Tech Regulatory Overhaul Series: Banning M&A Activity
Continuing with DisCo’s series of posts explaining how antitrust bills recently introduced in the House plan to regulate a handful of companies, it is concerning that Representative Jeffries’ bill, the ‘‘Platform Competition and Opportunity Act of 2021’’, proposes to ban all meaningful M&A activity of leading tech companies to the detriment of the U.S. innovation ecosystem.
Contrary to U.S. market economy principles, Rep. Jeffries’ bill is a custom-made merger control regulation that will prohibit covered platforms from engaging in transactions that would otherwise be reasonable from a business perspective. This type of regulatory imposition is unprecedented and will have a negative impact on the innovation ecosystem in the U.S.
In contrast with the already existing Clayton Act, which forbids anticompetitive transactions, the proposed bill designates a handful of market players and blocks them from (i) buying any competitor, (ii) potential competitor, or (iii) any business that may enhance or help to maintain their market position. In other words, acquisitions from designated companies will stop being an aspirational exit strategy for risk takers.
The introduction of this bill represents a departure from the constructive dialogue that had been taking place in the past months on how to upgrade the existing merger control system, including burden shifting proposals and lowering the Hart-Scott Rodino (HSR) thresholds considerations. In turn, this bill is the exponential example of the radical approach the new legislative package has taken against companies, and how disproportionate these bills are overall.
The consequences of imposing a per se ban on M&A activity on a few companies are multiple. First, this regulation will run against the market economy that characterizes the U.S., establishing a bad precedent, and opening Pandora’s box for the politicization of the economy. M&A activity is a standard part of a market economy whereby businesses engage in added-value transactions. Some of these acquisitions prevent companies from going bankrupt, others simply merge seeking synergies, others represent ‘acqui-hires’ by which a company focuses on acquiring human capacities, etc. The motives behind transactions are multiple, but in the innovation sector usually acquisitions are a path to scale up and grow good business ideas. Indeed, a high percentage of start-ups are acquired, and only when accessing bigger resources offered by the acquirer can newly-born businesses grow and succeed. By imposing a ban on leading tech companies’ ability to engage in M&A activities, an essential principle of the market economy that has enabled the start-up ecosystem to exist will be distorted.
Secondly, the incentives for risk takers to innovate will be significantly impaired. The ban on M&A activity not only will represent a departure from market economy principles, but will also diminish the incentives of innovators to invest in the U.S. As many entrepreneurs acknowledge, whereas ideally start-ups should grow organically, the reality is a different one. In most cases, acquisitions are the exit strategy that follows a majority of start-ups. In turn, the revenue generated through these acquisitions provides innovators with resources to continue to innovate, keeping the innovation cycle alive. The disruptive impact that this M&A ban will have on the innovation cycle is worrisome and risks slowing down the innovation path to the detriment of the U.S. economy.
Finally, a ban on M&A activity on a handful of companies will eventually favor other ecosystems outside the U.S. It is foreseeable that the public sector will take advantage of regulatory frameworks that slow down the growth of U.S. tech, and subsidize local businesses that have not been able to organically compete against leading U.S. tech companies. A ban on M&A activity will only favor the foreseeable protectionist approach that will likely reign in the near future, and eventually will harm U.S. competitiveness.
For all these reasons, Representative Jeffries’ bill is a bad example of policymaking that imposes radical prohibitions on dynamic companies and markets. Hopefully, this radical proposal won’t be widely supported and more constructive approaches to the revision of merger control systems will eventually be considered.