Imagine a world where consumers can’t buy cars from General Motors, where farmers can’t buy tractors from John Deere, and where the postal service delivers cross-country mail using buses, rather than planes. Now imagine a world where you can’t find a video on how to fix your toaster because YouTube operates exclusively as a dating site, if it exists at all.
Consumers are worse off in this world than in ours, yet this is the type of world that the Federal Trade Commission’s lawsuit against Facebook would create. (Full disclosure: the organization I work for receives funding from Facebook and other tech companies.) The FTC seeks to unwind Facebook’s acquisitions of Instagram and WhatsApp on grounds that those companies, if left alone or purchased by others, would have grown to challenge Facebook’s dominance in social media.
A century ago, Louis Brandeis railed against corporate consolidations and “the curse of bigness.” Today, the concern is “nascent” corporate acquisitions, where an established company purchases a smaller firm in a related market to nip a potential rival in the bud. A recent report from the House Judiciary Committee proposes a variety of fixes to this perceived problem: heightened merger scrutiny, structural separation of large companies into single lines of business, and the possibility of unwinding past acquisitions.
As described in a new paper, however, history urges caution. Had these ideas been in place during the last century, America’s economy could look very different — and smaller. Nascent acquisitions repeatedly benefited competition and consumers. They provided acquired companies with critical financing to survive and innovate. They allowed acquiring companies to bring new products to consumers faster and cheaper. Moreover, as data confirms, such purchases usually lead to lower prices and greater innovation for consumers.
Nobel laureate Ronald Coase identified the most famous such acquisition. In 1908, Fisher Body designed an enclosed auto body to appeal to women. This insight helped the company prosper, and by 1918, Fisher Body sold to most major car manufacturers. Within a few years, however, General Motors purchased all of Fisher Body’s stock. Coase concluded that the purchase made economic sense: GM secured its supply chain and Fisher Body found a permanent customer for its specialized output. The purchase also allowed GM to lower costs by locating its body plants near its assembly plants.
Similarly, John Deere might never have sold tractors but for a nascent acquisition. In the early 20th century, Deere was a farm equipment company that sold planters, buggies, wagons, and grain drills. Deere’s tractors, however, all flopped in the marketplace. To satisfy its customer base, in 1918, Deere purchased the Waterloo Gasoline Engine Company, which had developed the first successful gasoline tractor. Deere devoted more than one-third of its advertising budget to touting the tractor. The bet paid off: In its first year, Deere’s distribution network and marketing expertise roughly tripled the sales of Waterloo tractors to consumers, and over time Deere’s green tractors became global icons.
Nascent acquisitions kept some companies alive. In 1926, a bus operator founded Pacific Air Transport to carry mail and passengers between Seattle and Los Angeles. The airline struggled for two years, with thin profits and the loss of several aircraft. In 1928, Boeing bought the company and upgraded its airplanes. Within two years, the company roughly tripled its number of passengers and volume of mail.
More recently, in the tech sector, nascent purchases have increased innovation and output. In 1987, Microsoft purchased Forethought, which allowed it to improve and distribute PowerPoint far more broadly. In 2005, YouTube was a dating site that offered women $20 to upload videos. In 2006, Google purchased the company, injected capital, and upgraded its platform. Five years later, YouTube hit more than three billion daily views.
These examples offer lessons for today. As the FTC acknowledges, Facebook purchased Instagram and WhatsApp, at least in part, because Facebook saw the potential in mobile photo sharing and mobile messaging but couldn’t develop competitive technology internally — just as John Deere saw the potential in tractors, GM in enclosed auto bodies, and Boeing in mail delivery. Each company acquired smaller firms that arguably could have grown to rival their acquirers.
Hindsight isn’t always 20/20. Looking backwards, it’s easy to conclude that John Deere eventually would have developed tractors, that GM would have built entire cars, and that Instagram and WhatsApp would have become viable businesses. In reality, nothing was inevitable. Their success stories required time, money, skill, and the assumption of risk.
In the face of such uncertainty, policymakers should exercise caution before they discourage investment in small companies by rewriting antitrust law, or by bringing lawsuits to unwind deals years after the fact, out of a speculative belief that small acquired companies would have grown into global giants if only they had been left to their own devices. America’s economic history should teach our regulators and policymakers a little humility.
Asheesh Agarwal is Deputy General Counsel at TechFreedom, a 501(c)(3) non-profit that advocates for free-market principles in the technology sector and is supported with funding from a wide variety of foundations, corporations, and individuals, including Facebook. Agarwal formerly served in the Trump administration and as an assistant director in the FTC’s Office of Policy Planning.