M&A DOA? Maybe.
In a signal of what might be on the horizon for U.S. corporates, including tech (and beyond Big Tech), Joe Simons, chair of the Federal Trade Commission (FTC), indicated that roadblocks could be set up to stop some of the traditional means of growth and innovation.
As PYMNTS reported late last week, the regulator remarked that antitrust enforcers should be on guard against dominant companies buying emerging startups.
“A monopolist can squash a nascent competitor by buying it, not just by targeting it with anti-competitive actions,” Simons said at an American Bar Association event, as reported by Bloomberg. “It may be easier and more effective to buy the nascent threat, only if to keep it out of the hands of others.”
Those sentiments have been strikingly similar to parts of the Department of Justice (DOJ) suit that seeks to block a deal between Visa and Plaid. In a statement announcing the suit earlier in the month, Assistant Attorney General Makan Delrahim of the DOJ’s Antitrust Division said that “Visa is attempting to acquire Plaid, a nascent competitor developing a disruptive, lower-cost option for online debit payments. If allowed to proceed, the acquisition would deprive American merchants and consumers of this innovative alternative to Visa and increase entry barriers for future innovators.”
And in another salvo, the FTC investigation into Facebook is reportedly close to being finished and may lead to a suit centered on Facebook’s past acquisitions of WhatsApp and Instagram.
And in a nod to attempts on a grand scale to reign in mergers and acquisitions (M&A), Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez earlier this year introduced the Pandemic Anti-Monopoly Act. The legislation would levy a moratorium on M&A that involves companies with more than $100 million in revenue or financial institutions (FIs) with more than $100 million in market capitalization. The act is unlikely to go make much progress in a Republican-led Senate.
But banning deals also would shut off a common exit strategy that pushes entrepreneurs to make the leap from concept to corporation — selling to larger firms for what they hope is a hefty price tag.
Temper Of The Times
The Ocasio-Cortez/Warren proposal is indicative of the temper of the times.
And in anticipating what the regulators are looking at, consider the fact that there are, of course, three types of mergers that would be under the microscope — whether as part of broader antitrust policy or specific legal action: vertical, horizontal and conglomerate.
In a nutshell, vertical mergers represent deals between two companies that produce different products or services and rarely involve companies acquiring direct competitors. Horizontal mergers are ones that effectively create a fusion, taking several companies under one umbrella, with complementary (sometimes competing) products or services. Conglomerates create a single entity out of enterprises that are in unrelated verticals.
It seems that the horizontal and conglomerate deal making will be in the proverbial hot seat moving forward.
PYMNTS reported this year that the connected economy is seeing a tailwind from the emergence of online platforms. And those platforms (think Uber and eBay) have been growing through horizontal expansion, which allows them to add ancillary services, that in turn allows, say, an Uber ride-hailing driver to pivot to food delivery. The House subcommittee on antitrust, commercial and administrative law of the committee on the Judiciary said in its report titled “Investigation of Competition in Digital Markets” proposals include “two mainstay tools of the anti-monopoly toolkit: structural separation and line of business restrictions.”
As PYMNTS remarked, structural separations can prohibit dominant companies from operating in competition with the firms dependent on the very infrastructure provided by that dominant company. Limits on the lines put certain markets, perhaps, off-limits.
That could spell trouble for companies like Facebook that tend to use infrastructure to tie activities and apps together (where plans to integrate Instagram, WhatsApp and Messenger were announced last year). Scrutiny on conglomerates bears down on companies like Alphabet, which has everything from Google to YouTube to self-driving cars under its hood.
If mergers are truncated in a wholesale manner, then the build-versus-buy debate is settled mostly in the build camp, which means that larger companies must rely on organic means to innovate, and so new services and offerings reach consumers more slowly.
But as observed in a PYMNTS roundtable discussion on M&A, the pandemic has only proved to be a tailwind. Not surprisingly, that tailwind includes the shift to digital payments as well as commerce and financial services done online across mobile devices.
“The pandemic has only dramatically accelerated … urgency around building out those capabilities,” said Lisa Ellis, partner at MoffettNathanson. “So, on one hand, strategic steps that companies might have been looking at taking over a 12- to 24-month time horizon are now suddenly capabilities that they urgently need right now in order to help their customers. But on the flip side, businesses also have to focus on their own operations any time there’s a massive economic disruption business.”
David Evans, chairman of Global Economics Group, has noted that the DOJ and FTC look at 1,500 to 2,000 transactions each year, with teams of economists and lawyers in place examining areas of competitive concern.
An overwhelming number passed muster. Between 2008 to 2016, he said, the competition authorities challenged only 2.8 percent of the mergers that were proposed.
“So, in other words,” said Evans during the roundtable, “97.2 percent — virtually all of them — posed no competitive issues.”
But might it be the case that holding up mergers for review might have a chilling effect on companies, discouraging them to even attempt to get deals done? It’s an unintended consequence that the drive to promote competition through regulatory limitation might stymie benefits that would otherwise accrue to consumers.
As for those consumers, Karen Webster noted that third of consumers, some 70 million Americans, now report that they are “very” or “extremely likely” to select a merchant based on the availability of suitable digital, touchless offerings. Of the more than 2,000 consumers surveyed, delivery (66 percent), curbside pickup (58 percent) and inventory availability (55 percent) are the most valuable attributes. Increasingly, we expect a continuum of services and access that transverse physical and online realms.
The digital age is famed for bringing speed to everything we do, but it may hit speed bumps of its own.
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