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Next US president under pressure to act on antitrust and rampant M&A

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Next US president under pressure to act on antitrust and rampant M&A

Whoever wins the U.S. election on Nov. 3 will be under growing pressure to reverse decades of light touch antitrust regulation after both Democrats and Republicans used a House antitrust subcommittee report on Big Tech to call for the regulator to be beefed up.

Antitrust has barely figured in the U.S. presidential election campaign so far, but Democrat recommendations to boost funding for regulators and even break up Big Tech companies highlight a marked change in attitude after decades of political apathy enabled an explosion in mergers and acquisitions and major consolidation in a number of industries.

"The momentum here is enormous and it would be hard certainly for Biden not to do something about it," Matt Stoller, director of research at the American Economic Liberties Project and the author of Goliath: The 100-Year War Between Monopoly Power and Democracy, said in an interview.

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According to research group Capital Economics, the proportion of "notifiable" mergers reported to the U.S. Department of Justice and investigated for antitrust dropped from 13.6% in 1978 to 2.4% in 2018.

The hands-off approach has contributed to a proliferation in the number of M&A deals. Between 1985 and 2017, the number of mergers completed annually rose from 2,309 to a peak of 15,558, with that figure dropping only slightly to 13,277 in 2019, according to the Institute for Mergers, Acquisitions and Alliances.

Critics, including Democratic senators Bernie Sanders and Elizabeth Warren, suggest this has facilitated uncompetitive consolidation, creating oligopolies in a number of markets, notably airline, mobile telecoms and healthcare sectors, exacerbated by M&A, preventing new businesses from accessing markets, restraining innovation, driving up prices and suppressing wages.

Airline mergers

"There was a clear structural decline in antitrust of which big tech is the most glaring example, but there's all sorts of evidence elsewhere in defense and airlines," said Oliver Jones, senior economist at Capital Economics, in an interview.

Having flirted with bankruptcy after the Sept. 11 terrorist attack in New York in 2001 and the financial crisis of 2008, airlines turned to M&A to survive. A slew of deals drove consolidation in the American airline industry, leaving four main players American Airlines Group Inc., Delta Air Lines Inc., Southwest Airlines Co. and United Airlines Holdings Inc.

In 2008, Delta Air Lines and Northwest Airlines agreed to a merger to create the largest airline in the world at the time. This was followed in 2010, when regulators signed off on a $3 billion merger between United Airlines and Continental Airlines after an antitrust investigation, which claimed the title. This was then trumped by American Airlines' merger with US Airways then the fifth-largest airline in 2013.

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While antitrust investigations were launched into the United Airlines and American Airlines deals, both cases were settled by concessions. The four companies now control the majority of the market in 40 of the 100 largest U.S. airports, accounting for 66.2% of all domestic passenger flights. The market dominance even convinced Warren Buffett, a long-time skeptic of the industry, to take a stake in the four companies in 2016, although he reversed course and sold his holdings this year.

M&A has had profound consequences in the telecommunications space as well. In 2019 regulators gave their blessing to a $26.5 billion merger between T-Mobile US Inc. and Sprint, then the third- and fourth-largest wireless telecommunications carriers in the U.S. T-Mobile, AT&T Inc. and Verizon Communications Inc. now enjoy a combined market share of 86%, according to Kagan, a research division within S&P Global Market Intelligence.

Measured by volume of deals, the tech sector has been the leading proponent of M&A this century, with 20% of all deals through 2018, way out in front of industrials and financials at 11% each. High-profile deals such as Facebook Inc.'s $1 billion takeover of Instagram LLC in 2012 that were given the green light by regulators have now been questioned, given Facebook's dominant position in social media. Globally, the Facebook family, also including Facebook Messenger and WhatsApp Inc., claims 2.47 billion daily active users and 3.14 billion users monthly.

