The acquisition of tech companies: Balancing innovation and competition

This article is part of the ‘Inspiring Transformations’ series promoted by Esade Entrepreneur Institute for its 30th anniversary. 

The acquisition of technology companies has become increasingly prevalent in today's fast-paced business landscape. These acquisitions involve one company purchasing another to gain access to its technology, intellectual property, talent pool, or customer base. While such transactions can bring synergies and foster growth, there has been growing concern, particularly among regulators and competition authorities, about their potential negative impact on innovation. 

One alarming trend in technology company acquisitions is the so-called "killer acquisitions," where larger pharmaceutical or tech companies acquire smaller innovative startups with the intention of discontinuing their products and reducing competition. Such practices stifle innovation and limit consumer choice, leading to legitimate concerns among industry experts and regulators.  

While there are valid reasons to address the issues associated with killer acquisitions and the potential harm to innovation, adopting a stricter regime that limits the acquisition of technology companies may have unintended consequences. A less-developed market for startups, resulting from reduced acquisition opportunities, could undermine incentives for innovation and entrepreneurship. 

The potential downsides of regulation 

In particular, acquisitions often serve as vital exit strategies for entrepreneurs and their founders. They provide an avenue for entrepreneurs to monetize their innovative ideas and enable investors to realize returns on their investments. By limiting the ability to exit through acquisitions, entrepreneurs and funders may become hesitant to take risks and innovate, ultimately stifling the entrepreneurial spirit and hindering technological advancements.  

Robust and innovative startup ecosystem relies on the presence of exit opportunities

Therefore, while introducing stricter rules for technology company acquisitions can increase competition and protect against harmful practices, it is essential to carefully consider the potential downsides. A robust and innovative startup ecosystem relies on the presence of exit opportunities, including acquisitions. By excessively restricting acquisitions, we risk dampening the incentives that drive entrepreneurs to create groundbreaking technologies. 

Researching a complex challenge 

The acquisition of technology companies presents a multifaceted challenge that requires careful consideration of the trade-offs involved. Thorough research is needed to assess the impact on innovation and entrepreneurship, enabling policymakers to make informed decisions. Striking a delicate balance is essential, as excessive regulation may discourage entrepreneurship, while inadequate regulation could lead to harmful practices.  

By promoting research that explores these complexities, policymakers can design effective frameworks that foster healthy competition and incentivize innovation. A comprehensive understanding of the nuances will help create a vibrant technology landscape that benefits society while curbing detrimental acquisition practices. 

References and recommended readings 

• Chondrakis, G, Serrano, CJ, and Ziedonis, RH. (2021) Information disclosure and the market for acquiring technology companies. Strategic Management Journal 42: 1024-1053 
• Conti, A, Guzman, J, Rabi, R. (2021) Herding in the Market for Startup Acquisitions. Available at http://dx.doi.org/10.2139/ssrn.3678676 
• Cunningham, C, Ederer, F, and Ma, S. (2021) Killer Acquisitions. Journal of Political Economy 129:3, 649-702 
• Fons-Rosen, C, Roldan-Blanco, P, and Schmitz, T. (2021) The Effects of Startup Acquisitions on Innovation and Economic Growth. Max Planck Institute for Innovation & Competition Research Paper No. 23-02, CEPR Press Discussion Paper No. 17752, Available at http://dx.doi.org/10.2139/ssrn.3785485