Mergers & Acquisitions: The FTC versus the Free-Market

by | Jun 2, 2023 | Antitrust & Monopolies

The FTC is placing itself as the primary arbiter when it comes to business transactions, and it is conveying that it can predict what the future holds for innovations and acquisitions. This creates an environment of not only great uncertainty for business, especially now that previous transactions may be revisited and reconsidered, but also great risk for the competitiveness of US firms.

Namesakes of the 90s are seeing better days as Bed Bath & Beyond and David’s Bridal file for bankruptcy, joining the likes of Blockbuster and RadioShack. Each of these big box stores were big business in their heyday, and serve as a reminder that even the best can go bust in a dynamic marketplace.

Incumbent firms are prone to fall victim to the replacement effect, whereas opportunities for innovations are deemphasized so as to maintain the status quo. A great example of this is Kodak’s reluctance to embrace digital photography.

For firms to have staying power, they must be alert to changing market needs and pivot according to changing realities. Sometimes this can be done through the scaling of assets and resources by means of a merger. A current example of this is the proposed Kroger-Albertsons merger, which aims to create a premier omnichannel sales network for not only groceries but also healthcare and pharmaceutical needs. Through the joining of existing retail units, the merger would establish a national footprint for Kroger and enable it to capitalize on the growing trend of retail media marketing as well as compete with industry giants like Walmart and Costco.

Accordingly, one might think the FTC would welcome the merger, given that Walmart has long been lambasted for its behemoth status without a worthy adversary when it comes to sales of groceries. Yet the FTC is reluctant to allow the transaction.

Currently, the FTC is ramping up its review of all things merger and acquisition related, including even past deals – to the dismay of Big Tech firms.

Antitrust advocates clearly have the advantage when it comes to the coercion of contributions from tech firms, and spending shows no signs of slowing. In 2020, Big Tech spent roughly $34 million on lobbying expenses, which increased to $55 million in 2021, and nearly $70 million in 2022.

Ever since the 1990s, when Microsoft was first sued by the US government on the grounds of anti-competitive activity, members on the Hill have honed in on converting Silicon’s finest into Congress’s sycophants – as evidenced by the request to be regulated from Mark Zuckerberg and, more recently, Sam Altman.

Presently at issue is Microsoft’s purchase of Activision Blizzard.

Microsoft’s interest in Activision Blizzard is strong given the desire to bulk up gaming content in order to better serve subscribers of Microsoft’s Game Pass plans. Activision was the original third-party game publisher, and Activision Blizzard has quite an impressive history of fan worthy games such as World of Warcraft, Diablo, Candy Crush, and Call of Duty. This deal would help Microsoft continue to stake a strong claim in the gaming sector.

Since the acquisition would not infringe upon consumer welfare (it likely would do the opposite), it is unclear what the FTC is after – especially now that the EU, along with several other countries, has given clearance to the transaction.

When it comes to the gaming industry, Tencent is in the top slot, with Sony in second place. Even if Microsoft were to acquire Activision Blizzard, it would nonetheless lag behind these two firms, making the FTC’s concerns a bit confusing.

Sony benefited greatly from its purchase of Naughty Dog in the early aughts, which happened to be a time when Microsoft acquired a few firms that flopped, such as Navision and aQuantive. And this is an important point: Success from an acquisition is never guaranteed.

The rationale for M&As is so incumbent firms can adopt adjacent or nascent innovations while remaining primarily focused on internal operations and existing core offerings. Incumbents are unable to operate in an environment of high risk in hopes of high reward like startups do, and entrepreneurs will iterate and pilot projects until they get something right and have something worth selling. The potential for licensing or a buyout is a strong incentive for innovations and entrepreneurship, not only given the payout but also the pride of a project reaching a broader audience given that incumbents can market and scale in a way startups can’t do on their own.

The FTC, however, seems to overlook the benefits of M&As for the companies wishing to transact. This was made clear when the FTC filed an antitrust lawsuit over Meta’s acquisition of the tech startup Within, a VR fitness app developer. The FTC claimed Meta could develop its own app rather than buy one, but why not allow a startup to sell if it wants to? And should the FTC really be spending its time mandating multiple fitness apps?.

Antitrust cases cost a great deal of time and money, and yet Lina Khan asserts that FTC will be looking more closely at M&As both past and present — and this assertion should be of concern to any entrepreneur and any corporate investor.

Essentially, the FTC is placing itself as the primary arbiter when it comes to business transactions, and it is conveying that it can predict what the future holds for innovations and acquisitions. This creates an environment of not only great uncertainty for business, especially now that previous transactions may be revisited and reconsidered, but also great risk for the competitiveness of US firms.

The FTC has not only a skewed view of the government’s role for business, but also a limited one in its assessment of the US market. Currently, the Chinese corporation Shein is proving to be one of the fastest growing online apparel retailers with sales surpassing H&M and Zara. The trend for promoting a #SheinHaul is also disrupting sales for Amazon, given the cost-savings consumers can find when buying directly from fast-fashion suppliers, rather than via Amazon’s e-commerce system. So while the FTC calls into question Amazon’s dominant status once again with another antitrust lawsuit, international competition from China may handle Khan’s concerns and quash the American-owned giant in the end. And with Temu hot on the heels of Shein, we may find American firms floundering to keep up at all, thanks to being sidelined by FTC filings.

Made available by the American Institute for Economic Research.

Dr. Kimberlee Josephson is an associate professor of business at Lebanon Valley College and serves as an adjunct research fellow with the Consumer Choice Center. She teaches courses on global sustainability, international marketing, and workplace diversity; and her research and op-eds have appeared in various outlets. She holds a doctorate in global studies and commerce and a master’s degree in international policy both from La Trobe University, a master’s degree in political science from Temple University, and a bachelor’s degree in business administration with a minor in political science from Bloomsburg University. Follow her on Twitter @dr_josephson

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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