"There haven't been many successful looking new entrants for some time," Jones said. "We talk about killer acquisitions, and the idea that when a company grows big enough to be perceived as a threat that the companies have so much cash they can just purchase them."

Big Tech dominance

The most obvious example of uncompetitive markets is in the tech sector, where the findings of the subcommittee highlighted the scale of the dominance in key digital markets. The report found that Google LLC captures around 81% of all general search queries in the U.S. on desktop and 94% on mobile, helping Google take around 73% of the search advertising market in 2019. Google and Apple Inc. combined account for the operating systems in over 99% of smartphones in the U.S. through Android and iOS giving them control of the mobile app market. Meanwhile, Amazon.com Inc. takes half of all U.S. online retail sales, with 60% of all online U.S. product searches starting on Amazon.com.

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"The subcommittee’s series of hearings produced significant evidence these firms wield their dominance in ways that erode entrepreneurship, degrade Americans’ privacy online, and undermine the vibrancy of the free and diverse press. The result is less innovation, fewer choices for consumers, and a weakened democracy," the report noted.

Nowhere is the dominance of the tech giants more obvious than in the stock market. Apple became the first $2 trillion company earlier this year, and the combined market cap of the four big tech companies totaled $5.297 trillion as of Oct. 8, 17.4% of the entire S&P 500.

The high-profile, 16-month investigation into Big Tech and antitrust, which included the CEOs of Apple, Google, Facebook and Amazon being hauled in front of a hearing by Zoom in July, brought broader concerns about competition in corporate America to the fore.

Unity task force

Toughening antitrust enforcement is one of the goals highlighted in the Biden-Sanders unity task force recommendations, a series of policy measures that attempt to unify the moderate and progressive wings of the Democratic party.

"There's clearly a change in the discussion that's happening in the media, and on the academic side of things as well, with a few high-profile books over the last few years — Thomas Philippon's The Great Reversal and Goliath by Matt Stoller," Jones said. "The conversation has changed a bit and the fact that this report has come out — the language comparing the tech giants to the oil barons — you definitely wouldn't have seen that four-five years ago."

Before the report's publication, the subcommittee's chairman, Rep. David Cicilline, D-R.I., had suggested the Glass-Steagall Act for tech to address what he perceives as a conflict of interest whereby companies such as Amazon both sell on, and control, an e-marketplace. The report found that 37% of active third-party sellers on Amazon's marketplace 850,000 sellers are entirely reliant on Amazon for their income and the committee had Amazon in its sights when it recommended "structural separations and prohibitions of certain dominant platforms from operating in adjacent lines of business."

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The subcommittee, which is Democratic-led, recommended reforms big and small, from increasing enforcement agency budgets to breaking up firms. While a number of the recommendations are aimed specifically at the digital landscape, other proposals, such as introducing "presumptive prohibition" that would make it easier to mount class action lawsuits against M&A, go beyond tech.

While some Republicans reacted by warning against government overreach, Rep. Ken Buck, R-Colo., released his own report that found some areas of agreement between the two parties.

Specifically, Buck supports the need for additional resources and tools for oversight at enforcement agencies. Additionally, Buck's report finds agreement with proposals that would shift the burden of proof for companies pursuing M&A and a recommendation to empower consumers with data portability and interoperability standards.

Breaking up is hard to do

While the areas of agreement do not include blockbuster changes such as structural separation, antitrust experts believe some of these areas have enough bipartisan support in Congress to bolster antitrust enforcement.

"I think at the very least, it's going to mean more agency resources [for the U.S. Federal Trade Commission and U.S. Department of Justice]," said John Yun, who was previously acting deputy assistant director in the economics bureau in the antitrust division at the FTC.

The calls for a breakup are backed by American Economic Liberties Project's Stoller.

"It's necessary to do a legislative breakup," Stoller said, noting that the political environment has shifted dramatically against the tech giants. "That's probably going to be the hardest statute to pass and that takes five years. But you can't really address the platforms without taking it apart."