Tech Industry Acquisitions and Competition: Counterpoints to an Incomplete FTC Report and Legislation that Relies on It

TL;DR:

• New research findings cast doubt on antitrust theories that GAFAM broadly engages in “killer acquisitions” and creates “kill zones” in order to maintain and expand marketplace dominance in key sectors.

• The research shows that acquisitions of technology companies are widespread across the economy, and during 2010-2020, GAFAM accounted for fewer than 1.5% of them.

• More intense competition among firms is positively correlated with a higher likelihood of engaging in technology M&A, suggesting that acquisitions are a common and potentially pro-competitive mechanism for firms to differentiate their offerings and offer new products.

• Competition between GAFAM and other firms, as well as competition within GAFAM, as evidenced by the technology areas in which M&A occurs, has been steadily increasing since 2010.

Ongoing debates about competition in tech often point to the merger and acquisition (M&A) activities of top technology firms. Some antitrust authorities suggest that the largest tech companies – namely, Google/Alphabet, Amazon, Facebook/Meta, Apple, and Microsoft (collectively also known as GAFAM) – may be unusual in their M&A activities. For example, a recently released FTC 6(b) study, “Non-HSR Reported Acquisitions by Select Technology Platforms, 2010-2019,” describes specific metrics of GAFAM’s M&A activities, including the pace of their transactions, the distributions of their transaction sizes in dollar terms, and the ages of the acquired firms, and then concludes that the data demonstrates anti-competitive intent and results. 

Many GAFAM acquisitions have been reviewed by a variety of regulators, including retrospectively. Yet, a common argument is that not enough of these deals were reviewed, contested or blocked, and that GAFAM may have engaged in so-called “killer acquisitions” (a concept adopted from research into M&A in the pharmaceutical sector) or created so-called “kill zones.” The same argument underlies calls by the FTC, Members of Congress, and other authorities for merger guidelines and competition laws to be changed. In addition, policymakers have recently introduced several new pieces of legislation that would dramatically change merger-review policies – specifically targeting acquisitions that may involve GAFAM or altogether block acquisitions of certain sizes. (These proposals are not too dissimilar from recent developments in the European Union; notably, research has shown that other, related EU policies in the digital space, such as GDPR, may have in fact harmed competition and innovation.)

These proposed changes to merger-review policies are based on the broad assumption that GAFAM acquisitions predominantly reduce competition. An alternative hypothesis is that GAFAM acquisitions are not particularly different from the M&A activities of other acquiring firms, with the broad purposes of acquiring new talent and ideas, producing and commercializing new product innovations, and enhancing shareholder value. The narrow focus of policymakers (in legislation) and regulators (in the FTC report) strictly on the merging parties causes an analytical deficit as it largely omits an examination of the broader ecosystem. In particular, GAFAM acquisitions may provide incentives for entrepreneurs, investors, and other incumbents to enter emerging markets, and in this manner may reflect increased competition.

These points are perhaps best illustrated by the FTC’s 6(b) study and its exclusive focus on GAFAM, omitting a comparison of the overall attributes (such as the size, type, pace, and volume, among other characteristics) of GAFAM’s acquisitions to other leading acquirers of technology companies. Critically, if policymakers’ hypothesis is that the M&A behavior of GAFAM firms is extraordinary and requires novel regulation, then GAFAM’s acquisitions should be compared to acquisitions by similar “peer” groups of firms. If the M&A behavior of GAFAM firms does not substantially differ from that of peer groups, that would constitute evidence against the hypothesis that GAFAM’s M&A activities merit specific regulatory changes, going against the premise that GAFAM acquisitions provide a basis for a radical overhaul of U.S. merger-review policies. After all, acquisitions can already be reviewed under existing laws, including retrospectively, independent of merger filings. 

