One of the things I have been saying about disruption is that when it potentially arises what potentially disrupted incumbents will try and do is acquire the disruptive entrant rather than be disrupted by them. Consequently, incumbents have an important tool in their arsenal that can be deployed if they face existent threats. This was backed up by my own research with Matt Marx and David Hsu.
In a long post, Mark Cuban (Shark and billionare) says much the same thing:
When private companies can’t or won’t go public, they become easy pickings for their competitors to buy them.
In my not so humble opinion, this is the ultimate productivity and investment killer in the USA today.
One of the reasons today’s 3700 public companies hoard cash is because they know that rather than investing in uncertain R&D and productivity enhancements to protect them against the “Innovators Dilemma”, upstart companies that could disrupt them and their industries, they can simply buy those companies. They recognize that the current conventional wisdom for those disrupters is to stay private. Which means that with just a minuscule number of exceptions, their investors will be crying for them to be acquired. Why would a company invest in the uncertainty of R&D and other innovative organic options when there are hundred of billions of dollars of dead money tied up in ground breaking companies, all looking for liquidity ? In this age of stay private, it makes no sense to build when you can buy.
- When you buy, you not only have far greater value certainty vs R&D, but you also eliminate a competitor. And you may get the additional benefit of paying for the entire investment through job cuts
It is undeniably destructive to our economy and future when many of our most innovative and exciting companies are bought by their competition. It is a “Precognitive Anti-Trust Violation” I know that sounds laughable in so many ways. But at its heart, it’s true. It’s also incredibly destructive to our standing in the world and our economy.
He is making a broader point that IPOs have fallen out of favour with start-ups either because founders don’t want to lose control or because of higher regulatory burden and a consequence of that is acquisitions are an easier exit path. Cuban sees this as suppressing future competition.
This is certainly potentially the case. Instagram may have presented future competition to Facebook had it not been acquired although Snapchat and Twitter (for now) remain in that boat. I have a paper coming out in the Canadian Competition Law Review that expands on this notion and asks antitrust authorities to beware of simply accepting that disruption is a thing and competition is inevitable (here is the working paper version — see also this popular piece on mergers and antitrust in disruptive industries). But I am not convinced it is just a mechanism for privately held entrants. Even if they are public mergers can happen. They may be a little more complex but if the returns are there those complexities can be overcome.
In terms of impact on antitrust, I do not believe that antitrust authorities should get into the habit of preventing such precog (to use the Minority Report term) acquisitions. For starters, they are an important exit strategy and so drive entry in the first place. So I am not sure it is as “incredibly destructive” as Cuban suggests. In addition, it is far from clear that antitrust authorities have countervailing precog capabilities that will allow them to intervene and not make errors. What is better is that they have a consistent policy so that uncertainty is reduced. That may mean a bright line on investigations should there be a current increase in concentration above a certain threshold or if the acquiring firm has more than x percent of a market.