Across industries, the U.S. Federal Trade Commission recently looked askance at vertical mergers, those in which a company buys another having a noncompeting technology, component or other aspect of the supply chain needed for a common good or service. This is an overreach by the FTC that puts the fundamentals of America’s innovation ecosystem at risk. Not only does discouraging vertical mergers and acquisitions stifle the innovation engine of American growth, but it also jeopardizes our national security.
Unlike the past — when companies like AT&T had Bell Labs, or the U.S. government made large investments in research and development to push advances in military technologies and then spun those off into the commercial economy — much of today’s innovations are driven by startups and smaller companies. Major corporations still have in-house innovation organizations, but more often the model now is to buy innovation through M&A.
Target companies and their investors make big bets, often longshot bets, on emerging technologies and/or proprietary capabilities. Once considered proven, those technologies drive a company’s attractiveness and valuation to other industry players. In this way, risk-taking is rewarded and innovations are onboarded and scaled, driving growth on the commercial side and superior capabilities on the national security side.
The FTC has an important function protecting consumers from anticompetitive actions that could raise prices and stifle innovation. Unfortunately, the FTC’s recent actions are a grievous overreach that hurt U.S. global competitiveness — increasing the costs to American businesses while ceding time to global competitors like China to catch up and swallow market share, or field competing capabilities.
An example of this in the pharmaceutical sector is the FTC’s action against the merger of Illumina with GRAIL. Illumina spun off GRAIL when the latter developed an early cancer-detection technology so it could access larger sources of risk-tolerant capital. When that bet paid off, per the spin-off strategy, Illumina sought to reacquire GRAIL to scale the technology and get life-saving capabilities to consumers. After sitting on the deal for nine months, forcing all the parties to spend many millions of dollars, and seeing its case unlikely to succeed, the FTC is reportedly encouraging Europe to take over and mire the merger in infinite bureaucracy. All the while, foreign competitors use this time to catch up, and countless lives that could be saved are put at risk.
The FTC is similarly affecting the defense-industrial base. Despite numerous administrations, Congress and the National Defense Industrial Association’s own “Vital Signs” report noting defense-industrial base fragility and supply chain risks (exacerbated by the COVID-19 crisis), the FTC is looking unfavorably on vertical mergers whose purpose, at the Defense Department’s encouragement, is to shore up critical supply chains.
Even more concerning is that an anti-M&A attitude by the FTC is generating a reluctance to make investments that shore up supply chain risk and is potentially exposing portions of the defense-industrial base to adversary capital. This puts modernization and, ultimately, our nation’s war fighters and national security at risk.
If the FTC’s concern is the loss of competition or monopolistic consolidation, it should focus on using the tools it currently has on the books to ensure fairness, competition and transparency by those companies that grow through M&A transactions.
There must be assurance that the FTC will regulate mergers fairly and accordingly with its mission, as well as with the realities of international competition. Without it, companies will be leery of mergers. This, in turn, will stifle American innovation and damage our economy and national security. Smaller companies with breakthrough technologies will have a harder time securing the capital and resources that larger companies provide to develop and deliver those technologies.
If Washington changes policy and objects to vertical mergers (or, even worse, gets the Europeans to delay and kill them), the effects will ripple all the way down to an entrepreneur’s decision to start a company. Even if that entrepreneur does start a company, without a clear exit capability, investors will be less willing to back a new invention. As a result, important technological advances will be lost with tangible consequences to the economy and to our position in the world.
The FTC should revert back to its original purpose and its mission to protect consumers from truly anticompetitive actions, work with companies to mitigate any potential negative impacts of vertical mergers, and seek to more rapidly reach ways forward for these deals because time is the one resource we can never get back. America’s innovation ecosystems are built on this, and America’s economic and national security depend on it.
Retired U.S. Air Force Gen. Hawk Carlisle is president and CEO of the National Defense Industrial Association. He previously served as the head of Air Combat Command.