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Should we be wary of killer acquisitions?

gafam killers acquisitions

A killer acquisition is the process of acquiring a company in order to integrate or even eliminate a key innovation. Often described as predatory, this practice can also be a source of opportunity for target companies. Experts at AURIS Finance, an M&A consultancy, explain.

What is a killer acquisition?

A killer acquisition is any operation designed to eliminate a major innovation in a given market. Very often, this type of operation is carried out by a large company, such as the digital giants or Big Pharma, who see a competitor entering their market with an innovation that could be detrimental to the continuation of their business. In this case, the company acquires the target company to nip the innovation in the bud. Predatory acquisitions, a variant of killer acquisitions, involve the acquisition of a target to strengthen a dominant position in a market. In this case, innovation may be retained by the acquiring company.

A practice that is common to both Big Tech and Big Pharma

A recent study by economist Colleen Cunningham analysed 16,000 R&D projects in the pharmaceutical industry over a twenty-year period. She found that 6% of the acquisitions made by these companies could be considered “killer” acquisitions. The practice is also common in Big Tech. In a bid to control competition, tech giants have reportedly made more than 700 acquisitions since the 2000s. Two researchers from the University of Liège conducted a study on the acquisitions made by Big Tech between 2015 and 2017. They found that 60% of the services acquired by the giants were no longer offered under their original name after the acquisition.

Regulators on the front line

Against this backdrop, regulators have put safeguards in place. For example, on 30 November 2021, the UK’s Competition Markets Authority (CMA) ordered Facebook to sell Giphy, a company specialising in the production of gifs, which the American company had acquired in May 2020 for €400 million. The European Union has also taken up the issue, with the possibility for member states to notify it of certain acquisitions or mergers.

Transactions that are sometimes unfairly demonised

But are they all bad? In an article published in French newspaper Les Echos, Hugues Calvet, partner at Bredin Prat, criticises the simplistic “David versus Goliath” approach. “To ensure their development, innovative companies have an objective need for financing. And it is investors who will provide the resources for the start-up, taking on major risks. The return on investment, the ultimate profit, is subject to a very high degree of uncertainty”. He adds: “This profit can only be made in two situations: either the start-up is a great success; or it fails to develop on the market and has to be acquired by another company (an “exit strategy”), at a price commensurate with the expected success. Contrary to popular belief, this type of acquisition very often allows the company to grow thanks to the resources of the acquirer: distribution of the innovative technology, integration into the business model, combination of existing expertise within the new group, etc. “.

Get the support you need

For innovative companies, the search for an “exit strategy” that will allow them to continue their development must be carried out at an early stage in order to avoid a hasty acquisition by a company wishing to curtail their innovations. Market research, identification of potential buyers, valuation – AURIS Finance experts are at your side.

Contact us!