To eliminate competition, you can buy out competitors and shut them down. This means less choice for the consumer and, in some cases, the loss of innovative products and even life-saving ones, as is the case with the pharmaceutical industry. These so-called “killer acquisitions” are likely to be scrutinized more closely in the US and EU after a recent increase of powers for competition regulators.
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A July 2022 decision by the European Court of Justice has expanded the European Commission’s ability to investigate a wider range of mergers and acquisitions (M&A). Last year, the US Federal Trade Commission (FTC) also changed its criteria for scrutinizing certain deal types.
In the past, these regulators were only empowered to examine deals that met a certain threshold, usually between direct competitors. The recent rulings allow them to review almost any purchase.
Regulators must, however, navigate the world of expensive and risky research and development investments when applying this new power to industries that move quickly, such as technology or pharma. Many M&A transactions can benefit consumers, but it’s difficult for regulators. Calling it wrong can actually stop innovation and prevent new products from being brought to market.
US and EU regulators have the same concern. If dominant companies are allowed to purchase startups, this could affect innovation and market concentration and rob consumers of new technology and products. The FTC stated that “several decades of consolidation” across the economy have coincided with “a lessening of the competition, reflected in increasing mark-ups and decreasing wages.”
This view is supported by research. EU regulators also want to investigate and possibly prevent any acquisitions that they think may harm consumers.
Killer acquisitions are a major concern for competition regulators when they try to make sure that established companies buying innovative small players do not hinder or destroy innovation. an influential economic paper in the pharmaceutical industry explains that the dominant firm’s goal in a deal like this is to eliminate a competitor, even if the patients don’t benefit from the better treatment.
Recent changes in US and EU M&A powers were triggered after a 2020 announcement from US biotech company Illumina regarding its plans to purchase Grail, which is a developer of early-detection cancer tests. This acquisition was one that wouldn’t receive much scrutiny from antitrust authorities.
Illumina’s dominant position on the market will not be affected by Grail’s acquisition as its product is still not operational. The combined global turnover of the two companies did not exceed the EU merger threshold of EUR5billion (PS4.3billion).
The merger was challenged almost immediately by the EU and US regulators. Both plans were announced to examine the merger’s potential impact on innovation and competition in the market of genome-based diagnostics.
In such situations, regulators often worry about market concentration. Illumina, for instance, might make it difficult for another startup to develop better diagnostic tests in order to protect its recent acquisition.
The most extreme example of an acquisition deal is a killer. According to research, only 6% of pharmaceutical acquisitions are made by a larger company that buys a smaller firm with a promising drug in order to abandon the project.
Digital markets are no exception. It is common to suspect dominant firms of following a similar strategy. Last year, the UK regulator ordered Facebook to sell Giphy, a database with GIF-like animated images it had purchased for US$315,000,000 (PS262,000,000) in 2020, for fear it was a killer purchase aimed at destroying an advertising rival. Meta appealed this decision to the UK Competition and Markets Authority in April 2022. Giphy still had not sold a single ad.
Mergers and acquisitions activity. Shutterstock
is similar to the pharma industry; very few tech deals appear to match the definition of a killer purchase. In fact, it is common for dominant firms to buy innovative startups even before they have generated any profit.
Waze, the leader in free online maps at the time, was seen as a threat to Google Maps. When Google purchased it, Waze was not closed, as one would expect from a major acquisition.
It added some of Waze’s innovative features to Google Maps while maintaining the former as a niche product. Google was able to maintain its dominance and increase profits by using user data.