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M&A deals involving big tech companies could become more difficult as US regulators step up scrutiny.
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If regulators increase scrutiny, it could block other big tech companies from buying startups.
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Experts say it can be difficult for late-stage startups to continue to innovate if they have few exit options.
US regulators are trying to crack down on Big Tech’s bids for startups — and that could have big implications for the broader tech M&A scene.
The US Department of Justice plans to buy Adobe’s $20 billion bid for design software startup Fima, Bloomberg reports. That reported challenge comes as the U.S. Federal Trade Commission investigates Microsoft’s $69 billion deal to buy Blizzard. And US regulators aren’t the only ones paying attention to these deals: UK and EU authorities are cracking down on big tech M&A.
If regulators try to aggressively block acquisitions, that could dampen the appetite of other large corporations to pursue such acquisitions—and thus make it harder for smaller companies to see viable exit options. That could make it harder to attract talent, keep growing and ultimately have a major impact on innovation in the tech ecosystem, lawyers, analysts and investors told Insider.
“There’s been a lot of political pressure on big tech in general,” RBC analyst Rishi Jaluria said. “It takes longer to close deals.”
Preparing for more M&A wars
Big companies are already bracing for more challenges for potential deals. Stephen Adur, a technology and legal expert at the Pillsbury Winthrop Shaw Pittman law firm, told INSIDER that he is advising clients, primarily buyers, to build strong safeguards to protect them if the deal falls apart.
For example, Adobe faces a $1 billion payout if the Figma acquisition fails. Although buyers may want lower fees and looser obligations because of the regulatory environment, sellers will be less inclined to agree to such a deal, Amdur said.
“A broken deal is very disruptive to the target company,” he said.
But buyers may be reluctant to agree to such steep breakup fees in their offers, said Zach DeWitt, a partner at Wing Venture Capital.
A longer process means more uncertainty for all startup employees. One of the benefits of joining a startup is getting stock options in the company, which convert to stock — and ultimately money — when a company goes public or is acquired.
But with a dormant IPO market and greater uncertainty around M&A, there may be less incentive to work in startups, which will eventually make it harder for such companies to recruit and retain talent, Jaluria said.
It could mean additional challenges to proposed technology M&A deals as well as a narrowing pool of potential buyers. Larger corporations may turn to private equity and other buyout firms to exit startups that are barred from strategic M&A, said Andrew Sherman, a partner at the law firm Brown Rudnick.
That’s not necessarily a good thing for startups, he added, adding that “it affects contracts and valuations as well as growth opportunities down the road.”
Enhancing creativity rather than hindering it
Some lawyers and tech analysts argue that acquisitions by tech giants can give startups more resources to grow.
“A common criticism is that big companies buy up smaller companies to save the technology and eliminate the competition,” Sherman said. “I don’t think that’s true as a fairy tale.”
According to Jaluria, Microsoft’s acquisition of LinkedIn in 2016 is a prime example of this.
“LinkedIn used to be primarily an HR tool and now it’s become a huge sales tool that many salespeople use. It’s become a great marketing tool,” Jaluria said. “LinkedIn is a better company today and I would argue that it is doing better under Microsoft ownership than it did on its own.”
Others argue that M&A is actually one of the most important factors driving technological innovation. IPOs and buyouts usually result in payouts to investors, founders and employees, said Wing Venture Capital’s DeWitt. Those people invest a lot in startups.
“This flywheel is part of those fluidity phenomena.” “I’m a little concerned about what the DOJ is saying.”
Of course, there are times when a big tech company wants to buy a smaller, more innovative competitor because it’s afraid of being displaced.
If the DOJ challenges Adobe’s acquisition of Figma, it will be a major issue, said Rutgers Law School professor and antitrust expert Michael Carrier.
“If this is considered a ‘horizontal’ merger, the courts are more likely to support the government’s challenge because the merger removes a company from the market,” he said. “A ‘vertical’ merger in which the firms do not compete is more likely to prevail.”
Faima and Adobe say they don’t compete directly now, but have had competing products in the past. Adobe has officially announced the demise of its Figma-competing XD product.
Ultimately, protecting innovation should be a priority for regulators, lawyers and analysts told Insider.
“There has to be a hope and dream of one day selling to a big tech company,” Sherman said. By making that more challenging, he added, “you’re creating a ripple effect across the ecosystem that destroys innovation.”
Read the original article on Business Insider
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