By: Cristina Caffarra (OECD On The Level)
Agencies are paying more attention than ever to mergers where there is no loss of immediate competition, but the concern is the loss of future competition. ‘Potential competition’ theories are increasingly focused on the notion that, ‘but for the transaction’, parties engaged in complementary activities would have eventually come to expand and compete in each other’s domain; and the deal entails the loss of that future competition and the dampening of overall innovation relative to an independent counterfactual. This is coming up particularly in deals involving tech platforms buying up (or building stakes in) younger/innovative specialists in areas they are not currently in, but where they want to expand.
Greater attention to potential competition is indeed overdue, especially in deals involving tech platforms with enormous capabilities to expand into multiple adjacent markets through the ‘roll up’ of smaller or nascent firms. This is ‘the way tech rolls’: frequent relatively small acquisitions of complementary functionalities to be integrated into the platform – sometimes cannibalised, sometimes bolted on, but essentially no longer separate efforts. The traditional antitrust posture in these cases has been ‘Mergers of complements? No issue. In fact, great! Integration is efficient. Potential entry is too speculative to worry about.’ And indeed, integration into a platform that can provide execution and funding to a nascent firm could be a good thing. But this is only one side of the story. Suppose the target indeed offered a platform a ‘way to market’ in a service or functionality where it is lacking, but also suppose the platform would have otherwise strived to build its own offering in that space organically. A deal then eliminates a future competitor in that functionality – the acquirer itself.
Note that this is not just about whether there are ‘killer acquisitions’ in tech that we failed to catch, i.e. acquisitions for the purpose of killing or taming a potential future threat to the acquirer’s core business. A much more common possibility are ‘reverse’ killer acquisitions, where the question is what innovation by the buyer is being foregone as a result of it buying a business it could have built organically instead? Looking just for the possibly elusive ‘future replacement’ to a core business misses out on multiple cases where the buyer discontinues or foregoes its own effort because it has appropriated the ‘next best thing’.
Why do we care? Because what we should care about is the overall intensity of innovation effort in the economy and the impact this ultimately has on consumers. We want as much rival innovation effort as possible. A buyout of a promising nascent/small innovator deprives the world of that innovator’s contribution in an alternative scenario – an IPO, a sale to another buyer, or some other version of the future – in which it would have competed with an innovation developed and implemented by the buyer. This is what we are missing with ‘reverse’ killer acquisitions: social welfare is enhanced when the would-be buyer also develops a service or a product, with head-to-head competition in the final product market…
