One way to eliminate competition in business is to simply buy them out and shut them down. And that means less choice for consumers and sometimes loss of innovative and, in the case of the pharmaceutical industry, even life-saving products. But such so-called killer takeovers are likely to be viewed more critically in the US and EU following a recent expansion of competition regulators’ powers.
A July 2022 ruling from the European Court of Justice has: extensive the European Commission’s ability to investigate a wider range of mergers and acquisitions (M&A). And last year the US Federal Trade Commission (FTC) changed the criteria for research certain types of deals.
Historically, these regulators were only authorized to investigate business deals of a certain size, usually between potential direct competitors. These recent statements will allow them to research almost any purchase.
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However, in applying these new powers to rapidly changing industries such as pharmaceuticals or technology, regulators must navigate a world of expensive and risky investments in research and development. It’s very difficult for regulators to spot a killer takeover before it happens, and many mergers and acquisitions can actually benefit consumers. So if you call it wrong, it can nip innovation in the bud and prevent new products from entering the market.
US and EU regulators share the same fear: Allowing dominant players to buy up startups could affect innovation and market concentration, depriving consumers of the benefit of new products and technology. In announcing its new approach, the FTC said that “several decades” of consolidation in the economy corresponded to a “reduction in competition manifested in rising profit margins and shrinking wages.”
When competition regulators try to ensure that incumbents that buy small innovative players don’t hinder or even destroy innovation, one of their biggest concerns is great acquisitions. As documented in a influential economic newspaper as far as the pharmaceutical industry is concerned, the dominant company’s goal in such a deal is to destroy a potential competitor to its own company, even if it means patients never benefit from better treatments.
The recent changes to US and EU mergers and acquisitions control powers were triggered by a 2020 Announcement by US biotech company Illumina about its plans to acquire Grail, a developer of early-detection cancer tests. At the time, this sounded like the kind of takeover that wouldn’t get much attention from the competition authorities.
Grail’s product is not yet operational and its acquisition will not affect Illumina’s dominant market position. The deal did not even cross the EU Merger Regulation threshold of €5 billion (£4.3 billion) of combined global sales for the companies involved.
Almost immediately, however, regulators in the U.S and the EU opposed the merger. Both announced plans to explore its potential impact on competition and innovation in the genome-based diagnosis market.
In situations like this, regulators often worry about market concentration. If another start-up comes up with better diagnostic tests, for example, a dominant player like Illumina… make life difficult to protect the recent takeover.
But killer takeovers are the most extreme case of this kind of takeover deal. Research shows that in only about 6% of pharmaceutical acquisitions, a large company buys a smaller company with a promising new drug, simply to end the innovative project.
In digital markets, dominant companies are also often suspected of pursuing a similar strategy. Last year, the British regulator ordered Facebook to give Giphy. to sella database of GIF-like animations it had acquired in 2020 for US$315 million (£262 million), fearing it was a cutthroat takeover aimed at destroying a potential rival in the advertising market. When Meta appealed this decision in April 2022, Giphy sell one more ad in the United Kingdom. Just like in the pharmaceutical sector, but few tech deals seem correspond to the specific definition of a killer acquisition. And in fact, dominant companies that buy innovative start-ups before they generate profits is a common business model in the digital economy.
In 2013, Waze was a potential disruptor for Google Maps as the dominant company in the free online maps market. But when Google has taken over at US$1.1 billion, it didn’t shut down Waze as you’d expect with a great acquisition.
In this case, consumers benefited from a better Google Maps product, but Waze now has less incentive to innovate because it no longer competes. The FTC did not oppose the takeover in 2013 but is now reportedly considering looking at it again.
Big gamble from regulators
If regulators routinely block such takeovers, start-ups will have to act differently. Rather than relying on a takeover by a dominant player to inject capital into the business, they will have to find other ways to make money – possibly by charging consumers directly.
whatsapp and Instagram, for example, had almost no revenue when Facebook bought them for $19 billion and $1 billion, respectively. But they benefited from the acquisition by a larger platform. Neither were killer takeovers, but both allowed for greater market concentration.
By opening up acquisitions of small and innovative companies to greater scrutiny, regulators are taking a huge gamble. To block a takeover, they have to demonstrate that it harms innovation, often in highly technical areas.
While researchers were able to identify killer purchases afterwards, and convince a judge at the time of purchase that a deal is bad for consumers is much more difficult. As such, the stakes are high for regulators: one wrong decision could affect the future of medicine and the future of our digital lives.