Mindful of these shortcomings, and in order to understand GAFAM’s M&A in the proper context, my colleagues and I recently completed two research studies. The first examines tech M&A by public firms and the second compares GAFAM’s M&A to acquisitions by other acquirers. Both cover acquisitions from 2010-2020 – a comparable timespan to the FTC study – but instead of focusing only on five firms, the studies analyze the M&A activities of all publicly-listed North American companies, as well as several GAFAM “peer groups,” which may include non-public firms, including: 

• Leading non-GAFAM firms operating in the digital space
• Leading non-GAFAM acquirers of technology companies
• Leading private equity (PE) firms

(Academic pre-prints of these papers are available here and here.)

These analyses reveal that GAFAM acquisitions are not particularly unusual compared to their peer firms, and do not appear to have the characteristics of “killer acquisitions” nor do they create “kill zones.” Moreover, GAFAM acquisitions are emblematic of broader trends, where acquisitions of technology companies are symptoms of more intense competition and increasing overlaps in firms’ offerings, and not of diminishing competition. These findings cast doubt on the hypothesis that GAFAM acquisitions are unusual, and thus challenge the assumptions underlying policy proposals for overhauling the merger review process, which often aim to treat such acquisitions as presumptively anticompetitive, and specifically target M&A by technology firms. 

Specifically, the two studies find that: 

• Technology companies are acquired by firms in all economic sectors. During 2010-2020, for instance, acquirers from the Services and Supply Chain sectors completed 5,720 acquisitions of technology companies, in comparison to 4,903 tech company acquisitions by firms in the Information sector.

• Larger and older public firms are more likely to acquire tech companies. 

• The vast majority of acquired tech companies offer products and services that fall outside the acquiring firm’s core area of business. 

• There is a positive link between a public firm’s likelihood to engage in technology M&A and the amount of competition the firm faces from other public firms at the time of M&A. In other words, tech M&A across all industries is associated with firms that face more intense competition in their home markets from other incumbent public firms. 

• These results suggest that public companies that acquire technology companies are motivated to expand through M&A into new technology and business areas because they face increased competition in their core areas.
  
• Acquiring relatively young tech startups is a common practice, particularly by firms in the Information sector. 

• Using a technology categorization from Standard & Poor’s, when the ages of acquired firms are normalized based on the average age of all firms operating in their technology category, GAFAM acquisitions of relatively younger companies is not significantly different than acquisitions byother top technology firms.

• According to a dataset compiled by Standard & Poor’s, out of the 41,796 majority-control acquisitions of technology companies operating in the Information, Communications and Energy Technologies (ICET) space during 2010-2020, GAFAM acquired 595, accounting for less than 1.5%.

• On a per-firm basis, some top technology acquirers, including private equity companies and other non-GAFAM firms, have matched or exceeded GAFAM in their volume of majority-control acquisitions per year since 2018.

• Utilizing a technology categorization from Standard & Poor’s, the analysis finds that GAFAM and other top technology acquirers increasingly compete with each other across categories over 2010-2020. Moreover, competition within GAFAM has steadily increased over this time period as well.

• The analysis finds that GAFAM acquiring in a technology area is positively correlated with other firms also entering the area via M&A. These findings counter novel and still unproven antitrust theories such as kill zones. For the kill zone theory to hold insofar as the M&A context, GAFAM’s acquisitions should deter competitors from acquiring in the same technology and business areas. However, the data demonstrates that acquisitions by GAFAM companies in a certain “zone” is followed by acquisitions by non-GAFAM companies in that same zone – which strongly suggests that GAFAM acquisitions signal or validate a zone of opportunity and trigger more intense competition in that zone of opportunity, rather than less competition and less opportunity as we would expect from a “kill zone”. 

• GAFAM primarily acquires tech companies in order to expand into new areas beyond their core businesses. In comparison to other groups of top technology acquirers during 2010-2020, GAFAM acquisitions were the least concentrated around the acquirer’s core business area, with the vast majority of GAFAM acquisitions branching into new technology categories.

The additional context and findings provided by these studies calls for a reevaluation of policymakers’ assumptions about GAFAM acquisitions of technology companies. In particular, these findings suggest that technology acquisitions are common; they are a symptom of increasing competition, and of competitors’ need to bolster their offerings by expanding into new technological areas in order to offer additional features, products, and services. 

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.