This week, the Federal Trade Commission demanded that the five biggest tech companies turn over years of information on some of their past acquisitions. They’re not focusing on the big purchases, like Facebook buying Instagram or Google buying Waze, its navigation competitor. These are purchases that were too small to require reporting to antitrust officials. Think sub 100 million bucks.
The FTC wants to know if tech companies got to be giant whales by gulping down a whole bunch of minnows that might have grown into big, competitive fish had they just been left alone in the pond. I spoke with Diane Bartz, who covers antitrust for Reuters, about all of this. The following is an edited transcript of our conversation.
Diane Bartz: What the Federal Trade Commission decided to do is a very wonky thing called a 6(b) study. They sent all these orders to the big tech companies, some of which are being investigated. They ask them about all their transactions that they concluded were below the level that normally has an antitrust review. Right now, that’s about $94 million. The idea is that they’re going to, maybe in the future, be doing a more tough review of these smaller acquisitions, [like] maybe they should lower the threshold of what’s reportable to the government as an acquisition. They also did a little bit of saber rattling, saying, “If we find an anti-competitive acquisition …” in the hundreds of transactions that they’re expected to be told about, they might go in and try to do an enforcement action.
Molly Wood: What do you think is the goal of this review?
Bartz: The goal is for them to look at the smaller transactions and see if there’s a transaction that is anti-competitive. I think what they’re saying to themselves is, “Is there a company that would have risen up to be the next Facebook, the next Google, but that didn’t happen because it got bought by Facebook or it got bought by Google while it was still a tiny, tiny company.” I think they’re looking to see if these acquisitions of smaller companies are reducing dynamism in Silicon Valley.
Wood: What is the threshold now for a deal, an acquisition that does have to be reported to the FTC, and where do you think that could land?
Bartz: Right now, it’s about $94 million. Just the fact that there’s an antitrust review doesn’t mean that deal isn’t going to happen. Something like 98% of reviews are done in 30 days — fine, no problem. Then maybe 1% or 2%, something like that, they get what’s called a second request, which means they have to file a lot of documents. At the end, most of them go forward, and maybe they have to divest something. Then, a very tiny percentage — one of the other agencies — will go to court and say, “I want this stopped.”
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It’s not that clear what might come out of the FTC’s research action. Maybe it will be as simple as Diane Bartz says, lowering the threshold for the amount of money that qualifies as an acquisition that has to be reported to antitrust regulators. Any suggestion that the FTC might be getting more aggressive about blocking mergers or acquisitions is going to cause some concerns among venture capitalists.
Earlier this month, the FTC sued to stop Edgewell Personal Care Co., aka Schick razors, from buying the razor blade startup Harry’s in what would have been a $1.3 billion deal. Business Insider Prime had an interesting story about how investors, who count on companies having big so-called exits that usually come through a merger or acquisition, were stressed. That stress is only likely to increase if it gets harder for companies to buy other companies.
Investors and startup founders often shape companies specifically to be acquisition targets. In 2016, 97% of these exits were mergers or acquisitions, and most of those happened after a company got Series A funding and before Series B, when the companies were still quite small, according to CB Insights.
Considering that IPOs have really fallen out of favor in the tech world in the last several years, anything that introduces friction into the startup acquisition funnel is bound to have some ripple effects. Keep your eye on this trend, friends.
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