Banning corporate mergers and acquisitions
Let me start with a note of clarification. I am not trying to send my mother into early retirement. (She has spent the last 20+ years as a strategy lecturer at the Ross School of Business at the University of Michigan, where one of her main courses is Mergers & Acquisitions.)
This started as most ideas do for me: reading an article. Benedict Evans had an interesting argument for why antitrust and regulation may not be the panacea many of us in the anti-big tech camp might be hoping for.
Then, a new idea suddenly dawned on me: what if the problem wasn’t companies getting too big, but the means by which they get there? What if corporations were not allowed to acquire or merge with other companies? That sent me down the rabbit hole that ends up with this post.
First, let’s spell out the idea. What does banning corporate M&A mean?
A business cannot be sold or merge with another business except in the event of a declared bankruptcy. A business can be bought by another person, but if a person happens to own multiple businesses, they must operate completely independently of each other.
Next, let’s disclose the caveats.
This is very anti-free market. Anti-capitalist. The idea of limiting the free market in this fundamental way will be heretical to those that believe the capitalist engine must run largely unencumbered.
This idea may very well be dumb. Even if it is, and someone points out why soon after I post this, I at least wanted to think through what some of the positive effects may be.
This is unrealistic. It’s neither economically nor politically palatable and the actual means of implementation may prove insurmountable. But that doesn’t mean we can’t engage with the thought experiment.
Now, let’s get to the potential effects.
If a business that started had to grow completely organically, it would make conglomerates like those of FAANG (Facebook, Apple, Amazon, Netflix, Google) much harder to create. Google would never have been able to acquire the backbone of AdSense, Google Maps, Android, among other Google services. Facebook would not have Instagram, WhatsApp, or many of the key features on Facebook itself or its advertising / analytics capabilities. Amazon would not have Whole Foods, Zappos, Alexa, or much of the basic infrastructure for Amazon Web Services, Audible, or the Kindle.
Of course, one may argue that had they not been able to acquire the services, they could have spent the money to build out the capabilities internally. Sure. But the existing services had a head start and would have been fighting competitively against those efforts instead of getting absorbed in support of them.
Jeff Bezos made a pretty impressive case for large companies. I’m not arguing against the creation of large companies. I’m arguing for their organic creation instead of inorganic growth through M&A.
Might this concentrate even more power in founders like Jeff Bezos and Mark Zuckerberg? Instead of acquiring through their companies, perhaps they would take their massive wealth and acquire these companies as individuals instead. I highly doubt this. First, it’s unlikely they would have had this multi-billion level of wealth without the accretive value of many of their acquisitions. Second, without being able to fund their purchase through their companies, they would have to create liquidity in order to fund their acquisitions. They would have to do this with no potential reward in terms of the share price of their existing company since they would operate independently. Instead of a typical Amazon acquisition, this structure would mirror Jeff Bezos’ adventures with space travel, where he personally funds Blue Origin by selling $1 billion in Amazon stock each year.
What about how companies are even funded?
Private equity would no longer be able to exist in the same way. They could no longer do the classic private equity rollup, where they take multiple small companies and create a larger one out of them. They could still buy companies out of bankruptcy and turn them around. But, with the prospect of selling the company on to another company taken away, there would be a renewed focus on the long-term fundamentals and prospects of the business.
Venture capital, losing the most typical exit strategy of an acquisition, would have to zero in on an initial public offering (IPO), share buybacks, or selling to wealthy individuals as an exit. This would almost assuredly change the types of businesses that VCs fund and even allow them to get more creative on structures (e.g. profit or revenue-sharing).
These feel like very positive effects on the funding ecosystem. Plus, as I think my mother would agree with, the majority of mergers & acquisitions don’t even work out as intended. Synergies often go unrealized. So, maybe I’m saving companies from themselves. Of course, there are probably other effects I’m overlooking, and hoping some of you will point them out. But, maybe, just maybe, stopping businesses from buying other businesses might be a step towards making capitalism work for us instead of vice versa.