"Killer Acquisitions -- There Are Many Bona Fide Reasons for M&A Activity in this Sector"

In the U.S. we have ample means to evaluate acquisitions.  Under the Hart-Scott-Rodino Act acquisitions above a certain size must be notified to the FTC and the Antitrust Division of the DOJ, who have a 30-day waiting period to review them.  Where they believe there are grounds to further investigate, they issue a second request for information.  A broad second request can be negotiated so that potentially dispositive issues are addressed first.  After all information required by the second request is provided, the agencies have 30 days to decide whether to sue in Federal Court to block the acquisition.

The governing statute, section 7 of the Clayton Act, contains an incipiency standard.  It prohibits acquisitions the effect of which "may be substantially to lessen competition, or tend to create a monopoly."  Even if an acquisition falls below HSR size standards, it can still be challenged. Our premerger filing standards are not jurisdictional.  See, for example, the Bazaar Voice case (N.D. Cal. 2014), where the deal fell below HSR reporting thresholds but was challenged after it had closed; as a remedy, the defendant had to re-create an independent competitor: sell acquired assets to an independent buyer, provide syndication services to the buyer for four years, waive breach of contract claims against customers so they could elect to work with the divestiture buyer without penalty, and waive trade secret restrictions for any of its employees who were hired by the buyer.  The court appointed a trustee to oversee the divestiture process and monitor compliance with the remedy.

HSR second requests can obtain company strategy and planning documents, years of emails from executives and key employees, and internal deliberations about price, input costs, R&D planning, etc., as well as masses of sales data.  Under the well-developed joint FTC/DOJ Merger Guidelines, each product and service can be examined, by geographic market, to assess whether the combination will create market power, i.e., the ability to increase price, reduce quality, or reduce production without reference to a competitive response that would discipline or constrain it.

With this arsenal in place, we do not need new laws.  M&A activity in the tech sector can well be addressed under existing standards.  Where a transaction would create upward pricing pressure, reduce innovation, reduce quality, or preclude competitors from a necessary input or outlet, evidence of this can often be found in the parties' internal strategy, business planning, product development and pricing documents.  If it exists, evidence of these effects should be found and presented.  Where empirical evidence does not exist, an acquisition can be pro-competitive or competitively neutral.

For example, acquisitions in technology industries can be part of a virtuous cycle.  An inventor gets angel capital to realize an idea; venture capital vets it and contributes risk capital for stock; if that succeeds, private equity buys a stake in the company; P.E. capital enables more growth, and ultimate sale to a large enterprise.  At each stage, investors evaluate the company and assess whether it merits further growth.  If it does, then ultimately, the original inventor can reap a large return.  The prospect of large returns spurs the inventor to start another business and serves as an example to other of what can be achieved.  The successive acquisitions in this cycle are a process that brings new products and services to market.  Enforcement overreach could deter this innovation.

In another scenario, a company may reach the limits of its ability to grow as a stand-alone entity.  An acquisition can give it access to complementary assets, patents, know-how, and capital that enable continued growth.  Costs of doing business -- for example, salaries, rent, equipment, or legal compliance costs -- can be spread over a larger revenue base. A promising product can be brought into a larger organization that can has the means to continue its growth and ultimately make the product available to consumers.

In another case, where a large incumbent company acquires a small one, the product of the small one can become almost instantaneously available to hundreds of millions of people due to the incumbent's marketing and distribution system.  One example: Apple acquires a free standing app and puts it in the App Store.  Immediately, it has worldwide distribution, which is massively pro-competitive.

In another case, an acquisition can be competitively neutral but beneficial to employees.  An acquirer might acquire a company that could not otherwise survive, in order to obtain its human talent.  This provides continuing employment for employees who will not lose their jobs, while assisting the acquiror's talent recruitment objectives.

In analyzing acquisitions, keep in mind that tech markets -- even those in which the large incumbents operate -- are not static. To cite a few examples -- Data sets can be wasting assets; consumer preferences and demographics change with time.  Facebook, Google and Amazon compete for advertising dollars.  Amazon is moving into search with its voice activated Alexa. Microsoft, Amazon and Google compete in offering cloud based services. Amazon's owner has moved into video content. Android and iOS compete as operating systems.  Face Time is competing with Skype. Duck Duck Go has entered the search business and promotes itself as offering greater privacy. WalMart competes with Amazon, and the majority of retail sales are still done at brick & mortar stores.  And through television advertising, some companies -- for example, travel and hotel sites -- are finding ways to attract customers directly to their websites without intermediation by another platform.

In all of this, bear in mind that a high market share, network effects and economies of scale are not by themselves anti-competitive, but rather are necessary attributes of a successful product.  Large market share can result because a firm provides the best product and service, and therefore consumers want it.