Big Tech’s M&A Freeze: A New Era of Regulatory Scrutiny
While the tech sector is buzzing with excitement over artificial intelligence, the reality of the market is quite different. Mergers and acquisitions (M&A) activity has declined significantly, driven by a wave of regulatory scrutiny under the Biden administration. Big tech companies are facing an unprecedented level of scrutiny from the Federal Trade Commission (FTC) and the Justice Department (DOJ), leading many to abandon planned acquisitions.
Key Takeaways:
- Big tech M&A is in a deep freeze. The value of tech deals has plummeted since 2021, with a significant drop in completed transactions.
- Regulators are cracking down on Big Tech. The FTC and DOJ have made it clear that they will aggressively scrutinize any potential deals, particularly those by the biggest players in the industry.
- New approaches to acquisition. Google’s move to hire the founders of Character.AI is a new strategy, bypassing traditional acquisitions and instead entering into licensing deals.
- The regulatory landscape is uncertain. The upcoming presidential election could lead to significant changes in antitrust policy, but both major parties have shown increasing concerns about the power of Big Tech.
- Private equity is thriving. While big tech deals are stagnant, private equity investors are increasingly active in the market, swooping up companies in sectors where regulatory scrutiny is less intense.
A Hostile Environment for Big Tech Deals
The landscape for tech acquisitions has shifted dramatically in recent years. The value of tech transactions has plummeted, dropping from a peak of $1.5 trillion in 2021 to $544 billion in 2023. This trend is expected to continue for the rest of 2024.
The primary reason for this decline is the intensified antitrust scrutiny of Big Tech. The Biden administration has made it clear that it will be aggressive in scrutinizing mergers and acquisitions. This shift has forced Big Tech companies like Amazon and Adobe to abandon deals, even those involving smaller startups.
For example, Amazon abandoned its $1.7 billion purchase of iRobot after the FTC and European regulators raised concerns about the deal’s potential for anti-competitive behaviour. Similarly, Adobe walked away from its $20 billion acquisition of design software startup Figma, citing the lack of “a clear path to receive necessary regulatory approvals”.
Shifting Strategies: Focusing on Talent and Licensing Deals
Big Tech companies are adapting to this new environment and are exploring alternative strategies. Instead of traditional acquisitions, some companies are increasingly turning to talent acquisition (acqui-hires). Google, for instance, has adopted the strategy of licensing technology, rather than simply acquiring startups outright.
One such example is Character.AI, a startup developing generative AI models for conversational AI. Google entered into a licensing deal with Character.AI, keeping the startup alive and gaining access to its technology, while avoiding the potential scrutiny a full-scale acquisition might have brought.
Private Equity Steps in to Fill the Void
While Big Tech deals are struggling, private equity investors are thriving. The private equity industry is taking advantage of the uncertainty in the market and the relatively lower regulatory scrutiny for private companies.
In recent months, we have seen private equity firms like BlackRock and Permira successfully acquiring major companies like Preqin and Squarespace, respectively. These deals highlight how the private equity market is increasingly filling the void left by Big Tech’s cautious approach to M&A.
The Future of Tech M&A: Uncertainty Reigns
The future of tech M&A remains uncertain. The upcoming US presidential election presents a potential turning point in antitrust policy. While the regulatory environment under a Trump administration could be less hostile to big tech, we are likely to see continued scrutiny. Even with a new administration, the current attention to antitrust concerns suggests that the scrutiny of tech deals will linger.
Moving Beyond M&A: A New Era for Big Tech Innovation?
While Big Tech faces headwinds in M&A, it is important to recognize that innovation remains a hallmark of the industry. Companies like Google are actively creating partnerships and building licensing deals to gain access to promising new technologies. This shift in strategy could ultimately lead to more diversified innovation across the tech sector.
Rather than relying solely on acquisitions, Big Tech companies are increasingly focusing on internal R&D, partnerships, and talent acquisition. This shift is driven by a combination of regulatory pressure, a desire for more strategic acquisitions, and a focus on internal development of AI and other cutting-edge technologies.
Finding the Right Balance: Innovation and Competition
Ultimately, navigating the current regulatory landscape is essential for both Big Tech companies and the broader innovation landscape. While the focus on antitrust concerns is understandable, it’s crucial to find a balance. Striking a sensible middle ground will allow innovation, promote competition, and ultimately benefit consumers. Only time will tell how the antitrust landscape evolves, but it’s clear that Big Tech M&A is taking a significantly different path than it did just a few years ago.
