Over the past few years, lawmakers from across the political spectrum have lined up to condemn mergers and acquisitions. For example, Senator Amy Klobuchar (D-MN), Chair of the Senate Judiciary’s Antitrust Subcommittee, warned, “today, we’re increasingly seeing companies choose to buy their rivals rather than compete.” Senator Tom Cotton (R-AK) echoed Senator Klobuchar’s concerns, claiming, “Big tech firms have bought up rivals to crush their competition, expand their monopolistic market share, and to harm working Americans.”
While lawmakers line up to criticize mergers and acquisitions, a new report from NERA Economic Consulting highlights the numerous ways they benefit consumers and enhance consumer welfare.
The report should serve as a clear warning to lawmakers in Washington about the dangers of reforming the rules that govern merger and acquisition rules in the United States.
Congress is currently considering several proposals that would rewrite America’s merger rules. Most notably, the Platform Competition and Opportunity Act (PCOA), which is under consideration in the House and Senate, would prohibit big tech companies from acquiring companies that provide similar services. PCOA would also require certain covered companies to prove that any proposed merger is not anti-competitive, a major shift in establishing the burden of proof.
In addition, the more punitive Ending Platform Monopolies Act would structurally separate big tech companies and unwind previous mergers. Finally, lawmakers have also proposed increasing merger fees that would see the cost of pursuing mergers and acquisitions raised significantly, especially for multibillion-dollar deals.
NERA’s report also highlights the dangers of new proposals to small and medium sized enterprises (SMEs). As a result of mergers and acquisitions, tech giants provide SMEs with a range of “free ad valued services that allow small-to-medium businesses to reach millions of customers at minimal cost and scale their business.” If Congress rewrites merger and acquisition rules, however, it is likely these free services would be lost, raising prices for both SMEs and ultimately consumers.
One of the principal dangers of rewriting rules governing mergers and acquisitions is it would depress innovation, particularly in the tech field, rather than unleash it, as proponents of reform believe. A 2020 survey from Bain and Company revealed that 58 percent of start-ups expect to be acquired by incumbents, and acquisition is a principal incentive for founding start-ups. Bain and Company also found that mergers and acquisitions incentivize entrepreneurs to create start-ups, exit, and then “pour money into the next wave of deals,” creating an ecosystem of creation and acquisition that delivers new and innovative products for consumers.
NERA’s recent report also emphasizes this danger, demonstrating “venture capital investment in start-up firms would be reduced by 12 percent” due to the elimination of “viable exit options.”
Without the prospect of acquisitions, entrepreneurs will be disincentivized from founding future start-ups that deliver innovative goods and services for consumers.
The desire to reform merger and acquisition rules also ignores the reality that they can lower prices for consumers. In quarter three of 1993, the average airfare in the United States-adjusted for 2021 inflation, was $517. By quarter three of 2021, however, the average cost of airfare had fallen to just $314. The substantial decline in price for airfares occurred after a period of consolidation that allowed the industry to “produce substantial and credible efficiencies” and “cost savings in airport operations, information technology, supply chain economics, and fleet optimization.” The result of these lower prices has been substantially more Americans flying since the 1990s.
While public hostility toward big tech may be growing, it should not serve as a justification for lawmakers in Washington to pass legislation that ultimately harms consumers. Unfortunately, as NERA’s economic experts and countless others have warned, current proposals to rewrite America’s antitrust laws will do just that and raise the costs of goods and services for every American. With inflation reaching 7.9% in February 2022, Washington’s timing couldn’t have been worse.
This was published in The Economic Standard.