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Comment by gregwebs | Hacker News Reader

My understanding is that the vast majority of these M&A destroy capital. The reason to own dividend stocks is not because they pay dividends but because they don't have tons of cash lying around to spend on low value projects or M&A.

It would be a lot more insightful to discuss the aquisitions that have a known positive impact. The truth is probably that each company had just a few very important acquisitions (that should be more closely scrutinized).

Our current tax laws make vertical integration or even conglomerates more tax efficient. Greater scrutiny of anti-competitive mergers is needed, but we should also make separate companies just as tax efficient (VAT tax, etc) and otherwise closely examine how we can change economic incentives here.

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> My understanding is that the vast majority of these M&A destroy capital.

I think this would be very difficult to tease out of the data. Many acquisition are de facto defensive, even if they or not anti-competitive from a legal monopoly perspective.

How could one measure the the loss of brand value if the acquired companies were allowed to mature or be acquired by a competitor?

It's also a 'number of acquisitions' vs. 'value of acquisitions' argument.

If you had to guess the 'value' of TurboTax, The Microsoft Office Suite, Macromedia, Instagram, YouTube, NeXT, Pixar, VMware, etc. etc., you'd probably find that the good M&A outweighs bad.

It's just that bad M&A happens a lot can be really bad (AOL Time Warner).

>Our current tax laws make vertical integration or even conglomerates more tax efficient. >...we should also make separate companies just as tax efficient (VAT tax, etc) and otherwise closely examine how we can change economic incentives here.

"Biggest companies pay the least tax, leaving society more vulnerable to pandemic – new research (2020)" -- https://theconversation.com/biggest-companies-pay-the-least-... -- (https://news.ycombinator.com/item?id=22786371)

"Destroy capital" is unavoidably speculative, I think. I'm not sure it's the most useful frame. No need to be abstract if we're referring primarily to a few large companies/conglomerates.

Instagram, Whatsapp, Youtube, Android, Doubleclick, etc.. Those acquisitions are undoubtedly a major part of how Google & FB got to here... and here is a good place for shareholders. IMO, it's hard to argue management destroyed value, but we don't ever know alternate realities.

Either way, I think there's a strong case that "competition for monopoly" is the key dynamic here. A business similar to adwords-google but with only 1% of the market share is worth way less than 1% of adwords-google. Think of Yahoo/MSFT's attempts at adwords' runner ups. How much is reddit worth, relative to FB? There are lots of examples. Even if the market does have multiple contenders, the power curve tends to be mighty in modern, software-centric economics.

For a variety of reasons, strong pressure to consolidate appears to be the case often. Whatever those reasons, this creates/describes a strong incentive to consolidate. We know empirically that consolidation happened, and acquisitions played a role. Consolidation also happened in cases where acquisitions didn't play a major/obvious role.

Tax laws are one of those reasons, but not the only ones. There's low interest rates, the laws of other countries, the business cycles, financial markets, etc. It's financial markets that have the operative say on capital creation vs destruction. They value FB highly, and have usually seem pleased with M&A in terms of demand for the stock.

There are also "natural" reasons for M&A, and consolidation more broadly. Software is cheap to replicate/scale and is often winner-take-most. Media is similar. Ad markets (and marketplaces generally) exhibit network effects. Networks (like social networks) exhibit network effects.

IMO the whole theoretical/legal framework of antitrust is quite bougus, in 2021. Monopoly isn't just about pricing power, and whatever else ancient economists observed in previous centuries.

> Monopoly isn't just about pricing power, and whatever else ancient economists observed in previous centuries.

This understanding of monopoly has only existed since the mid-20th century. Prior to that, the definition of a monopoly was more expansive and included analysis of market & industry structure.

The start of this line of thought was Robert Bork in 1978: https://en.wikipedia.org/wiki/The_Antitrust_Paradox

cheers both. I thought these were from the 20s.

