Regulators are Undermining Startups by Attacking America’s M&A System and Activity

By SBE Council at 28 August, 2023, 4:50 pm

by Raymond J. Keating –

The current Federal Trade Commission (FTC) and Department of Justice (DOJ) most assuredly don’t like mergers and acquisitions (M&A). That, of course, lines up with their regulatory crusade against “big business” in general. This political bias, unshackled from any kind of sound economics, has repeatedly been made clear via assorted actions, including their recently released proposed merger guidelines, which would further muddy already murky antirust regulatory waters.

FTC Chair Lina M. Khan stated, “Open, competitive, resilient markets have been a bedrock of America’s economic success and dynamism throughout our nation’s history.” She got that much correct, but little thereafter, including the bizarre, underlying assumption that competitive markets rest on hyper-activism by government regulators.

These proposed merger guidelines, according to the FTC and DOJ, offer “thirteen principles that the agencies may use when determining whether a merger is unlawfully anticompetitive under the antitrust laws.”

SBE Council President & CEO Karen Kerrigan was correct in observing: “When reviewing the list of 13 guidelines, one walks away with the sense that FTC and DOJ ideologues want to stop merger and acquisition activity in its tracks. That will certainly be the case if these unworkable and irrational guidelines are implemented.”

Indeed, it’s hard to read these vague guidelines, and not conclude that, if imposed, these would do nothing more than empower regulators to act according to their political whims and preferences, create greater uncertainty in the M&A marketplace, and thereby disincentivize and undermine investment in startups and growing small businesses.

Of course, regulators don’t like talking about the full consequences of their actions, including that last point about undermining entrepreneurial activity. But when one understands that investors, such as venture capitalists, consider M&A as a means for getting a return on their investments, then pushing M&A antitrust policymaking further away from sound economic and market considerations, to be more deeply immersed in political ideologies and special interest influences, means real ills for small, entrepreneurial firms that desperately need investors become clear.

A study titled “Venture Capital Investments and Merger and Acquisition Activity Around the World,” by Gordon M. Phillips, from Dartmouth College’s Tuck School of Business and NBER, and Alexei Zhdanov, of Penn State University’s Smeal College of Business, looked at venture capital investment and M&A activity in 48 nations, as well as at “country-level pro-takeover legislation” and “U.S. state-level antitakeover business combination laws.”

What did they find?

● “We show that there is a strong positive association between venture capital and lagged M&A activity around the world. We argue that growth in M&A deals in a country is likely to attract more investments by VC firms as venture capitalists anticipate more viable future exit opportunities via a takeover.”

● “…we argue that an enactment of a country pro-takeover law represents a positive shock to M&A activity. On the other hand, the passage of a state antitakeover law in the U.S. can be interpreted a negative shock that is likely to reduce M&A activity in that state. We show that subsequent VC activity responds to both types of shocks. First, the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment in that state.”

● “Overall, our results highlight the importance of M&A markets for the incentives to engage in VC. As many start-ups rely on VC funding and venture capitalists rely on acquisitions for subsequent exits, our results suggest that an active M&A market is important for encouraging venture capital investments, entrepreneurship and growth.”

Yes, M&A opportunities are vital for investment in startups and smaller enterprises, and government reducing costs and obstacles to M&A is positive for entrepreneurship, investment and growth, while government increasing costs and uncertainties to M&A is negative for entrepreneurship, investment and growth.

Khan and Company go on and on about increased concentration and less competition in the marketplace. Such claims are rooted in political bias, and are made without sound economic reasoning and evidence. But whether one believes such nonsense or not, the best course of action that government can take is to reduce governmental costs and obstacles to starting up and growing new businesses. That is, policymaking should be focused on incentivizing entrepreneurship and investing in entrepreneurial ventures.

Unfortunately, the pro-big-government, anti-market, anti-business ideology of the likes of Lina Khan blinds them to the reality that their own policies, including the FTC and DOJ merger guidelines, undermine vital entrepreneurship.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.