DealLawyers.com Blog

An article in the NYU Law Review links greater antitrust enforcement to a decrease not just in M&A but also IPOs. It says “startups have responded to the antitrust crackdown not by choosing a different exit but by choosing no exit.” A summary in the HLS blog describes this link and the alternatives that “startups” are pursuing.

Between 2012 and 2019, enforcers challenged only three startup acquisitions.

Between 2020 and 2023, they challenged fourteen. Lawsuits or the credible threat of lawsuits killed deals between Adobe and Figma (design software), Sanofi and Maze (pharmaceuticals), Qualcomm and Autotalks (automotive), and Google and Wiz (cybersecurity).

It says this had a “chilling effect” that “spread across Silicon Valley, putting would-be acquirers, founders, and VCs on notice that acquisitions by large incumbents were risky.” But this didn’t push more startups to pursue IPOs.

[W]hile IPOs and acquisitions both provide liquidity, they are not perfect substitutes. The price that a startup commands in an acquisition may exceed the valuation it can achieve in an IPO because of synergies, economies of scale and scope, or the premium incumbents are willing to pay to eliminate potential competitors. The IPO market is also highly cyclical, so going public at the wrong time could be costly. And heightened antitrust scrutiny can reduce the value of an IPO by undermining one of its main advantages: access to publicly traded equity that can be used as currency for future acquisitions.

“Startups,” acquirers, founders and VCs have turned to other means to meet their goals.

In an employee tender offer, a startup lets its employees cash out some or all of their shares while the startup remains private. Secondary sales of startup shares used to be small deals, and they were typically limited to founders or other key employees. But now rank-and-file startup employees can sell their shares, and the secondary market for startup equity has multiplied in value.

Continuation funds let VCs stay invested in their portfolio companies longer than traditional venture funds allow. And as a result, startups face less liquidity pressure and can postpone exits.

Thwarted acquirers have also figured out strategies to evade merger enforcement. One of their strategies is a new structure that we call a centaur—a private company that is funded primarily by public company cash flows. The two largest centaurs are OpenAI and Anthropic, the companies behind ChatGPT and Claude. OpenAI has raised $13 billion from Microsoft, and Anthropic has raised $8 billion from Amazon and $3 billion from Google. Corporate VC investments by operating companies have been rising for the last two decades. But the centaur structure goes beyond traditional corporate VC by crowding out other investors and tying the fate of the startup and the public company with a deep commercial partnership. These deals allow Big Tech to access cutting-edge technology—and exercise influence over potential competitors—without an acquisition.

Another strategy is the reverse acquihire. In this kind of deal, a large tech company persuades the founders and key employees of a startup to quit en masse. Then it hires the former employees and makes a payment to the shell of the startup they left behind, which is ostensibly a fee to license the startup’s tech but is really a means to pay off its VCs. A reverse acquihire is an acquisition in substance but not form. And it’s becoming popular—Microsoft, Amazon, Alphabet, and Meta have all used it.

– Meredith Ervine