The IMO best contemporary overview of the legal issue as it pertains to tech is this piece[1] by Lina Khan. Love the subtle irony I did not catch until today in the title, "Amazon's Antitrust Paradox". It cites and argues the opposite of the Bork piece in many respects.

[1] https://www.yalelawjournal.org/note/amazons-antitrust-parado...

> we should also make separate companies just as tax efficient

Corporation taxes should be progressive too. Huge corporations are harmful to society, we should incentive many small ones to take their place.

>Huge corporations are harmful to society,

Can you tell me who kept your packets coming during the covid lockdowns?

Huge corporations are important. They possess the capital, logistics and capacity and institutional knowledge, as well as the resources to absorb shocks during crises. They are able to operate society at scale.

On average big business pays higher wages, provides better benefits, is more productive. Monopolistic competition is more dynamic and delivers better outcomes than highly competitive small-business.

> Can you tell me who kept your packets coming during the covid lockdowns?

Mine? Mostly a government company. But secondly a specialized logistics one that outsources last mile delivery almost everywhere. I'm impressed by how many places decided to concentrate shipping on that one, and how well it works.

Anyway, if size is that important for logistics, it's not some progressive taxation that will change things. On semiconductors, for example, it will certainly not make any difference. And if size is not that important, then not having one or two companies killing every competitor due to concentrated power overwhelms any possible loss you may come out with.

>Huge corporations are harmful to society

Not necessarily disagreeing but I am curious how you ultimately came to such a general conclusion. I can see both sides: E.g., Walmart may be good for many in society by offering lower prices, while simultaneously being bad by putting smaller, better paying jobs out of business

Ideally, we wouldn’t have corporate taxes. They’re well-intentioned as a tax on the wealthy, but it would make much more sense to just tax the people who are wealthy! Tax them more than we do today, and get rid of carve-outs like Capital Gains.

> My understanding is that the vast majority of these M&A destroy capital.

It'd be interesting to see whether the modern tech industry is an anomaly with regards to this longstanding pattern. In particular, I wonder there's an exception for the typical acquisition of smallish, fast growth startups by a tech giant who can generate synergies by quickly integrating the tech on to their platform. Historically these types of acquisitions wouldn't show up in the M&A literature, because the targets are private companies, and the standard estimation techniques rely on public equity returns.

> My understanding is that the vast majority of these M&A destroy capital.

The FAANG stocks have very high compound annual returns stretching over more than a decade. I don't think there's evidence that those returns would be higher without their many acquisitions or evidence of capital destroyed.

It can be argued that whether M&A on net is capital generative or destructive depends on the management team and their ability to successfully integrate the acquired company's team, products, and technologies. Which translates to bad management destroys capital, which is an obvious truism.

I agree that returns would not be much different if they had avoided bad M&A. They have tons of cash and have to do something with it if they don't give it back to shareholders. Amazon has historically had the least amount of cash sitting around and thus has done the fewest acquisitions (FB may be less, but their market cap is smaller and their business is less diverse).

I also agree that returns have been greatly improved by a few key acquisitions for Google (Double Click, Youtube) and FB (Instagram). For Apple and Amazon I don't know where they are benefiting from their M&A (this is likely my ignorance, I would be interested to know).

I just think it makes more sense to focus on a few key (anti-competitive) acquisitions than to complain that big companies do hundreds of M&A deals over a couple decades.

It's possible for a company to benefit from an M&A deal in a way that is not anti-competitive.

> For Apple and Amazon I don't know where they are benefiting from their M&A (this is likely my ignorance, I would be interested to know).

It's mostly around specific and niche tech in the case of Apple, which is a good example of the above IMO. Unless they involve tons of patents (which is not my impression) they aren't really anti-competitive. Other firms can develop this same technology should they wish to make the investment.

I’m sitting here wondering whether there might ever be a tax on user data. It sounds a bit strange but I do feel like we underestimate how much data consolidation creates uncompetitive environments.

