Vertical Mergers and Entrepreneurial Exit

Abstract

The idea that tech companies should be permitted to acquire nascent start-ups is under attack from antitrust populists. Yet, this debate on vertical mergers has overlooked important empirical contributions regarding innovation-related mergers in the strategy literature. This Article explores the extant empirical strategy literature, which generally identifies a procompetitive basis that supports vertical mergers as efficiency enhancing. This literature solidifies the current general vertical merger presumption that favors a procompetitive vertical merger policy for purposes of government merger enforcement. However, the procompetitive benefit for a presumption of merger approval for most vertical mergers does not end with the synthesis of an under-explored literature. Rather, the broader implications of vertical mergers and presumptions of legality have another overlooked implication—a change of policy may dampen entrepreneurial investment and innovation. Entrepreneurial exit is critical to a well-functioning entrepreneurial ecosystem, as the possibility of entrepreneurial exit via vertical merger is now the most usual form of liquidity event/exit for founders and venture capitalists. Vertical merger policy that would unduly restrict large tech firms from undertaking acquisitions in industries as diverse as finance, pharmaceuticals, medical devices, technology hardware, and internet platforms would hurt incentives for innovation in the economy by chilling business formation in start-ups. Increased difficulty in the exit for founders and ventures capitalists makes investment in such ventures less likely, since the purpose of such investment is to reap the rewards of scaling a venture to exit. Thus, a general inference that makes vertical acquisitions, particularly in tech, more difficult to undertake leads to direct contravention of antitrust’s role in promoting competition and innovation. This Article explores how entrepreneurial exit for founders and venture capitalists is best served by promoting a robust vertical merger policy, though one that intervenes in cases of specific anticompetitive harm.

Keywords: vertical mergers, innovation, antitrust, entrepreneurship

JEL Classification: k21, k22, m13, L13, L4, L40