Will the U.S. Government Break Up Big Tech? And How Will It Affect Investment Banking?
A few months into 2020, it seemed certain that the coronavirus / COVID-19 pandemic would be the #1 story of the year – and it has been.
But I’ll be honest: it has been dragging on forever, and I’ve gotten bored of hearing about it and writing about it.
The good news is that a few other important stories have emerged, and one of the most interesting is the future of Big Tech.
Earlier this month (October 2020), the House Antitrust Subcommittee released its 450-page report on “Investigation of Competition in Digital Markets,” which found that Apple, Google, Facebook, and Amazon have become “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.”
Regardless of who wins the election – I’ll write about that one next week – there’s growing bipartisan support for regulation, breakups, and other legislative action against Big Tech.
The Problem(s) with Big Tech
Traditionally, monopolies were viewed as harmful to consumers because they could charge exorbitant prices for sub-standard products due to their market power.
They could force out competitors by artificially lowering prices and then raise them again once the competition had given up.
But the tricky part is that antitrust law in the U.S. is defined vaguely, it has changed over time, and the enforcement criteria have also changed over time.
When it first began with the Sherman Antitrust Act of 1890, the law focused more on anticompetitive behavior.
But in the 1970s, enforcers became less willing to break up big companies (with a few exceptions, like AT&T and Microsoft), and antitrust law shifted to focus on “consumer welfare.”
So, to justify a breakup, not only must a company be dominant, but it must also be harming consumers by keeping prices artificially high.
By that criteria, it’s difficult to argue that the Big Tech companies need to be broken up.
Has Amazon raised prices for the average person?
It’s even tougher to make the case for a company like Facebook, where the product/service is “free” – as long as you give up your privacy to use it.
Since the Big Tech companies don’t meet the traditional breakup criteria, the government has been redefining that criteria.
The key issues with these companies are platform participation, predatory pricing, and cross-business-line integration.
For example, since Amazon operates a marketplace platform and also participates on that platform, it can see which products are selling well.
Then, it can introduce its own versions at lower prices – even if it loses money doing so – and force other companies out of business.
Yes, consumers get lower prices, but they also have fewer options and hand over more of their spending and data to Amazon.
In other words, it’s less about direct consumer harm and more about anticompetitive behavior.
Another issue is that these companies have completed 500+ acquisitions over the past few decades without even a raised eyebrow from the government.
This explains why Google owns Android and DoubleClick, why Facebook owns WhatsApp and Instagram, and why Amazon owns Whole Foods and Zappos.
Even if you don’t think the Big Tech companies should be broken up, you would probably agree that they have too much power and control too much of everyday life.
So, what to do about it?
Regulate vs. Break Up Big Tech vs. Other Solutions
In case you haven’t read all 450 pages of the Congressional report, their main recommendations include:
- Breaking up and restructuring the Big Tech companies.
- Strengthening laws against mergers and acquisitions.
- Making sure the FTC and DOJ do their jobs and enforce laws rather than being asleep at the wheel.
- Allowing normal citizens to take monopolist companies to court.
The two main solutions are regulations and breakups, and the points above fall into these categories.
Breakups are simple to describe: split up Google (OK, “Alphabet”) so that Android, Search, YouTube, Cloud, Apps, Maps, etc. are all separate companies.
Of course, the devil is in the details – if Google owns 90%+ of the market, should “Search” be one company, or should it be broken up into regional entities, like a utility?
Regulations are trickier to describe, but they might include points such as:
- Facebook must make all your data portable so that you can transfer it to other social networking platforms.
- Google must provide click and search data to competitive search engines (yes, the few that exist) so they can improve their services as well.
- Companies cannot both own platforms and also operate on the same platforms (similar to what Elizabeth Warren proposed).
Those in favor of regulations usually argue that breakups “won’t work” because the tech companies have natural monopolies, because it’s not possible to split up certain business segments, or because breakups would not necessarily create more competition.
Those in favor of breakups argue that regulations won’t work because the tech sector changes too quickly for regulators to keep up, and that regulations won’t necessarily spawn more competition.
Also, since these companies operate globally, there might be very different rules in different countries.
So… Regulations or Breakups?
My best guess is that some combination of both – and not just in tech, but in other consolidated industries – will happen.
If a business is a natural monopoly, it should be regulated like a utility company rather than broken into pieces.
For example, I’m not sure how Facebook’s original social network could be “split up” because most of the value would disappear with dozens of separate networks.
Contrary to what the tech companies claim, though, it’s possible to break up portions of these companies.
Going back to Facebook, Instagram and WhatsApp could be spun off – no matter how “integrated” they now are – because they were originally separate companies.
So, one approach might be:
- If it’s possible to break up the firm into separate companies because they operate in different markets or do not have network effects, do so.
- And if the business is a “natural monopoly,” such as a social network, restrict how it can monetize user data and how advertisers interact with it.
Break Up Big Tech: Will the Government’s Efforts Succeed?
