“When large, dominant firms are unable to innovate on their own, it’s common for them to focus more on how to find those ideas from their smaller competitors. Today’s report begins to shed light on how the largest technology giants — Facebook, Google, Amazon, Microsoft, and Apple — engage in acquisitions to lock up assets and intellectual property that may someday threaten their dominance,” US Federal Trade Commission (FTC) Commissioner Rohit Chopra said in a statement published on September 15 alongside a new report on unreported acquisitions by big tech companies.
Based on the report, the FTC is considering making reforms that will make it harder for big tech companies to escape the scrutiny of antitrust authorities.
What is the report about?
Back in February 2020, the FTC launched a study to understand acquisitions activities of big technology companies, specifically focusing on the acquisitions that did not require reporting to antitrust authorities at the FTC and the Department of Justice because they did not meet the reporting requirements prescribed under the Hart-Scott-Rodino (HSR) Act.
The study was expected to shed more light on “whether large tech companies are making potentially anticompetitive acquisitions of nascent or potential competitors that fall below HSR filing thresholds.”
The findings of this study reveal that Facebook, Google, Amazon, Microsoft, and Apple made 616 acquisitions valued at or above $1 million between 2010 and 2019.
Most of these acquisitions escaped the radar of the antitrust authorities because they use avoidance devices, said Commissioner Chopra. “Avoidance devices are tricks that buyers can use to disguise a transaction so that the transaction doesn’t trigger the HSR thresholds,” he added.
“While the Commission’s enforcement actions have already focused on how digital platforms can buy their way out of competing, this study highlights the systemic nature of their acquisition strategies,” said FTC Chair Lina Khan. “It captures the extent to which these firms have devoted tremendous resources to acquiring start-ups, patent portfolios, and entire teams of technologists—and how they were able to do so largely outside of our purview.”
What policy changes can we expect to come out of this study?
- Modifications to reporting requirements: “This study underscores the need for us to closely examine reporting requirements under the Hart-Scott-Rodino Act and to identify areas where the FTC may have created loopholes that are unjustifiably enabling deals to fly under the radar. While broader reforms to HSR may be overdue, the antitrust agencies must also guard against unduly permissive interpretations that handicap us. The Bureau of Competition has recently taken useful steps to start closing certain loopholes, and we must continue this important work,” Chair Lina Khan said in a statement.
- Additional scrutiny of non-compete clauses: “The data show that non-competes played a significant role in how firms designed transactions, with over 76% of the acquisitions captured including non-compete clauses for founders and key employees of the acquired entities. As the Commission considers the use and misuse of non-compete clauses across the economy, further scrutinizing the use of non-competes in merger agreements will aid this broader work. Exploring how firms in digital markets may be using acquisitions to lock-up key assets along with talent will be a worthy area of study,” Khan stated.
- Working with international counterparts: “It is notable that less than two-thirds of the non-reported transactions involved the acquisition of domestic assets or firms. This figure underscores the importance of close collaboration and cooperation with our international counterparts, several of whom have developed significant expertise in scrutinizing digital markets. I am especially keen to ensure that the FTC is learning from partners who have excelled at institutionalizing a broader range of tools and skillsets, helping mitigate information asymmetries and ensuring greater analytical rigor,” Khan said.
- Reforming antitrust statutes to address digital markets: “While the Commission should ensure that we use these findings to plug gaps in our existing work, I hope this study also proves useful to lawmakers as they consider reforms to the antitrust statutes. While the existing law uses deal size as a rough proxy for the potential competitive significance of an acquisition, digital markets in particular reveal how even smaller transactions invite vigilance,” Khan said.
Study reveals the PacMan strategy that big tech uses
“I know there was some speculation about whether this study would have revealed specific transactions the Commission would have liked to know about in order to challenge,” FTC Commissioner Rebecca Slaughter said in a statement. “But I think that’s the wrong question. To my mind, the more significant contribution this study provides is the window into the overall pattern of these firms’ acquisitions.”
My concern has always been that when we simply review acquisitions serially, we may miss bigger picture patterns of anticompetitive roll-up strategies. I think of serial acquisitions as a PacMan strategy: each individual merger, viewed independently, may not seem to have a significant impact, but the collective impact of hundreds of smaller acquisitions can lead to a monopolistic behemoth. – Commissioner Slaughter
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