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Scrutiny from federal regulators will likely have a chilling effect on mega deals from some of the world’s most valuable companies.
While a bulk of Wall Street analysts have said that possible antitrust probes into Facebook, Apple, Google’s parent company Alphabet and Amazon won’t result in actual breakups, it could hurt their ability and appetite to buy up other companies.
“The biggest impact may be that future acquisitions of size will be much harder to do, though we believe most investors were already assuming this to be the case,” Raymond James internet analyst Aaron Kessler said in a note to clients this week. “Antitrust investigations into top tech names present a risk that is very likely to persist even in the event of a Presidential administration changeover following the 2020 election.”
The bulk of mergers don’t need approval from the Department of Justice or Federal Trade Commission due to their size. Although there are exemptions, the antitrust watchdogs only require companies to report deals valued at more than $90 million. Regardless, either agency “can take legal action to block deals that it believes would substantially lessen competition,” according to the FTC’s site.
Technology stocks got pummeled this week after reports that the Justice Department is preparing an antitrust probe of Google. According to Reuters, the DOJ has been given jurisdiction over Apple’s practices as part of a broad review into tech companies’ behavior. Meanwhile the Federal Trade Commission has reportedly taken over probes into Amazon and Facebook‘s effects on competition. Shares of Facebook and Alphabet alone wiped off a total $130 billion in market value Monday, sending the Nasdaq into correction territory.
Experts are anticipating fewer multi-billion-dollar deals from these firms in the years it could take to resolve antitrust complaints. While they are only a fraction of technology M&A, Loup Ventures Gene Munster said deals worth more than $20 billion “will be more difficult to get approved.” Otherwise, Munster said the heightened regulatory scrutiny will have little impact on the tech giants in the long run.
Other Wall Street analysts told clients that while more scrutiny is a drag on stock prices, it likely won’t end up in real split ups. Baird senior research analyst Colin Sebastian told clients that “breaking up is hard… and unlikely” and the likelihood of “nuclear options” such as forced break-ups or exposing search or feed algorithms, remains low.
These tech names haven’t shied away from big acquisitions, historically. Apple paid $18 billion last year for Toshiba Memory, while Microsoft spent $29 billion to buy LinkedIn in 2016. Facebook’s biggest check ever was $22 billion for WhatsApp in 2014, according to data from PitchBook.
Deal sizes began climbing in 2012, the year Alphabet bought Chicago-based Motorola Mobility for $13 billion. The record-setting year was 2014, with a total 138 deals worth more than $46 billion from Microsoft, Amazon, Apple, Facebook, Alphabet and their subsidiaries. Last year, the five tech giants spent roughly $30 billion total in M&A.
Heading into the second half of 2019, the four big tech giants have spent a total of $1 billion, according to PitchBook. Apple has sealed the biggest one so far with the acquisition of Dialog Semiconductor for $600 million. Alphabet has spent a mere $60 million in 2019, while Amazon has spent $347 million, according to PitchBook.
Still, tech is under pressure from both sides of the political aisle heading into a 2020 presidential election. Larry Downes, project director at the Georgetown Center for Business and Public Policy, said mergers are as much a publicity calculus as they are a legal one.
“Candidates are always looking for a bad guy and tech has become a convenient target,” said Downes, co-author of “Pivot to the Future: Discovering Value and Creating Growth in a Disrupted World.” “You’ve got candidates that are going to rail against them — I suspect they would weigh that even more heavily than the delay and the cost of doing a big transaction.”
Senator and presidential candidate Elizabeth Warren has been arguably the most vocal Democrat on the issue, and in March unveiled the clearest proposal yet to limit the growth of Silicon Valley. Her campaign sponsored a billboard in San Francisco that said in all capital letters: “Break Up Big Tech.” On the other side of the political spectrum, President Trump has criticized Amazon CEO Jeff Bezos and argued that social media platforms look to silence conservative pundits. Last summer, the president told Bloomberg News that Facebook, Google and Amazon may be in a “very antitrust situation,” but did not go as far as saying they should be broken up.
“Big tech is in the doghouse right now, and if they really wanted to do a big deal they’d have to prepare for the reality that it would get a ton of pushback,” Downes said.
(L to R) Jeff Bezos, chief executive officer of Amazon; Larry Page, chief executive officer of Alphabet; Sheryl Sandberg, chief operating officer of Facebook; then-Vice President-elect Mike Pence and then-President-elect Donald Trump meet at Trump Tower, December 14, 2016.
From a legal standpoint, some Wall Street analysts argue that Democrats’ consumer-protection arguments might not have teeth. Baird analyst Colin Sebastian highlighted the fact that these services are free and said the growth of Facebook and Instagram, and to a lesser extent Amazon, “created more competition for Google in recent years, would seem to dilute arguments that the ‘duopoly’ is unfriendly to consumers.”
Given that services provided by Facebook, Google and Amazon are either free or “have created more efficient markets, it is difficult to argue and win a consumer harm argument,” MoffettNathanson said in note to clients, adding that they don’t anticipate “meaningful antitrust enforcement action in the near term.”
The Microsoft effect
Regardless of the outcome, these legal battles have historically caused headaches for tech companies. Microsoft spent the better part of a decade fighting an antitrust case in the early 2000s. In the 1970s when IBM was the clear leader in the computer business, it fought its own antitrust case, which was ultimately settled. Intel and Qualcomm have faced similar DOJ scrutiny. Downes said these companies “suffered tremendously” in addition to the legal costs.
“That litigation, and the possibility that they would lose, led those companies to make significant changes to their business practices and to avoid certain M&A activity that they might have pursued during that time or afterwards,” he said.
But smaller deals by tech companies may not immediately catch the attention of regulators. Facebook bought Instagram for $1 billion in 2012, while Google acquired YouTube in 2006 for $1.65 billion. At the time, those deals didn’t raise flags for regulators because the smaller firms didn’t compete “head-to-head with the acquirer,” according to Douglas Melamed, Stanford University Law School professor and former U.S. Department of Justice acting assistant attorney general in charge of the antitrust division.
“You’re asking the agencies to project whether the acquisition will nip a competitive threat in the bud, or perhaps be anti-competitive,” Melamed told CNBC’s “Squawk on the Street” Wednesday. “That’s a very difficult enterprise so even with some adjustments in antitrust law, it is not clear how many acquisitions of that type would be prohibited.”