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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.
The decision of July 2022 by European Court He expanded that. European Commission Ability to analyze a wide range of mergers and acquisitions. And last year US Federal Trade Commission (FTC) It also changed the criteria for examining certain types of agreements.
Historically, these regulators have been empowered to investigate a limited number 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 a similar 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 consolidation 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 potentially 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 dominant firm’s goal in this type of deal is to drive the competitor out of business, even if it means patients never get access to better treatments.
The changes to US and EU M&A inspection powers were triggered in 2018. It is an announcement by an American biotech company in 2020 Illumina About the plan to get Grail, developer of early-detection 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 didn’t even break the EU merger rule limit of €5bn (£4.3bn) in total global turnover for the companies involved.
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.
Major companies buying startups before they can make any profit is a common business model in the digital economy.
In this type of situation, regulators are often concerned about the market focus. If another startup comes up with better diagnostic tests, it could become a dominant player, such as Illumina. It makes his life difficult To protect what he recently acquired.
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 (right now Meta) to sell GiphyThe GIF-like animation database, which is valued at $315 million (£262 million) in 2020, is a killer acquisition that aims to destroy a rival in the advertising market. Giphy had to sell one ad in the UK when Meta launched an appeal of this decision in April 2022.
Similar to the pharmaceutical sector, however, few technology deals seem to fit the definition of a killer acquisition. And in fact, major companies buying innovative startups before they can make any profit is a common business model in the digital economy.
In 2013 waz It was a distraction. google maps As the leading company in the market for free online maps. But when Google Bought for US$1.1 billion, the killer acquisition didn’t shut down Waze as you might expect.
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 benefited from a better Google Maps product, but Waze has less incentive to innovate now that it’s no longer competing. 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 regularly block such purchases, startups will have to do things 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.
WhatsApp And InstagramFor example, when Facebook bought them for $19 billion and $1 billion, it had almost no revenue. 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.
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