Banning “big tech” acquisitions: a cure worse than the disease?
Some policymakers have been led to believe that large tech companies buy startups with one goal – to kill off potential competitors before they make it big. This notion, which has been readily debunked, is now threatening to weave its way into EU regulation, with serious repercussions for the prospects of the EU’s fledgling tech scene.
Last week, the startup community gathered in Finland’s capital Helsinki to rub shoulders with potential buyers. The event showcased a European tech scene in rude health, pulling in 100 billion dollars in funding so far this year, more than doubling the 2020 figure. Regulating so-called “killer acquisitions” was the last thing on the mind of participants. What are they most concerned about? According to a recent report by Atomico, it’s regulation of employment, stock-options, and tax.
But some politicians continue to make targeting “big tech” the priority. Possible last-minute amendments to the Digital Markets Act (DMA) would effectively introduce a blanket ban on digital ‘gatekeepers’ acquiring companies in Europe. But killer acquisitions, a concept lifted from the pharmaceutical market, are at best a phantom menace in the tech sector.
It bears reminding that the vast majority of start-ups fail. This is normal. Acquisitions of innovative start-ups are “exit” opportunities for both investors and founders. These kinds of exit opportunities mean that a founder, an engineer or programmer with particular skills, knows she can go start or join a new company without the opportunity-cost of failure because even if she fails, there is a good chance she can get “hired” through acquisition at a bigger firm (sometimes referred to as “acquihires”).
Treating all such exits as “killer acquisitions” would remove significant tech investors from time-sensitive sales processes. As any economist can tell you, if you remove some of the largest bidders in an auction, you will end up with a much lower price. Their presence means European start-ups get more investment, not less. Rather than cutting down on competition, these potential acquisitions encourage competition and innovation, because the possibility of exit by acquisition creates investment incentives and lowers the cost of capital for new entrants.
As tech industry analyst Benedict Evans recently noted “the vast majority of Silicon Valley acquisitions, by any company, represent the recycling of talent and capital from ideas that didn’t go all the way into new ideas that might. Silicon Valley is a machine for running experiments, and most of the experiments don’t work – that’s part of what ‘experiment’ means.”
Moreover, when entrepreneurs sell their ventures, they go on to seed the market with more start-ups and more innovation. Facebook, YouTube, Yelp, LinkedIn, Tesla, SpaceX, Yammer, Friendster, Zynga were founded by people who made their first fortune when eBay acquired Paypal in 2002. Similar stories emerged from the sale of European success stories like Skype and Mojang.
And all that says nothing about the benefits that a start-up gains from the scale and resources of joining a larger tech company, helping its innovations reach more customers, more quickly, at lower cost.
Before heading into uncharted territory, upending long-standing and well-functioning merger-control frameworks, EU legislators should carefully assess the unintended consequences on the EU’s digital ambitions that such rules would have. Margrethe Vestager, the EU Commission’s Vice President for digital and competition with a history of wanting to increase scrutiny of tech mergers, said of killer acquisitions that it is “not always clear whether [they] should be prohibited … or what kind of [merger] remedies would work in digital markets.”
Blanket prohibitions would not close the tech gap between Europe and others, and could end up making matters worse at a time when the EU startup scene is really starting to roar.