New plans to stop tech giants from buying up smaller rivals threaten future innovations.

One way to eliminate competition in a business is to simply buy them out and shut them down. And this means less choice for consumers and sometimes the loss of innovations and, in the pharmaceutical industry, even life-saving products. But such so-called killer acquisitions may face greater scrutiny in the US and EU following the recent expansion of the powers of competition regulators.

In the year A ruling by the European Court of Justice in July 2022 expanded 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 its standards for examining certain types of contracts.

Historically, these regulators have been empowered to investigate a limited range of business deals, mostly between direct competitors. These recent decisions allow them to analyze any purchase.

When applying these new powers to industries such as pharma or technology, however, regulators must navigate costly and risky research and development investments. It’s hard for regulators to spot a killer acquisition before it happens, and many M&A deals can benefit consumers. So calling it wrong can stifle innovation and prevent new products from reaching the market.

US and EU regulators share the same fear: if major players are allowed to buy start-ups, this could affect innovation and market concentration, depriving consumers of the benefits of new products and technologies. In a statement about the new approach, the FTC said that “several decades” of tightening in the economy have been matched by “growing signs of declining competition and declining wages.”

There is research that supports this view. Similarly, EU regulators want to investigate – and prevent – any purchases they believe could harm consumers.

Deadly purchases

As competition regulators try to ensure that established firms that buy smaller innovation players do not stifle or even destroy innovation, one of their main concerns is killer acquisitions. According to an influential economics paper on the pharmaceutical industry, the main goal of this type of contract is to drive the competitor out of business even if it means patients never use better treatments.

The changes to US and EU M&A diagnostic powers were triggered by US biotech company Illumina’s 2020 announcement of plans to acquire Grail, a developer of early-stage cancer tests. At the time, this seemed to be the type of purchase rarely scrutinized by antitrust authorities.

The Grail product is not yet operational and the acquisition will not affect Illumina’s core market position. The deal did not even breach the EU’s merger regulation limit of €5 billion (£4.3 billion) for companies involved in combined international transactions.

But regulators in the US and EU immediately objected to the merger. Both announced plans to investigate the impact of genome-based diagnostics on market competition and innovation.

In this type of situation, regulators are often concerned about the market focus. If another startup comes up with better diagnostic tests, such as Illumina, a dominant player like Illumina will make life difficult to defend its recent discovery.

But a killer buyout is the worst case of this type of buyout deal. The study found that only about 6% of pharma acquisitions involve a large company buying a promising new drug only to abort the innovation.

In digital markets, major companies are also suspected of following a similar strategy. Last year, the UK regulator ordered Facebook to sell a database of GIF-like animations it acquired for $315m (£262m) in 2020, in what it fears is a killer acquisition that could destroy its rival. Advertising market. While Meta launched an appeal against this decision in April 2022, Giphy had to sell one ad in the UK. Similar to the pharmaceutical sector, however, few technology deals seem to fit the definition of a killer acquisition. And in fact, it’s a common business model in the digital economy for major companies to buy new startups before they’ve made any profit.

In the year At the dawn of 2013, it was possible to dethrone Google Maps as the dominant company in the market for free online maps. But it didn’t shut down Waze, as you might expect in a killer acquisition when Google bought it for US$1.1 billion.

Instead, it added some of Waze’s new features to Google Maps and positioned the former as a good product. This allowed Google to remain dominant and increase profits from user data.

In this case, consumers have benefited from a better Google Maps product, but Waze now has less incentive to innovate because it’s not competitive. The FTC did not object to the acquisition in 2013, but is now said to be considering reconsidering.

From controllers and big gambling

If regulators routinely block such acquisitions, startups will have to act differently. Instead of relying on major player acquisitions to inject capital into the company, they’ll need to find other ways to raise money — perhaps by charging consumers directly.

For example, WhatsApp and Instagram had no revenue when Facebook bought them for $19 billion and $1 billion respectively. But they benefited from being bought on the big stage. Neither were killer buys, but both increased market attention.

Regulators are taking a big bet by opening up acquisitions of smaller and newer companies to greater scrutiny. To block an acquisition, they must show that it harms innovation, often in highly technical fields.

While researchers may be able to identify fatal findings after the fact, it is more difficult to convince a judge that it is bad for consumers at the time of purchase. So, the stakes are high for regulators: a wrong decision could affect the future of medicine and our digital lives.

Article by Renaud Foucart, Senior Lecturer in Economics, Lancaster University School of Management, Lancaster University

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