Even worse is that all of this data can be used to infer other data. Once you know enough about a person, you can start making some alarmingly accurate guesses about them. I'm hoping for a lot more than a tax on this kind of data, myself.

Yes, tech firms incinerate capital on these deals (generally, Google particularly). It is confusing cause and effect: these firms are large (with little to no shareholder oversight), and so can spend large amounts of money on useless acquisitions.

The effect on innovation is the opposite: ppl start up companies knowing they will get bought (I wouldn't call this innovation but others would).

And your point about dividend stocks is wrong. Dividend stocks are usually cash-generative businesses that have high ROI but are capital constrained. For various behavioural reasons, people underpay for these stocks...although you have to factor in that dividend stocks will generate taxable income, so the returns tend to be overstated. Either way, it is neither here nor there...the question is about what you pay and what you get. You pay a certain price for marginal ROIC, the question is whether the price you are paying allows a decent return (generally speaking, I don't like dividend stocks, they are slow-growth, I will have to pay tons of taxes, and I will have to work out how to recycle the capital...I would much rather own a stock that can retain my capital and invest it for me at a high rate).

Btw, the reason why M&A happens and destroys capital is because it is a very easy route to growth, investors aren't sophisticated about value-destroying deals (if they result in growth in EPS), and comp is usually based on growth. It is a pretty toxic combination (you can't push on a string, most businesses can't grow fast, paying execs doesn't change that so the execs walk away with a big sack of your money and you end up with nothing).

>My understanding is that the vast majority of these M&A destroy capital.

My understanding is M&A is how large, stable companies that are focused on maintenance activities ultimately fund R&D. It would be interesting to see how M&A compares with in-house R&D in terms of "destroying capital"

> the vast majority of these M&A destroy capital

Even if true, it's irrelevant. The vast majority of VC investments also lose money, or as you put it "destroy capital" -- that's just high-risk investment generally. Nobody knows in advance what the future holds, which is why you spread your risk with lots of investments (or acquisitions).

But as long as you have enough runaway successes, then acquisitions are an overall profit-making, not profit-destroying, strategy. Even if the profit only comes from a small minority of them.

And that's only if you're counting the direct future profitability of an acquisition. Many times, the acquisition is also for key expertise or employees that may otherwise be prohibitively difficult to get, patents, the only way to compete in time, or is even strategically defensive -- to prevent your main competitor from acquiring the same critical technology/team.

I think the point is that there is some real business subsidizing the failed M&As. If a VC lost money on average (mean) with each investment, they’d run out of money, and the problem would self correct.

If a company is able to print unlimited cash, they can use the revenue on unlimited ill-advised acquisitions, and do unbounded damage to the economy.

> If a company is able to print unlimited cash, they can use the revenue on unlimited ill-advised acquisitions, and do unbounded damage to the economy.

At some point, they're still bound by what lenders will give them or how much investors will buy their stock for.

But apply the same to a government that can print unlimited cash..

(We may quibble over "unlimited" but it has been US Fed policy for decades and appears to be accelerating now.)

> there is some real business subsidizing the failed M&As

Citation needed. This is a common claim, but it flies in the face of common sense and financial incentives.

Corporate boards simply do not approve acquisitions because they've got no better ideas of what to do with cash, that's a fantasy. Boards are held accountable to investors, and investors want to make money, not fritter away cash. Investors want rising stocks or dividends at the end of the day, period.

Like I said, acquisitions are investments and investments can be risky, and so it's super easy to say in hindsight that an acquistion was dumb and that the board must be irresponsibly frittering away money instead of returning it to investors. But hindsight is always 20/20, right? As a general rule, companies simply are not "subsidizing" M&A's. It's just not how businesses or boards work at all.

Instagram was bought for 1 billion and is now estimated to be worth over a hundred billion dollars. Facebook has acquired 89 companies according to crunchbase so even if all of those cost a billion each which they didn't, Instagram would have made up for all of them single handedly.

And yet the “other bets” from Google don’t yet have a hit…

“The next big thing” is super hard work.

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