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Antitrust scrutiny could further slow Amazon, big tech M&A activity – experts

Amazon.com Inc. spent years growing its market power by scooping up emerging and complementary companies. But a deceleration in the pace of its acquisitions could further slow amid recent scrutiny by U.S. lawmakers and stronger antitrust rules, experts say.

Over the past decade, Amazon announced 76 acquisitions that contributed to its market dominance. Deal activity, however, has slowed in recent years as lawmakers pushed to limit its influence. Amazon and its subsidiaries announced nine deals in 2019, up from six in 2018 but down from 13 in 2017, according to data compiled by S&P Global Market Intelligence. As of August 2020, Amazon had announced two acquisitions.

The decline mirrors a broader trend among Big Tech companies Apple Inc., Facebook Inc. and Alphabet Inc., which have seen deal flow decline over the past few years.

Growing scrutiny in the U.S. and abroad will lead Amazon to pursue even fewer overall acquisitions, and limit deals to smaller, less well-known companies that fly under the radar, experts say. The e-commerce company is likely to target companies in areas such as cloud computing and emerging technologies. It is also likely to steer clear of deals in areas such as privacy and surveillance that could add to the narrative that Amazon holds too much power, especially amid the economic fallout of the coronavirus pandemic.

"Anything that touches on privacy or more consumer information is going to be scrutinized," said Michael Pachter, an analyst with Wedbush Securities, in an interview.

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Growing dominance

Over the past decade, Amazon and other big tech companies Apple, Facebook and Alphabet have been on a deal-making spree that allowed them to morph into some of the biggest tech companies in the world.

Amazon was the least active of the four, but experts say those transactions were significant. Consider Amazon's $13.7 billion purchase of Whole Foods Market Inc. in 2017 that gave the company access to the grocery market, and the company's 2018 acquisition of PillPack for $753 million that allowed it to leap into the prescription drug business.

The Whole Foods deal was by far Amazon's largest acquisition and a move that gave the company a better understanding of how grocery store supply chains work while informing its own line of grocery stores, said Mark Shmulik, a vice president and senior analyst with AB Bernstein, in an interview.

Amazon's approach to acquisitions has "always been to get into a new revenue pool," Shmulik said. "The one category that they were significantly lagging in when it came to retail and e-commerce in particular was on grocery and food."

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Whole Foods storefront in Rockville, Md. Amazon bought Whole Foods Market Inc. in 2017, giving it access to the grocery market. But experts expect Amazon and the other big tech companies to avoid blockbuster deals that could catch the attention of lawmakers.
Source: Whole Foods

Laying low

But the big tech firms are expected to keep a lower profile in acquisitions as antitrust scrutiny grows in North America and Europe.

U.S. lawmakers grilled the CEOs of Amazon, Apple, Alphabet and Facebook during a July 29 hearing before the U.S. House Judiciary Committee's antitrust subcommittee, which is examining whether these companies have abused their market power.

The European Union is probing Amazon over whether the company's use of data on third-party sellers violates EU competition rules, as well as slowing Google's plans to purchase U.S. wearables maker Fitbit Inc. for $2.1 billion with an investigation into the deal.

Meanwhile, the governments of Canada and Germany both announced probes into whether Amazon is engaging in conduct that impacts consumers and businesses. The probes were announced after Amazon CEO Jeff Bezos said at the July 29 hearing that he could not guarantee that the company did not violate an internal policy that prohibits Amazon from using third-party seller data to aid its private-label products.

Facebook's 2012 purchase of Instagram LLC is also being scrutinized by lawmakers as potentially anti-competitive. And Apple is facing a multistate probe led by Arizona that seeks to determine whether the company's intentional slowing of older iPhones breached deceptive trade practice laws, according to a July 29 Reuters report.

"I think big tech has heard a very loud whisper to lay low for a minute," said Nicol Turner-Lee, director of the Brookings Institution's Center for Technology Innovation, in an interview.

The firms will most certainly exercise caution about which deals to pursue, given strong bipartisan support for more antitrust enforcement, said Tom Forte, an analyst with D.A. Davidson who follows tech companies. Legislators are expected to introduce one or more legislative proposals this fall to limit their power.

The questions asked by U.S. lawmakers at the July 29 hearing suggest that they are getting "further up the learning curve on understanding the level of excess influence these companies have over businesses and consumers," he said in an interview.

"If I was Amazon, Apple, Facebook and Google, I would be nervous," Forte said.

Smaller, stealth deals

Amazon and the other tech firms will continue deal activity, but may opt to buy smaller startups that expand their portfolios without drawing much attention, experts say.

That could mean pursuing deals in emerging areas such as artificial intelligence and driverless technology, said Lucille Jones, deals intelligence analyst with Refinitiv, in an interview. Amazon, for example, on June 26 announced plans to acquire autonomous vehicle company Zoox Inc. Amazon declined to comment on when that deal would close.

"A lot of the activity that we are seeing doesn't seem to be the large, headline-grabbing takeovers that we had five or six years ago," Jones said, adding that the companies will be more focused on deals around "the next big thing."

Shmulik, of AB Bernstein, concurred, saying he wouldn't be surprised if Amazon announces deals to pump up strengths of its cloud-computing unit Amazon Web Services Inc. Amazon is reportedly in talks to purchase a minority stake in cloud services provider Rackspace Technology Inc., according to an Aug. 17 Reuters report. Rackspace helps companies migrate their data to AWS.

Amazon may also look at creative ways to snatch up assets it wants without acquiring the companies outright, said Forte, of D.A. Davidson.

He pointed to reported talks between Amazon and mall owner Simon Property Group Inc. about turning some of Simon's anchor department stores occupied by J. C. Penney Co. Inc. and Sears Holdings Corp. into Amazon fulfillment centers.

"They are able to get what they want out of buying JC Penney or Sears without having to buy JC Penney or Sears," he said. "It's a way to circumvent it."