In recent decades, major technology firms have acquired hundreds of nascent companies. Between 1987 and 2019, Google, Apple, Facebook, Amazon and Microsoft (GAFAM) acquired over 700 companies. There have been over 430 acquisitions in the last ten years alone. The acquisition of start-ups by major technology firms poses a significant anticompetitive threat, yet such transactions often escape competition scrutiny because they fail to trigger merger notification thresholds.

This paper, available here, provides a financial analysis of historic acquisitions by Google, Apple, Facebook, Amazon and Microsoft. Acquisitions in the digital economy are typically characterised by astronomical transaction values relative to the stature of the acquired firm—targets are typically young, lacking in tangible assets and yet to earn significant revenues. Given this, the paper introduces a new merger notification threshold — the economic goodwill test. The economic goodwill test is a concerned with the value of a target’s net tangible assets as a proportion of total transaction value. The difference between these figures largely represents the gains an acquirer expects to realise from a strengthened competitive position, therefore reflecting the logic driving the mass acquisition of technology start-ups.

Section II articulates the anticompetitive threat posed by start-up acquisitions.

We may distinguish between two types of start-up acquisitions: killer acquisitions and digital conglomerate acquisitions. Killer acquisitions are those in which the business operations of an acquired firm are terminated by its acquirer. Killer acquisitions prevent innovation that may otherwise reduce the profits of the incumbent. Moreover, by pre-emptively removing the threat of competitive entry, an incumbent’s incentive to innovate is diminished, as it has less need to improve its products in order to protect its market position. Killer acquisitions have been observed particularly in the pharmaceutical industry and in the digital sector – where, while many killer acquisitions may have been a means to on-board particular employees (‘acqui-hiring’) they undoubtedly also have the effect of removing potential future rivals.

Digital conglomerate acquisitions are those in which the acquired firm is integrated into the acquirer’s ecosystem. They, not killer acquisitions, are likely to be the primary source of anticompetitive concern in the digital economy. Instead of terminating acquired firms to avoid profit cannibalisation, GAFAM typically absorb start-ups into their digital ‘ecosystems’. In doing so, they create a presence across multiple value chains, enhance data-related economies of scale and leverage customers from adjacent markets towards their core market. Through the acquisition of firms in markets distinct or tangential to their own core market, large technology companies have become highly diversified conglomerates. Conglomerate mergers are not ordinarily thought to be a major concern for competition law. Yet, the digital economy has unique characteristics – digital platforms benefit from network effects and strong economies of scale and scope that act as concentrating forces and lead to market tipping, whereby a winner takes most of the market.

Given market tipping, protecting competition for the market is key to achieving more competitive digital markets. Correspondingly, if GAFAM continue to acquire and extinguish potential future rivals, as well as build conglomerate ecosystems, the digital economy will fail to reach its full potential. Competition law enforcement must therefore ensure that established market positions remain vulnerable to competitive challenge, including by properly governing start-up acquisitions.

Section III explores the financial dimension of start-up acquisitions.

GAFAM’s mass acquisition of nascent firms is a symptom of financial capitalism and representative of the challenge financialisation poses to competition law. Financialisation is the process through which financial capitalism has replaced the industrial, manager-led capitalism of the post-World War II period. It has two defining characteristics: the growth of the financial sector, and the ascendancy of shareholder value maximisation as the guiding principle of corporate behaviour. Financialisation interacts with the start-up acquisition phenomenon in two ways: bullish investor sentiment about the future prospects of the digital economy catalyses extensive speculative acquisition activity; and venture capital funds have emerged as a means through which start-ups access financial capital and other resources.

Under financialisation, investors care less about the short-term profits and cash flow of firms. Instead, they try to realise tremendous profits many years in the future. In particular, GAFAM are able to take advantage of investors’ beliefs about their future dominance, and specifically the financial power this sentiment confers, to make those beliefs a reality through extensive start-up acquisitions. This financial power is invisible to standard competition enforcement. Compared to their industrial-era predecessors, shareholder-oriented firms care less about current profits and more about competing for capital. This requires us to substitute a focus on short-term market equilibria for ‘futurity’. Writing almost one hundred years ago, institutional economist John Commons started using the term ‘futurity’ to describe firm valuation coming to rest on the present value of expected future profits, a change from the previous practice of valuing firms based solely on the estimated market price of net tangible assets. Unfettered financial markets promote a futurity-led economy. As financialisation accelerated over recent decades, so too did the degree of futurity in the economy.

Section IV introduces the economic goodwill threshold test.

