The FTC's focus on 'small' acquisitions by tech companies is the first shot in a big new battle (GOOG, AAPL, MSFT, AMZN, FB)

Joe Simons

The Federal Trade Commission's move to probe past acquisitions by the big tech firms is one more regulatory worry for those companies.
The agency plans to study the "hundreds" of deals the companies have made over the last 10 years that the companies hadn't previously had to report to it.
There's growing concern inside and outside the agency that the companies have used such deals to quash nascent competitors.
As a result of the study, the FTC could force the companies to unwind some of their past purchases or submit prospective ones for its review, legal experts said.
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In recent years, the big tech companies have made dozens of acquisitions that have largely flown under the radar screen, because the firms they acquired were relatively small.

Those acquisitions are now on the radar screen of regulators, most notably the Federal Trade Commission, which announced on Tuesday that it was going to be examining smaller-scale purchases made in the past by Microsoft, Google, Facebook, and Amazon. That's not a good sign for those companies. The FTC's study could result in much greater scrutiny of any future purchases of small startups that they make or in the agency forcing them to undo some of their past acquisitions.

"I think this is a first step that could lead to enforcement action. It could lead to new policies," said Doug Melamed, a professor of the practice of law at Stanford Law School.

US antitrust law — under the Hart Scott Rodino Act — requires larger companies that plan to make acquisitions over a certain size to notify antitrust authorities at the FTC and the Department of Justice. Regulatory authorities at those agencies often review those purchases and, in some cases — such as the attempt by the parent company of Schick razors to buy startup shaving company Harry's — they move to block them.

But companies have no duty to notify regulators about smaller acquisitions. The assumption is that such transactions don't generally affect competition in a significant way and that regulators should focus their time and resources on the bigger deals.

Some worry that small acquisitions could cause big problems

Some experts and market observers, though, have started to question that assumption. In the tech industry, there are relatively few large-scale deals that are subject to government review. But there are lots of smaller deals each year that go unreported to regulators. In a conference call with reporters, FTC chairman Joe Simons estimated that the number of purchases the big five companies have made over the last decade that weren't previously disclosed to his agency numbers in the hundreds.

At least some of those deals could have affected competition by allowing the dominant firms to extinguish nascent, would-be competitors. Just such concerns were raised when Facebook two years ago snapped up tbh, a fledgling social media app that was targeted at teens. Facebook shut down tbh less than a year after acquiring it.

"There's a huge question here of the shadow that the big-tech firms cast across Silicon Valley or across the startup world," Melamed said.

The study comes amid growing scrutiny of the tech giants. The European Union has already hit Alphabet with three fines of more than a billion dollars each for anti-competitive actions and has begun probes into Apple, Facebook, and Amazon. Meanwhile in the US, federal and state regulators have launched antitrust probes into those four companies. The FTC's action is likely a part of that broader inquiry into and reassessment of the power of the tech companies, legal experts told Business Insider.

But the questions go beyond Silicon Valley. In a statement that accompanied the FTC's announcement of its study, the agency's two Democratic commissioners urged it to look at the impact smaller-scale acquisitions have had in industries beyond tech. The dialysis industry has consolidated into two major national players, and research indicates the two companies gain power through making numerous acquisitions that were below reporting thresholds.

"Similar patterns of 'stealth consolidation' have been observed in pharmaceutical and hospital markets," commissioners Christine Wilson and Rohit Chopra said in their statement. "We urge the Commission to consider similar ... studies across other industries to ensure that we have a more complete understanding about the competitive effects of non-reportable mergers writ large."

The FTC has plenty of power

While the study represents the agency's first broad look at small-scale mergers in the tech industry, it's not completely unprecedented. The FTC has wide-ranging authority under the Federal Trade Commission Act to conduct studies into how industries or businesses operate, and it has used that authority in the past to examine mergers and competition in particular industries.

There's good reason for the agency to conduct this particular study, the legal experts said. Not a lot is known about how all the small acquisitions made by the tech giants are affecting competition in the industry, they said.

While there's growing concern about that the big companies are quashing competition, "there hasn't been, as yet, great studies and great data to demonstrate something like that is going on," said Prasad Krishnamurthy, a professor at the University of California-Berkeley's law school. He continued: "There is a dearth of research on the topic."

It's too early to know what the study will find or how the agency or other policymakers will respond to it. But one potential outcome could be that the FTC forces the big tech firms to undo some of their previous small-scale mergers. Simons himself suggested on the call that the agency could head in that direction as part of its inquiry.

The agency has the authority to undo mergers and acquisitions after the fact — even ones that weren't required to be reported to it. It did just that late last year when it ordered the dissolution of a merger between two prosthetic knee companies, finding that their combination was anticompetitive. The merger had taken place two years earlier and had not been subject to Hart-Scott-Rodino reporting requirements.

Unwinding mergers after the fact is "not widely done, for obvious reasons, but it has been done
and they have the power to do it," said Donald Polden, a professor at Santa Clara University School of Law.

The FTC could also step up its scrutiny over small-scale acquisitions in the future, whether by individual firms or across the board. The latter, though, likely would require Congress to update Hart-Scott-Rodino, Polden said.

Krishnamurthy is hopeful that one of the outcomes of the study will be that the big tech companies have to start notifying regulators even when they make these kinds of smaller acquisitions, because of the general worry about their impact on competition.

"This is not a concern that is going to go away," he said.

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