March 08, 2022

No There There: Putting Big Tech’s Acquisitions In the Proper Context

By Liad Wagman


  • Acquisitions by the five largest technology companies of smaller Information, Communication and Energy Technologies (ICET) firms accounted for less than 1.5% of all acquisitions of such firms during 2010-2020. 
  • The vast majority of those acquisitions were for less than $50 million, with a large portion less than $25 million.
  • Those acquisitions, while essentially unrelated to the core issue, have unfortunately been used as part of an argument to overhaul regulations governing tech acquisitions.

Recent debates about competition in tech often point to the merger and acquisition (M&A) activities of technology firms. Some suggest that large platform companies, such as Google (now Alphabet), Amazon, Apple, Facebook (now Meta), and Microsoft (collectively also known as GAFAM), may be unusual in their number, pace and concentration of technology mergers. For instance, a recently released FTC study, “Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019,” describes features of GAFAM’s M&A activities such as the pace of their transactions and the distributions of their transaction sizes in dollar terms, as well as the ages of the acquired firms.

Despite the fact that many of GAFAM’s M&A transactions have been reviewed by regulators (including retrospectively) a common argument is that out of the many tech M&A transactions (which are in fact quite common in the Information sector), too many did not get scrutiny, let alone be blocked. Therefore, within this logic, competition laws need to change because this situation represents a systemic failure. 

The main takeaways from the FTC study is that there were 616 acquisitions by GAFAM above $1 million during 2010-2019, but about two thirds of them were below $25 million and about 80% were below $50 million. Moreover, the report finds that only a tiny percentage of those transactions, about 2%, may have been affected by so-called “reporting loopholes” (where the acquirer did not need to report the transaction to regulators due to assuming the target company’s debt or committing future payments to its employees). 

A major shortcoming of the report is its tunnel-vision focus on GAFAM, without comparing the overall attributes (such as the size, type, pace, and volume, among other characteristics) of GAFAM’s acquisitions with other leading acquirers of technology companies. There is some recent research that aims to fill in this gap, which demonstrates that private equity and other tech firms have in fact overtaken GAFAM in recent years in their pace of acquisitions of technology companies on a per-firm basis (put differently, the numbers for GAFAM are similar to the number for their peer groups), demonstrating how crucial such a comparison is for any potential policy discussion about tech M&A.

The FTC report also indicates that GAFAM’s acquisitions tend to be of younger startups, but this characteristic is also common to other acquirers in the Information sector and is not unique to GAFAM, when the average age of other companies operating in the same space as the target’s is accounted for in the analysis. This part is important, because the fact that GAFAM tends to acquire younger targets has also been argued to be consistent with the competition concern of so-called “killer acquisitions,” where the acquirer buys a target in order to “kill” its product, as well as with difficulties in regulators’ evaluation of whether such mergers are anticompetitive. As highlighted by the 2019 LEAR Report, “[…] This may be problematic to the extent that there are considerable difficulties in understanding the competitive implications of acquiring a young firm, as at that stage in their life cycle their evolution is still uncertain and it is therefore very difficult to determine if the target will grow to become a significant competitive force.”

However, acquiring a target firm at a younger age does not necessarily imply an anti-competitive motive or anti-competitive outcomes. Under the killer acquisition theory, for a target to be a real threat to an incumbent, it must have introduced a valuable product or service that has a significant overlap with the incumbent’s business, and the acquiring incumbent must offer an acquisition price that exceeds the expected payoff of the target should it remain independent. First, the vast majority of GAFAM acquisitions have been shown to be of target firms that operate outside their GAFAM acquirer’s core business area. Second, acquirers in the Information sector overall tend to acquire younger targets because those young targets operate in emerging areas. Third, this logic implies that killer acquisitions should be characterized by large transaction prices, but the large majority of GAFAM’s transactions have relatively small acquisition amounts. 

Analysts in the technology community argue that such small transactions are hardly a cause for concern, and that the relatively small set of larger GAFAM transactions are a drop in the bucket of overall tech M&A. It is surprising, then, that those who operate outside of tech would consider such transactions worthy of introducing new regulatory processes with potential disruptions and inefficiencies into one of the most innovative areas of the economy. It is entirely unclear how such efforts would impact innovation. 

This also points to another major shortcoming of the FTC report – it does not include an analysis, or even a summary, subjective as it may be, of the potential competitive effects of GAFAM’s acquisitions, evaluated from an ex-ante perspective or retrospectively; especially since doing so was one of the main reasons for the study in the first place.

In the broader context, recent research also shows that out of the 41,796 majority-control acquisitions of companies operating in the Information, Communications and Energy Technologies (ICET) space during 2010-2020, GAFAM acquired 595, accounting for less than 1.5%, with the majority of those acquisitions, as indicated by the FTC report, having an acquisition price of less than $50 million. 

It is difficult then to justify some policy calls for a considerable overhaul of a longstanding antitrust system, with the argument that these acquisitions were too many or had some other untested anticompetitive effect. If that were the case – the FTC, precisely as a result of its aforementioned study, has had for some time the information needed to further evaluate those transactions within the existing regulatory frameworks.

Dr. Liad Wagman is a Data Catalyst Institute Competition Fellow and the James B. Finkl Professor of Economics at the Illinois Institute of Technology’s Stuart School of Business.

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