These developments led to changes in how property is valued: one looks at asset value when one is concerned with the use value of property, but will rely on property’s exchange value if the focus is on future profits. The US Supreme Court adopted this changed conceptualisation of property in the late XIX/early XX Century, leading to the legal protection of expected future income. By doing this, US courts acknowledged that firms generate a form of value distinct from the tangible assets they owned: ‘economic goodwill’, corresponding to the surplus of a firm’s total valuation over its net tangible assets which, in turn, is equal to the present value of future income. One source of the expectation of high future profits and, consequently, high economic goodwill, is the possession of a competitive moat created by factors such as loyal customers, intellectual property rights, a natural monopoly unconstrained by price regulation, network effects or economies of scale and scope.

The importance of ‘economic goodwill’ in the digital economy is quite large. Of Amazon’s valuation in 2017, only 8% corresponded to net assets; the ratio is similar for other tech companies. To uncover the economic goodwill in past start-up acquisitions, the paper examines the major acquisitions highlighted by the GAFAM firms in their annual financial statements between 2004 and 2019.  This shows that approximately 99%t ($85,406m) of the total value of GAFAM’s major transactions from 2004 to 2019 ($86,479m) can be accounted for as economic goodwill. Just one per cent of total transaction value can be attributed to targets’ tangible assets ($1,073m).

Given the importance of ‘future results’ in the digital sphere, one needs to add to existing merger control thresholds an ‘economic goodwill’ threshold, reflecting a target’s net tangible assets as a proportion of transaction value. The difference between net tangible assets and transaction value primarily represents the gains the acquirer expects to realise from its strengthened competitive position, notwithstanding the value of intangible assets such as intellectual property rights. In practice, however, profit-related economic goodwill is the key concern in start-up acquisitions. It comprises the expected future income of the acquirer’s improved competitive position and the expected future profits of acquired company had it remained independent. Distinguishing between these two elements would be an important part of substantive merger review that made use of financial valuation analysis; however, for the threshold test we must look to the overall economic goodwill value, since intangible assets valuations are internally generated and therefore subject to manipulation to avoid competition scrutiny.

Such an ‘economic goodwill’ test would be superior to existing transaction value thresholds. The economic goodwill test reflects the underlying impetus behind the start-up acquisition phenomenon. In this way, it is superior to the only other new threshold test proposed in reaction to the digital merger wave, which focuses on transaction value. This threshold test fails to get to the heart of the digital merger wave. Rather, competition authorities should be interested in transaction values insofar as they relate to the underlying assets of the target and the economic goodwill within an acquisition.


This is a very interesting and thoughtful paper. More importantly, it is original and bold, which is always to be welcomed (and why it won awards). I enjoyed it a fair bit, and my comments below should be read in this light.

While I found the discussion regarding ‘financialisation’ and ‘futurity’ very interesting – as I did the explanation of how legal concepts about the value of property evolved – I am not sure they were particularly relevant for the analysis. I am also not sure they add that much to our current understanding of competitive phenomena. After all, we know that companies are not valued for their underlying assets, and that digital valuations only make sense in light of future market power. However, this is a matter for a different type of publication, and I look forward to the author’s future work on the subject.

The proposed test seems rather similar to the transaction value thresholds already in place. Given this, a crucial question that I would have expected to see answered is why the author’s approach, and an ‘economic goodwill test’, should be preferred. This crucial question is dealt with in less than two paragraphs (that I reproduced to a large extent above) on the simple grounds that a transaction value threshold ‘fails to get to the heart of the digital merger wave. Rather, competition authorities should be interested in transaction values insofar as they relate to the underlying assets of the target and the economic goodwill within an acquisition.’ This is because ‘The economic goodwill threshold test reflects the motivation of start-up acquisitions to inhibit potential competition and secure profits in the future’.

Notification thresholds have dimensions other than catching certain types of transactions, however, so I am not fully persuaded by this argument. Other dimensions – e.g. administrability, market impact, resource allocation – are also relevant when designing merger notification thresholds. In other words, I think this comparison merited a much fuller discussion, if need be by structuring the discussion about ‘financialisation’ around it. 

I also had some doubts about the ‘economic goodwill test’ itself, but maybe this is a result of me not fully understanding the paper. According to the paper (and the literature I am familiar with), economic goodwill reflects the market value that a company will achieve above its book (accounting) value. Such value can have many sources (e.g. brand, expected profits, etc.), and so I do not see how it can relate solely to a propensity to restrict potential competition in the digital sphere, as the paper seems at times to imply. Instead, I understand the author to say that the expected gains from a reinforced competitive position are what really matters, and that this can be measured under a ‘profit-related economic goodwill’ metric. This metric would reflect both the expected future profits of the acquired company had it remained independent and the expected future income of the acquirer’s improved competitive position. It is only since the calculation of this value could be manipulated (since intangible assets are valued by the companies themselves) that we must rely on the economic goodwill test as a threshold for merger review. This makes sense to me, even if this is not always clear from the article as I read it. However, it also leaves me with the question of why we should consider economic goodwill to be good proxy for the restriction of potential competition – and, in particular, to be a better proxy than transaction value – unless it can be refined to identify the premia flowing from anticompetitive effects.  

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