February 12, 2020

Breakingviews: Tech deal review puts VCs in regulatory purgatory

by Breakingviews.

Silicon Valley is being pushed further into regulatory purgatory. Alphabet, Amazon and Facebook are among firms that will be providing data on tiny acquisitions to the U.S. Federal Trade Commission under new orders. Transformative deals are also worrying, though the ad hoc scrutiny of tech seems biased. It is the next impediment to venture capital firms seeking to exit investments.

Watchdogs are signaling to Big Tech that no deal is safe. On Tuesday, the FTC issued orders to five firms – Apple, Microsoft, Facebook, Amazon and Alphabet – to report deals that fell under antitrust thresholds, or transactions valued below $90 million. The FTC and the Justice Department, along with state attorneys general, were already looking at big tech firms for anti-competitive behavior.

A sharper lens on smaller deals is warranted. These particular tech companies are growing in both size and influence through acquisitions big and small. Alphabet did about 300 deals in the past decade. Microsoft has done about 175, and Amazon has more than 120 transactions. Facebook and Apple each have acquired more than 80 firms. Apple may be one of the most vulnerable under the FTC review. Last May, Chief Executive Tim Cook told CNBC that in the previous six months alone, the company had acquired about two dozen small firms.

Regulators worry that taking out would-be competitors at an early stage have helped them reach dominance. Other industries also have similar dynamics, though with the exception of Edgewell Personal Care’s scrapped acquisition of startup Harry’s, deals have largely skated by. That could change if the FTC broadens out its focus on acquisitions of early stage companies, not just tech ones.

Venture capitalists could suffer. While the resource-strapped FTC will likely move slowly given the amount of data it is expected to receive, Silicon Valley depends on asset sales for investment returns. About 60% of startups say their long-term goal is to sell to another company, according to a 2020 report by Silicon Valley Bank released on Tuesday. Their money, like deals, will be stuck in the abyss.

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