Antitrust & Reverse M&A in Tech

October 2024

Over the past two years, mergers and acquisitions (M&A) activity among strategic acquirers in the technology sector has seen a steep decline. This downturn stems from several interconnected factors, including plummeting stock prices, heightened economic uncertainty, and a shift in focus from aggressive growth to profitability. The numbers tell the story starkly: the total value of tech M&A deals dropped to $280 billion in 2023, a dramatic fall from the $792 billion recorded in 2021. Layoffs, office closures, and restrained spending have further dampened the appetite for acquisitions. While private equity firms still hold significant capital, rising interest rates have made them more cautious, further slowing deal momentum.

Regulatory scrutiny has compounded the challenges, particularly for large technology firms like Google, Amazon, Facebook, and Apple (the GAFAs). In Europe and the U.K., oversight by the European Commission and the Competition and Markets Authority (CMA) has intensified. These regulators have actively blocked or reversed high-profile deals, including Amazon’s acquisition of iRobot and Adobe’s planned merger with Figma. The trend is mirrored in the U.S., where the Federal Trade Commission (FTC), under Chair Lina Khan, has adopted an aggressive antitrust stance against tech giants, raising similar objections to those voiced by European counterparts.

The heightened regulatory environment has created significant barriers for acquisitions valued above $1 billion, contributing to a chilling effect on strategic M&A. Over the past two years, such activity has plummeted by 90%, drastically reshaping the landscape for tech firms. This decline has rippled through the startup ecosystem, which relies heavily on M&A as a primary exit strategy. Venture capitalists and startup founders are particularly affected, as alternative exits like initial public offerings (IPOs) have become exceedingly rare. Since late 2021, only three SaaS companies—Klaviyo, Rubrik, and OneStream—have gone public, marking a historic low in SaaS liquidity.

In response to these headwinds, a new trend has emerged: reverse acquihires. This innovative strategy allows corporations to hire key personnel and license technology instead of acquiring entire businesses. Reverse acquihires offer a way to integrate valuable talent and innovations while avoiding the regulatory and structural complexities associated with traditional M&A. Notable examples include Google’s deal with Character.AI, where the tech giant secured essential personnel and licensed technology without triggering antitrust concerns. Microsoft’s $650 million deal with Inflection AI followed a similar model, combining staff retention with AI model licensing. Amazon has also embraced this approach, acquiring key employees from Adept while compensating investors without a full acquisition.

While reverse acquihires help corporations sidestep regulatory scrutiny and reduce acquisition costs, they present mixed outcomes for startups. Founders often experience diminished autonomy and financial returns compared to traditional acquisitions or IPOs. Equity compensation in these deals can be less favorable, and founders may find their strategic vision diluted within the broader objectives of their new corporate parent. Additionally, reverse acquihires can pose reputational risks, potentially complicating future entrepreneurial efforts.

Even this approach has not escaped regulatory attention. The FTC is beginning to investigate whether reverse acquihires are being used to circumvent antitrust regulations, adding a layer of complexity to these deals. As this trend grows, it may continue to reshape tech exit strategies, offering opportunities and challenges for both startups and acquiring firms.