Acquisitions of Startups by Digital Firms and Merger Policy
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–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– Philipps Universität Marburg Acquisitions of Startups by Digital Firms and Merger Policy Name: Marinell E. Falcón G. ABSTRACT The rise of the digital economy has brought significant challenges to competition authorities around the world. When it comes to merger control, the authorities have realized that there is an increasing trend in acquisitions of startups by digital firms such as Google, Amazon, Facebook, Apple, and Microsoft (GAFAM). The latest research and reports on this area suggest that the main problem with the acquisition of startups in digital markets is that due to the low-turnover characteristic of the acquired companies, the transactions are not detected by competition authorities for a pre-merger assessment. As a result, it is challenging to distinguish anti-competitive from pro- or neutral competitive acquisitions. The purpose of this research is to contribute to the discussion of the challenges of merger control in the digital economy by addressing the following question: what are the factors that can be considered in the assessment of startup acquisitions by digital firms to identify anti-competitive acquisitions better? Through a literature research and descriptive analysis of the acquisitions of startups undertaken by GAFAM within the last decade, the present research considers that a better assessment of startup acquisitions should take into consideration the characteristics of the digital economy, the incentives of the startups and firms, as well as trends and characteristics of past acquisitions. ACQUISITIONS OF STARTUPS BY DIGITAL FIRMS AND MERGER POLICY TABLE OF CONTENTS 1. Introduction ................................................................................................................... 1 2. Competition challenges in the digital economy .............................................................. 5 2.1 Distinctive characteristics of the digital economy and market concentration ......................... 6 2.1.1 Network effects .................................................................................................................................... 8 2.1.2 The role of data ..................................................................................................................................... 9 2.1.3 Economies of scale and scope ............................................................................................................ 10 2.1.4. Tipping markets ................................................................................................................................. 10 2.2. Barriers to entry vs dynamic competition: can new entrants challenge the market power of dominant platforms? ................................................................................................................. 13 2.2.1. Barriers to entry ................................................................................................................................. 14 2.2.2. Dynamic competition ......................................................................................................................... 16 3. Stylized facts of startup acquisitions by digital firms .................................................... 18 3.1. About the dataset ............................................................................................................... 18 3.2. almost half of all technological acquisitions HAVE BEEN MADE BY GAFAM ......................... 19 3.3. Overview of Startup Acquisitions by GAFAM ...................................................................... 21 3.3.1. Acquisitions of mature companies vs. acquisitions of startups ......................................................... 21 3.3.2. Number of startups acquired per year .............................................................................................. 21 3.3.3. Value of acquisitions and new value thresholds ................................................................................ 23 3.3.4. Inactive startups after the acquisition ............................................................................................... 24 3.3.5. Types of technology developed by the startups ................................................................................ 27 4. The main factors behind startup acquisitions by large digital firms .............................. 28 4.1. Why are large digital platforms acquiring startups? ............................................................ 29 4.1.1. To acquire new technologies and accelerate growth ........................................................................ 29 4.1.2. To acquire new talent ........................................................................................................................ 30 4.1.3. To eliminate competition ................................................................................................................... 32 4.2. Why do startups choose to be acquired by an incumbent? ................................................. 33 4.2.1. Acquisitions as a commercialization strategy .................................................................................... 34 4.2.2. Acquisitions as an exit strategy for entrepreneurs and investors ..................................................... 36 4.2.3. Acquisitions as a strategy to work for a leading technological company .......................................... 38 5. Merger control in the digital economy ......................................................................... 39 5.1. The effects of startups acquisitions by digital platforms ...................................................... 40 5.1.1. Effects on competition ....................................................................................................................... 41 I ACQUISITIONS OF STARTUPS BY DIGITAL FIRMS AND MERGER POLICY 5.1.2. Effects on innovation ......................................................................................................................... 44 5.2 Why have competition authorities been unable to challenge anticompetitive startup acquisitions? ............................................................................................................................. 45 5.2.1. Static competition assessment with price as the main variable ........................................................ 47 5.2.2. The low turnover characteristic of startups ....................................................................................... 48 5.2.3. Non-horizontal approach ................................................................................................................... 49 5.3. A review of Strategic acquisitions and post-merger assessment .......................................... 50 5.4. Identifying anti-competitive startup acquisitions ................................................................ 52 5.4.1. Transaction value threshold .............................................................................................................. 53 5.4.2. Evaluation of the likelihood of an anti-competitive acquisition and the significance of assets ........ 54 5.4.3. The importance of increasing attention to acquisitions by GAFAM .................................................. 55 5.4.4. Other recommendations ................................................................................................................... 57 6. Conclusions .................................................................................................................. 57 List of References ............................................................................................................. 61 Appendix A ...................................................................................................................... 68 Appendix B ...................................................................................................................... 79 Appendix C ....................................................................................................................... 80 LIST OF FIGURES Figure 1 - Top 10 largest global companies ............................................................................ 11 Figure 2: Number of GAFAM and non-GAFAM acquisitions ................................................... 20 Figure 3: Number of acquisitions by Google, Amazon, Facebook, and Amazon over time .... 22 Figure 4: Acquisitions of Startups that exceed the German and Austrian value threshold .... 24 Figure 5: Purpose of the technology developed by the acquired startups ............................. 28 LIST OF TABLES Table A1 - List of Acquisitions by Google, Amazon, Facebook, Apple, & Microsoft between 2004-2018 ............................................................................................................................... 68 Table A2 - Clusters for analysis of past acquisitions by Google, Amazon, Facebook, Apple, and Microsoft ................................................................................................................................ 79 Table A3 - List of strategic acquisitions according to selected reports and papers ................ 80 II ACQUISITIONS OF STARTUPS BY DIGITAL FIRMS AND MERGER POLICY 1. INTRODUCTION In the digital economy, two trends currently shape debates on competition and innovation policy: first, the increasing relevance of startups in the innovation