I don’t think this specific effort will succeed in breaking up or heavily regulating the Big Tech companies.
For example, the DOJ lawsuit against Google seems quite narrow – why would the government start by accusing Google of illegally making its search engine the default on Android, or pointing out how it pays Apple $12 billion per year for default placement on iOS?
It’s not as if Bing or DuckDuckGo will suddenly emerge and gain 50% market share, even if Google’s agreements are deemed illegal.
The government would have a stronger case if it went after Google’s ad-tech monopoly.
There, Google owns virtually every link in the chain between publishers and advertisers, and it has used its power to squash or acquire legitimate competitors, like DoubleClick.
So, I’m skeptical that this specific lawsuit will succeed in breaking up Google, but over the next 3-5 years, I could see any of the following happening:
- At least one, and possibly more, of the Big Tech companies will be broken up or forced to divest several divisions.
- Regulations that limit the power of companies to participate on platforms they own will be passed.
- Big Tech M&A activity will be more restricted, so we’ll see fewer mega-deals.
- The election results and political control of Congress and the Presidency almost don’t matter because both parties now hate the tech industry.
What Would “Break Up Big Tech” Mean for Deals and Investment Banking?
The effect on investment banking depends on whether the government favors the “regulation” route or the “breakup” route.
If it focuses on breakups, banks will benefit in the short term from all the spin-offs.
Just imagine the fees from Amazon splitting into 5-10 new public companies and the additional fees as those companies raise debt and equity and complete smaller M&A deals.
Banks love spin-offs because they bring new public companies into existence, which means fees on additional deals for years to come.
On the other hand, if the government focuses more on regulations and limiting M&A activity, banks will take a serious hit in the short term, and areas like technology investment banking will become far less lucrative.
Without the Big Tech companies as major buyers in M&A deals, plenty of companies will no longer have a plausible path to an exit.
Also, more deal activity will shift to regions outside the U.S., and Asia (China) will be the biggest beneficiary.
I would also expect cross-border M&A volumes to fall as companies become reluctant to do deals that might get blocked in one country.
It’s harder to say what will happen in the long term because it depends on “Step 2” of this plan and how much regulations and breakups extend beyond the tech industry.
Will the government block mergers and acquisitions above a certain size? Will they restrict certain companies from completing deals?
Or will they return to the status quo?
The “worst case” – from an investment banker’s perspective, anyway – is that there will be a much lower volume of mega-deals worth $10 billion+.
But even the volume of $1 billion+ deals could decline, depending on how governments worldwide react.
However, middle-market and smaller deal activity might pick up as smaller companies look to each other, rather than Big Tech, as potential merger partners.
The Irony of Spin-Offs, and Why Jeff Bezos Might Get Even Wealthier
Ironically, the “break up Big Tech” strategy could also end up making people like Jeff Bezos even richer.
In a spin-off, the subsidiary company takes certain Assets and Liabilities from the parent and separates into its own structure.
The parent’s shareholders then receive shares in the new, spun-off company while keeping their existing shares in the parent.
Sometimes the parent even sells shares of this new, spun-off company and receives the proceeds.
For a good example, take a look at IAC’s spin-off of the Match Group (Tinder), where IAC originally owned ~80% of Match.
When it sold that stake, IAC shareholders received 2.1584 Match Group common shares for each IAC share they held pre-transaction, and IAC itself received billions in cash proceeds from the sale of Match shares.
Match’s share price is now up ~67% since the spin-off was announced, so IAC’s shareholders have benefited as well.
Matt Stoller has some other examples of what happened to companies’ stock prices following well-known company breakups, including those of Standard Oil and AT&T.
The short version is that breakups often end up making the original company’s shareholders even wealthier, even as those shareholders’ ownership is dispersed among new entities.
I bring this up because it might explain why the government would not want to break up these companies (“Millionaires and billionaires!”).
On the other hand, I doubt that many people understand why and how this happens, and government officials are not exactly known for their accuracy in long-term predictions about financial markets.
And As for Your Career…
Even if something dramatic happens, it will be a multi-year process, so I don’t think you should necessarily stay away from entry-level tech IB roles.
If you enter the industry as various breakups and spin-offs are taking place, you might even benefit from higher deal activity!
If anything, you should pay more attention to the broader trends beyond tech: if the volume of mega-deals drops over the next 5-10 years, the bulge bracket banks and private equity mega-funds will become less appealing.
As I wrote in the private equity strategies article, it might give an advantage to smaller/startup firms and ones that focus on growth than financial engineering.
I don’t want to get into a discussion of long-term careers for now, but let’s just say that I am planning to write an updated version of the “Is Finance Still a Good Long-Term Career?” article before the end of the year.
So, break up Big Tech or regulate it? Both? Neither?
Is the U.S. government competent enough to make any of this happen?
And how do you think these changes will affect IB and other finance careers?
Oh, and will there even be a declared winner of the U.S. election next week, or will there be riots in the streets for several weeks?
I guess we’ll find out soon…
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