T he United States is home to the world’s largest and most innovative companies because we celebrate entrepreneurship. Americans tend to believe that good ideas can become great companies through a lot of hard work, a little luck, and without the government’s permission.
But the Biden administration seems to think that bureaucrats know how to grow the economy better than entrepreneurs.
A recent example of this came by way of Jon Stewart’s Daily Show interview of Federal Trade Commission chair Lina Khan. Stewart raised the topic of the FTC’s antitrust lawsuit against Meta that, if successful, would force the platform to sell off photo app Instagram and messaging app WhatsApp.
Stewart posited that Facebook would regard its 2012 acquisition of Instagram as “. . . a sign of our success. . . . We make bets on certain companies, and we turn those into successes.” Khan disagreed, saying “one key tenant of the anti-monopoly laws is that you can’t go out and buy one of your biggest competitors.”
Any fair observer would conclude that Facebook’s $1 billion acquisition of Instagram was a risky bet. Instagram was the largest-ever acquisition that Facebook made before becoming a publicly traded company. Despite Instagram’s success today, nobody viewed it as a serious competitor to Facebook back then — including Stewart himself, who dedicated an entire Daily Show segment to mocking the deal in 2012.
Progressives such as Stewart and Khan believe that mergers and acquisitions are simply a tool that big companies exploit to become bigger and more powerful. The problem with this conceit is that it assumes that acquisitions always work out in the acquiring company’s favor. Risky bets are risky for a reason — typically 70-90 percent of acquisitions are “abysmal failures.”
When these risky bets do work out, it is a win-win for both the startup and the acquiring company. Acquisition is the preferred exit strategy for half of startups. The acquirer can invest its resources into deploying and improving the startup’s product in ways that would not be possible if the startup remained independent. Entrepreneurs that worked hard to build a startup worth acquiring can either stay with their firm or start pursuing their next great idea.
Government officials have a talent for Monday-morning quarterbacking. In reality, no one making an acquisition knows for sure how a deal will turn out. And this is true for large companies such as Meta, too. As an example, in May last year, Meta took close to a billion-dollar haircut in selling off the business-software startup Kustomer, which it had only bought in 2020.
Risk and innovation go hand in hand, but instead of recognizing the risk that Meta took in buying Instagram, Khan launched an antitrust lawsuit to break the company up. An Obama-era judge dismissed the FTC’s case against Meta in 2021, believing the FTC did not sufficiently prove Meta’s monopoly power, but Khan continues to press the case via an amended complaint.
If Khan succeeds, it would set a terrible precedent that the government can break up companies based on bigness alone without proving their conduct has harmed consumers. Nobody argues that the government should bail out companies that make a risky bet and fail. In the same vein, the government should not retroactively punish companies for making a risky bet that paid off and benefited consumers.
While a lot of attention has been paid to the FTC’s antitrust cases against large technology companies during this administration, the DOJ and FTC have sought to block mergers across a wide range of industries. In the first year of Khan’s tenure as FTC chair, the agency sent over 200 letters to companies warning them to close deals “at [their] own risk.” The FTC is suing to block Kroger’s pending acquisition of Albertsons, an acquisition which would lower food prices for families struggling with inflation. Despite the woes affecting the traditional book-publishing industry, the DOJ killed a merger between Penguin Books and Simon & Schuster.
Under the consumer-welfare standard of antitrust law, business conduct has to harm Americans through measurable factors such as higher prices, lower output, or inferior quality in order to violate antitrust law, but the direction of antitrust policy today seems to more focused on an ideologically driven preoccupation with what the U.S. economic landscape should look like than protecting the consumer.
Congress has taken notice. The FTC is under numerous House and Senate probes for various abuses of power. Senate Republicans recently sent a letter to the FTC urging the agency to follow the rule of law, arguing that “mergers must be assessed under a fair and unbiased standard . . . that protects American consumers and does not impose policy preferences to further political ends.”
Americans are the biggest losers of a war on risky bets. Entrepreneurs will be a lot less likely to start a new company knowing that a bureaucrat can block their most likely exit strategy. No company management would roll the dice on acquiring a startup if they believed there was a significant risk that the government might swoop in and force them to unwind the transaction a decade-plus later. Under this regime, we all lose out on the benefits of the next successful risky bet.
Risky bets are a feature — not a bug — of the American economy. They should be celebrated, not second-guessed.