and acquisitions more generally.

The case for caution is especially strong given the absence of persuasive evidence for killer acquisitions in tech markets outside pharma.

One widely referenced study released by the National Bureau of Economic Research claims to present evidence of kill-zone effects following platform/startup acquisitions. Yet it relies on only seven acquisitions by Google and two by Facebook, each involving exceptionally large deal values greater than $500 million.

Other studies that use samples consisting of hundreds of acquisitions by the “GAFAM” platforms (Google, Amazon, Facebook, Apple, and Microsoft) fail to find evidence of killer acquisitions or kill zone effects. Rather, it appears these platforms principally acquire startups to enter new markets or secure complementary technologies that enhance each platform’s functionalities. These are legitimate objectives for acquirors engaged in stiff competition with other global platforms (for instance, Instagram vs. TikTok, AWS vs. MS Azure, and now Bing+ChatGPT vs. Google+Bard).

It should not be surprising that researchers have struggled to find evidence outside pharma for the killer-acquisition hypothesis.

As the business world widely recognizes, incumbent/startup acquisitions efficiently combine a startup’s innovation excellence with an incumbent’s scale, scope and access to capital. This potent synthesis can accelerate the process of converting an innovation into a viable product for market release. Unfounded regulatory interventions based on hypothetical models of market failure harm consumers and startups by obstructing the path to commercialization.

There is another cost to regulators’ eagerness to impose solutions for problems that do not seem to exist.

The fact is, most startups fail; among the small number that succeed, the vast majority achieve an exit for investors through an acquisition, not an initial public offering. The expectation that a startup can choose to monetize its innovation through acquisition induces venture-capital funds to invest in the first place. Any regulatory approach that obstructs these acquisitions therefore starves innovative startups of investment capital (or, in smaller markets such as the U.K., encourages startups to set up business elsewhere). That is an upside-down competition policy that discourages entry by startups while encouraging incumbents to avoid regulatory friction by bringing research and development (R&D) in-house.

A growing consensus asserts that merger review practices have allowed Big Tech to go on a “buying spree.” Yet no compelling evidence has been presented to show that platforms’ repeated acquisitions of startups pose an elevated risk to competitive markets. Acquiring complementary technologies or assembling the components required to offer new products is a well-established practice used by large tech firms to outsource R&D. Conversely, startups seek out acquirors that have the resources to accelerate an innovation’s path to market — a result that benefits founders, investors and consumers.

Antitrust law has a long-standing tradition of taking action based on factually demonstrated theories of competitive harm, rather than mere conjecture. In a climate of antitrust populism fueled by “big is bad” rhetoric, regulators have increasingly departed from these practices. The result is not merely a diversion of enforcement resources; regulatory interventions that delay or block acquisitions based on speculative theories of market failure are clearly anticompetitive.

Jonathan M. Barnett is the Torrey H. Webb Professor of Law at the Gould School of Law at the University of Southern California.