The author is director of competition policy at the International Center for Law and Economics
The UK competition regulator has offers reduce the burden of proof needed to block acquisitions of big tech companies like Google and Facebook. But, perversely, the proposals of the Competition and Markets Authority can end up halting agreements that increase competition, making life more difficult for British start-ups.
The measure would apply to technology companies with “strategic market statusA new designation for those who occupy a strong and powerful position in a digital market. As a first step, this will include Google, for its online search and advertising activities, and Facebook, for its position in social media. Eventually, companies like Amazon, Apple, and Uber could also be included, if they are deemed to have text messages.
Currently, an acquisition will be blocked if a CMA panel judges that it is more likely than not to weaken competition, for example by raising prices or stifling innovation. But the agency is concerned that existing law could miss deals where a company purchases a smaller one that could pose a future threat. This is, for example, what some believe to have motivated Facebook’s acquisition of Instagram, given the leaked emails about the purchase in which Mark Zuckerberg argued that Instagram “Can hurt us”.
The CMA wants to reduce the burden of proof to block any acquisition by an SMS company with a “realistic perspectiveTo reduce competition, described as a “more than fanciful, but less than 50 percent” chance.
This remarkably low standard goes far beyond previous proposals. This would likely have blocked agreements approved by the AMC in the past, such as Amazon’s investment in Deliveroo. It would apply to acquisitions even in markets where such companies were not considered to have “strategic market status”, so that it would be more difficult for them to enter other markets.
What the proposals lack is that Big Tech’s Biggest Competitors Are Often Other Big Tech Companies, and acquisitions can stimulate competition between them. Google’s purchase of Android helped it build a competitor to Apple’s iPhone; Apple’s acquisition of Beats helped it create Apple Music, which competes with Spotify and YouTube.
Instagram may have been bought to help Facebook better compete with Twitter and Google. And it was successful in part thanks to Facebook’s investments and good management decisions, like copy of stories Snapchat when it posed a threat. More recently, Google bought Fitbit to compete with Apple on smartwatches. The acquisitions also allowed entry and increased competition in cloud computing and video streaming.
While these agreements have increased competition, they may have created a “more than fanciful” opportunity to do the opposite. According to the proposals, even a deal with a 90 percent chance of improving competition should be blocked because of the 10 percent risk that it could reduce competition. Our aim should be to encourage agreements that are likely to promote competition, not to block them on the slightest chance that they will not.
In addition, start-ups depend on acquisitions. Along with an initial public offering, buying is the main way for entrepreneurs and venture capitalists to “exit” the companies they have created. The harder it is to sell your business, the harder it is to make a return. Fifty percent of U.S. start-up executives said being acquired was a long term goal, and 90 percent of start-up departures in the United States in 2008-18 were due to acquisitions.
Empirical evidence suggests that investing in start-ups is rule sensitive on acquisitions. One article found that venture capital activity increased by around 40-50% in countries that pass pro-takeover laws, and that US states that introduced anti-takeover laws saw a decline of 27%. % of venture capital investment deals versus those that did not.
Some founders in the UK have already complained that the rules hurt them. And if the United States does not follow the CMA, many start-ups could simply set up shop there rather than Britain.
The CMA rejects the risks of over-execution, devoting only 150 words in its 15,000 word proposal to this subject. But he’s already taking a more aggressive stance on mergers and acquisitions. Since the start of 2019, 81% of offers he referred for further review were blocked, abandoned or needed, up from around 50% between 2003 and 2017.
These proposals threaten to go even further and risk causing significant harm that the CMA has ignored. It is now up to the government to decide whether the agency obtains these powers. He must defend dynamic and competitive markets by saying no.