By Luise Eisfeld, Assistant Professor of Finance at HEC Lausanne
Tech giants such as Meta, Google, Apple, Microsoft and Amazon frequently acquire upstart innovators to maintain their competitive edge, market dominance, and stay ahead of the curve. More recently, the latest wave of such acquisitions has been particularly focused on generative artificial intelligence (AI), helping to bolster Big Tech’s capabilities in the field. In 2023, Apple was the leader among its competitors in AI acquisition, taking over as many as thirty-two AI startups. In the same year, Google acquired twenty-one, Meta acquired eighteen, and Microsoft acquired seventeen.
But do such acquisitions lead to a well-functioning software market? Do they promote new players, or stifle exciting disruptors? Shouldn’t promising startups instead beallowed to flourish independently, so that one day they can list publicly and contribute to a more diverse and competitive software market? And crucially, does the dominance of Big Tech in this issue need to be addressed? In software markets in particular, new entry by young, innovative startups is viewed as a key for ensuring vigorous competition, and as an important force that can discipline dominant firms.
To explore these questions and gain a deeper understanding of the long-term implications and challenges of this trend, I recently conducted a study focused on startups’ market entry and acquisitions in the global software market. After collecting new data from 20,000 software companies, I developed and applied a dynamic analytical model to examine startup entry competition within the digital sphere and the potential impact of acquisitions by Big Tech as well as other firms.
The model highlights two forces govern how entry can be affected by acquisitions. First, acquisitions can in fact drive new startup entry. The proportion of software startups that are acquired, instead of going public, has grown to roughly 95%. For many venture capital backed startups, being acquired is now seen as a viable exit strategy. On the other hand, however, dominant tech firms can use acquisitions to leverage their market power into new markets, thereby deterring new firm entry.
Preliminary results of the study indicate that indeed, acquisitions in general, including those by smaller firms, may encourage new entry. In a scenario where all startup acquisitions were entirely blocked, the entry of new startups might decline by as much as 20 percent. One reason for this is that venture capitalists and investors are more likely to invest if they anticipate that the company will be purchased for a profit at a later stage. However, the research also shows that blocking mergers between established industry players and more mature startups might increase startup entry, as investors may perceive their ventures as less likely to be obstructed by Big Tech companies. Therefore, merger policies need to balance these two opposing effects. A case-by-case review of acquisitions is essential, with a particular focus on the activities of Big Tech firms.
Regulators in the U.S. and Europe have ramped up their fight against anti-competitive behaviour by the Big Tech giants. In the wake of the European Union (EU)’s Digital Markets Act, a sweeping new law aimed at ensuring fair competition in the EU bloc’s tech industry, the European Commission has opened up a probe into the behaviour of Apple, Alphabet and Meta. So, the big question now is whether there should be a review of mergers or a stricter regulatory regime that controls market behaviour more generally.
This research, which has garnered attention from policymakers, including the UK Competition and Markets Authority, raises several important questions. As a society, do we want more startups to be acquired by Big Tech, resulting in only a few, new publicly listed firms? Or do we prefer a larger startup ecosystem with many more firms that have the potential to grow and pursue IPOs? If we favour the latter, then we need to reduce the regulatory barriers that startups face when aiming to become publicly listed companies, and also create an environment that nurtures startups to grow faster and larger.
