Killer Acquisitions in the Platform Economy: Do Tech Giants Acquire Target Firms to Leverage Innovation or Eliminate Competition?

Abstract

Killer acquisitions describe transactions in which an incumbent player decides to acquire a target firm solely to bring its innovation to a halt, thereby preempting future competition. This type of acquisition is inherently different from traditional acquisition motives based on the realization of operating and financial synergies in terms of the role of the target’s innovative capacity, product development stage, and impact on consumer welfare. Cunningham, Ma, and Ederer (2021) have found that killer acquisitions account for a significant share of transactions in the pharmaceutical industry, raising the question whether these types of innovation-inhibiting killer acquisitions might also take place in other sectors of the economy. One sector of particular interest is the platform economy, describing the economic activity of online matchmakers that connect producers and consumers through the use of multisided digital frameworks. Due to their high entry barriers, strong network effects, and data-driven economies of scale and scope, platform markets naturally tend to develop towards winner-take-all markets. Killer acquisitions could impede the only opposing trend, i.e. disruptive innovation through challenger firms, thus cementing the incumbents’ market power in the long term. These theoretical insights are underlined by observations from business practice as the five largest platform firms, Google, Amazon, Facebook, Apple, and Microsoft, have already reached dominant market positions throughout most relevant platform markets and engage in an unprecedented level of acquisition activity. This thesis develops an ex-post framework to increase our understanding of the dynamics, structures, and incentives that affect acquisitions in the platform economy. Its basic contention is that killer acquisitions are harmful since they lead to a loss of the target’s innovative capacity, thereby reducing consumer welfare and jeopardizing market competition. It is further hypothesized that the innovative capacity of platform firms follows distinct lifecycle phases, entailing implications with regard to the timing of killer acquisitions, the role of product market overlap, and competitive dynamics. Furthermore, four archetypes of acquisitions are derived based on the acquirer’s choices with regard to dealing with the target’s present and future innovative capacity. The acquirer can market the present and future innovative capacity (transformational acquisition), withhold the present and leverage the future innovative capacity (visionary acquisition), eliminate the present and future innovative capacity (visible killer acquisition), or market the present and eliminate the future innovative capacity (hidden killer acquisition). In order to showcase how the framework can be applied to business practice, four real-life cases are illustrated.