The writer is director of competition policy at the International Center for Law & Economics
The UK’s competition regulator has proposed lowering the burden of proof needed to block acquisitions by Big Tech companies such as Google and Facebook. But, perversely, the Competition and Markets Authority’s proposals may end up stopping deals that increase competition, making life harder for British start-ups.
The measure would apply to tech companies with “strategic market status”, a new designation for those with an entrenched, powerful position in a digital market. Initially, this will include Google, for its search and online advertising businesses, and Facebook, for its position in social media. In time, companies like Amazon, Apple and Uber could be included too, if they are deemed to have SMS.
Right now, an acquisition will be blocked if a CMA panel judges it more likely than not to weaken competition, for example by increasing prices or stifling innovation. But the agency fears existing law misses deals where one company buys a smaller one that may be a future threat. This is, for example, what some believe motivated Facebook’s acquisition of Instagram, given leaked emails on the purchase in which Mark Zuckerberg argued that Instagram “can hurt us”.
The CMA wants to lower the burden of proof to block any acquisition by an SMS company with a “realistic prospect” of reducing competition, described as a “greater than fanciful, but below 50 per cent” chance.
This remarkably low standard goes well beyond previous proposals. It would probably have blocked deals the CMA has approved in the past, like Amazon’s investment in Deliveroo. It would apply to acquisitions even in markets where these companies have not been deemed to have “strategic market status”, so they would find it harder to enter other markets.
What the proposals miss is that Big Tech’s biggest competitors are often other Big Tech companies, and acquisitions can drive competition between them. Google’s purchase of Android helped it build a competitor to Apple’s iPhone; Apple’s acquisition of Beats helped it build Apple Music, which competes with Spotify and YouTube.
Instagram may have been bought to help Facebook compete better with Twitter and Google. And it succeeded in part because of investment and good management decisions by Facebook, like copying Stories from Snapchat when it posed a threat. Most recently, Google bought Fitbit to compete with Apple on smartwatches. Acquisitions have enabled entry and increased competition in cloud computing and video streaming, too.
Even if these deals increased competition, they may still have created a “greater than fanciful” possibility that they could do the opposite. Under the proposals, even a deal with a 90 per cent chance of improving competition should be blocked because of the 10 per cent risk that it might reduce competition. Our goal should be to encourage deals that are likely to promote competition, not block them because of a remote chance that they do not.
Moreover, start-ups depend on acquisitions. Along with an initial public offering, being bought is the main way entrepreneurs and venture capital investors can “exit” the firms they have built. The harder it is to sell your company, the harder it is to make a return. Fifty per cent of US start-up executives said that being acquired was a long-term goal, and 90 per cent of US start-up exits in 2008-18 happened thanks to acquisitions.
Empirical evidence suggests investment in start-ups is sensitive to rules on acquisitions. One paper found venture capital activity grows by about 40-50 per cent in countries that enact pro-takeover laws, and US states that introduced anti-takeover laws saw a 27 per cent decline in VC investment deals compared with those that did not.
Some founders in the UK have already complained that the existing rules hurt them. And if the US does not follow the CMA, many start-ups may simply set up there instead of in Britain.
The CMA dismisses the risks of over-enforcement, spending just 150-odd words in its 15,000-word proposal on it. But it is already taking a more aggressive stance on M&A. Since the start of 2019, 81 per cent of deals it has referred for in-depth scrutiny have been blocked, abandoned or required remedies, compared with some 50 per cent between 2003 and 2017.
These proposals threaten to go even further, and run the risk of causing significant harms that the CMA has ignored. It’s now up to the government whether the agency gets these powers. It should stand up for dynamic, competitive markets by saying no.