Are pan-global corporates too large and too dominant, using M&A to stifle innovation?

Introduction 

 

Mergers & Acquisitions are a staple in the Western World for larger corporates to acquire complementary businesses, access new markets, secure Intellectual Property or new technologies. Transactions also present the opportunity for Entrepreneurs to successfully exit or ‘cash-out’. It is estimated that there were around 30,000 M&A deals globally in 2023. It’s common place.

Outside of normal strategic rationale, there is a type of transaction which is more insidious. Tactical acquisitions of competitors or to acquire IP with the intent to close or not support that business are called ‘Killer Acquisitions’.  Killer Acquisitions have the sole purpose of buying younger, more innovative businesses in order to eliminate competition. It is a defensive move and can be potentially anti-competitive for the consumer.  

Simon Heath, Partner at Heligan Group, commented “Killer Acquisitions are designed specifically to stifle competition and innovation, ensuring a dominant market position of the pan-global business.”

Traditionally, sovereign governments have been the most influential stakeholder to GDP growth: providing governance over law and regulations in a specific country, generating substantial revenue in tax receipts to support their nation through investment and expenditure. Arguably the rise of supranational corporates has superseded government. To put this into context, the UK is the sixth largest economy in the world with a GDP of £2.3 trillion ($3 trillion). Nvidia, Microsoft and Apple all have market caps greater than the UK GDP. 

These larger corporates often have a dominant market position, and their number one objective is to maintain that leading position, and sometimes at all costs.

 

The rise of the supranational corporate

 

Globalisation and the homogenisation of culture has created the perfect petri dish for the growth of pan-global corporates. Historically, the challenge of vast geographic distances and multiple time-zones have been mitigated through the advancement of technology, and culturally, the world’s population is becoming more similar, global brands (e.g. Coca Cola is sold in over 200 countries, McDonalds operates in over 120 countries) and common interests and activities are standardising how people consume. Concurrently, the technology landscape has transformed completely, meaning that we now live in an ultra-connected, immediate world where we have borderless technology.

The supranational tech-corporates have harnessed the increasing homogeneity to offer a uniform solution that meets the consumers ‘just-in-time’ mentality. These technology focused companies have a unique position, as geographic nomads, operating above government and substantially more nimble approach than government. The regulatory and legislative environment is struggling to adapt to the pace of change and these pan-global companies can take advantage of the lethargy of politics and regulation.

Simon Heath commented: “The CEOs of these corporates often operate in an aura of infallibility without appropriate challenge. The regulatory framework is inadequate and these global corporates can appear to have disdain for legislation, often seeing fines as a cost of maintaining market dominance.”

 

How does this impact M&A strategies?

 

Protectionism is at the heart of big company strategy. Maintaining market position. Defending against new substitute or competitive products and services. M&A provides a vehicle to deliver against these themes. The challenge for government is how to have effective legislation to prevent anti-competitive practices.

Simply put, today’s legislation is not fit for purpose. In general, it is focused on market share i.e. does an acquisition reduce consumer choice. Whilst that is fine and would prevent Tesco wanting to buy Sainsburys, if Tesco wanted to buy an upcoming and innovative drone food delivery company, which given it is nascent market would be small, the deal would likely be waved through. Yet, that drone company could be the future of shopping and be the future competitor to Tesco.

In the UK, the CMA is the main regulator for acquisitions, assessing the market share of a combined group and whether that would be detrimental to consumers. Anti-trust lawyers are often appointed to assess the definition of a market and if acting for the buyer, will want to define the market as broadly as possible to mitigate the potential concerns of the CMA. The definition of the market is often a disputable but intrinsically important element of competition law.

 

Illustrations of anti-competition and Killer Acquisitions

 

Most Killer Acquisitions never become a headline brand or name. That’s the point. Hoover up the new technology and either integrate it or shut it down. Prevent the competition. Large technology groups with almost ubiquitous wealth have acquired hundreds of companies, stifling innovation. So much so, that in July 2021, President Biden signed an executive order to explore the negative impacts of Killer Acquisitions. 

To illustrate the approach of larger groups to M&A, some examples of anti-competitive or market dominant positions are set out below.

 

Example 1:  Google (anti-competitive)

  • Strong argument that Google’s almost monopolistic position for online advertising potentially produces anti-competitive practices.
  • However does Google consider the fines it amasses as just a cost of doing business and more than offset by improved revenues?
    • September 2024: EU court’s €2.4bn fine for abusing its market dominance for shopping comparison sector relating to the British business, Foundem, a complaint raised in 2009.
    • This follows 2017 €2.4bn fine, 2018 €4.3bn fine, 2019: €1.5bn from the EU Commission on anti-competitive practices. The last fine was subsequently overturned.

 

Example 2:  Facebook (Killer Acquisitions)

  • Facebook acquired Whatsapp in 2014 for $19 billion. Whatsapp’s revenue in that year was £10 million, paying 1900 x Revenue for the business. Two years earlier, it acquired Instagram for $2bn. Insta had no revenue. 
  • Whilst these businesses weren’t acquired to be killed off, they were acquired to prevent competition. Given both were early stage businesses, Facebook recognised the threat to their business model and wanted to eliminate the competition before it commenced offering disproportionate pricing that only large corporates can afford.  

 

Example 3:  Zomato (Inadequate legislation)

  • Zomato acquired UberEats in India for $350m to prevent UberEats from devouring Zomato’s dominant market position. The acquisition fell beneath India’s competition requirements despite there only being three material food e-delivery companies in the country, reinforcing Zomato’s market position.

 

Simon Heath added  “There is an undoubted requirement to have checks and balances in place to manage these pan-global corporates as there is a potential for them, if they haven’t already, to have carte blanche for their activities. Government response is too slow, inadequate and unsatisfactory to control these organisations. Undoubtedly global organisations are necessary to meet our ever increasing consumer needs but these needs have to be wrapped in a fair framework to enable younger, more innovative businesses to thrive to ensure, we as the consumer get choice at a fair price.”