Any young postgraduate student coming from a former communist country to the West to research economy or finance in last several decades, was destined to be stunned finding that the focus of the academy and the finance industry was much more on the “cool” concept of Mergers and Acquisitions than on economic value creation, growth, or on the infamous invisible hand of the market forces. This gradual switch of the focus to pure financialization of the economy coincided with the corporate elites transferring their factories and inadvertently (or not) the know-how to at a time, just beginning to rise economically, China.
Trying as much as one can, it is difficult to see a great difference between the failed communist central planning model and monopolizing entire sectors through mergers & acquisitions, where the dominant player was either crushing the new entrants, or was buying and gobbling them up within its own central planning system. The entire industries such as pharmaceuticals, food production, retail, media, banking, IT, were consolidated through mergers and acquisitions into oligopolies of few big companies.
The most illustrative example for new industries at that time was Microsoft who through buying out or crashing all competition became a monopoly of the operating software in USA and globally, gobbling up entire start-up generations, killing competition and innovation. The modus operandi can be seen on the example of two applications, that it bought in 2015. Wunderlist and Sunrise that had significant early success in Silicon Valley introducing new unrivaled technology more advanced than Microsoft’s office app were both consequently scrapped by Microsoft who only kept some of the best engineers from both companies to disable any new start-ups.
The examples that followed are all too well known, Facebook, Amazon, Google, Apple – with their killer acquisitions that enable incumbents to maintain market share by burying, rather than beating the competition and start-ups at efficiency, innovation, new technologies. And all this at the expense of the free market forces and competition, and, ultimately, better and cheaper services and products for the consumer. Internal Facebook emails disclosed during the US congressional hearing, show that Instagram, subsequently bought by Facebook for $1billion in 2012, was described as a ‘threat’ to its unsuccessful Facebook Camera product. In the emails Zuckerberg admits to its inner circle that the Facebook approach towards mergers and acquisitions is to “neutralize a competitor”. And this was conducted in a hostile manner, with Facebook facing allegations of threatening Instagram founder Kevin Systrom with applying the “destroy mode” in case company tries to block Facebook’s acquisition.
Similarly, the empirical evidence of acquisitions in pharmaceutical industry shows forced discontinuation of the development of targets’ innovation projects in order to preempt future competition, again to the detriment of market forces and the choice and price competition for the consumers. Tracking detailed project-level development histories of more than 35,000 drug projects, Cunningham, et.al. (2018) shows theoretically and empirically that once acquired, the drug companies and the monopoly buyer are less likely to continue the development of drugs that were already in progress. These findings have enormous implications for antitrust policy, startups, exit, and the process of creative destruction.
The research confirms the monopolization of the US sectors and through multinational companies. Monopolization of sectors of entire global economy in many industries where fewer firms provide goods and services.
The 2016 report by US President’s Council of Economic Advisers (CEA) found that U.S. corporate mergers and acquisitions totaled $2.5 trillion in 2015 the highest amount on record. The CEA study also shows that at the same time the number of startups dropped by 50%. The conclusion was that barriers to entry have risen and the competition is decreasing in many economic sectors, “making consumers worse off since the dominant firms use their market power to raise prices, lower quality for consumers, or block entry of start-ups.”
The pretense of introduction of market forces within such organizational giants, were made with attempts to setup cost-centers where different parts of the Leviathan were spending enormous amount of time and resources on charging and invoicing each other to death for internal services with prices picked up from blue sky that had nothing to do with the market forces. It is internal planned economy that by the size of the giant monopoly translates to entire sectors being driven with centrally planned economic system, thus destined to fail once the outside income dries up.
The big private corporate giants avoided the collapse of such centrally planned internal economies by milking the cornered market through its monopoly powers thus covering up internal mistakes. In case they could not cover, there were always enough commercial banks to lend hand. Or, central banks in times of great crisis, to print fiat money to help keep the Leviathans alive, and pass on the costs on US tax-payers and through the dollar as a reserve currency to all tax payers around the world.
However, following the 2008 crisis and consequent failure to recover since then, the doubts that appeared internationally in the infallibility of the dollar, this was becoming more difficult to do. Hence, the first time in history the greater part of the costs had to be borne by the US taxpayers, resulting since then in ever increasing inequality that eventually brought Trump to power as a protest vote by the American people who saw that the system was going nowhere.
But how it is done, one might ask, since there are supposed to be anti-monopoly laws and regulations, independent regulatory agencies, right? The article Competition is Dying quotes the economist John Kwoka of Northeastern University that “antitrust laws, policy and practice … have been too permissive”. The regulatory agencies in all sectors chronically suffer from lack of accountability and oversight since they are not elected, and have been shown to be very prone to capture by the exact same monopoly powers they are supposed to regulate. The principle of revolving doors between the top managers of the regulatory agencies and large companies is well documented and its continuous existence is well-oiled and alive in practice. Hence, the lack of regulatory will to enforce and curb the monopolization of entire markets under one or few dominant players, demand new investigative tools that ensure any claimed efficiencies are tied to the specific transaction in question, OECD proposes.
However, any new instruments, tools for better measuring falsely claimed efficiencies of the acquisitions, the harm to the competition, innovation and customers from mergers and acquisitions will continue to be in vain, if the roots of the problem are not addressed.
This is the lack of accountability and citizens’ or consumers’ oversight of independent regulatory agencies, that have over the last decades taken over the mandate from elected ministries, whose policies, at least in theory, could be changed by voters. But all likelihood is that the current economic system in the West, where oligopoly of the corporate world merged with the political elites – is too entrenched and will resist any change – allowing the big monopolies to continue to kill not only innovation and competition but the mom & pop and High/Main street small business, in essence, destroying the social fabric of the nation.
Only this time there will be no more surprised researchers searching in vain for the infamous hand of the free markets in the US, since they now know that this is only a semantic while in practice there is only a corrupt crony monopolistic capture of the entire economy and financial flows by a system that is obliviously stumbling towards the cliff. The world has survived for millennia with more or less planned economies, before the free market and capitalism became the predominant model, so it will have to find and will find a new, more fair and equitable model to organize society and economy. Just don’t call the current Western model of governance free market capitalism. Call it what it is: A corrupt planned monopoly run by a small unelected oligarchy, and the nations are starting to see through the veil that is getting thinner with every passing day.
Amy C. Madl Killing Innovation?: Antitrust Implications of Killer Acquisitions, Yale Journal on Regulation. September 19, 2020
Richard Waters in Financial Times February 13 2020 Big Tech’s ‘buy and kill’ tactics come under scrutiny Companies such as Microsoft have been acquiring their most threatening competitors for decades
2016 Economic Report of the US President’s Council of Economic Advisors
Killer Acquisitions – Colleen Cunningham, Florian Ederer, Song Ma
Start-ups, Killer Acquisitions and Merger Control – Background Note, OECD Secretariat, 10-12 June 2020
Facebook accused of ‘copy, acquire and kill’ tactics in US antitrust hearing. By Samuel Stolton | EURACTIV.com. Jul 30, 2020
Robert J. Samuelson Competition is dying! Washington Post. 2018