The United States has, over the past few decades, been extremely lenient on antitrust enforcement, rarely blocking deals, even with overseas competitors. Yet, there have been inklings that things are changing. Yesterday, we learned that Visa and Plaid called off their combination after the Department of Justice sued to block it in early November. We also learned a week ago that shaving startup Billie would end its proposed acquisition by consumer product goods giant P&G after the Federal Trade Commission sued to block it in December.
Antitrust won’t kill acquisitions in general, but it could prevent the buyers with the highest reserve prices from entering the fray.
Many, many, many other deals of course get through the gauntlet of regulations, but even a few smoke signals is enough to start raising concerns. That new calculus is even before we start to look at the morass of reforms being proposed around antitrust in Washington, D.C. these days, nearly all of which — on a bipartisan basis — would create stricter controls for antitrust, particularly in critical technology industries and information services.
So, what’s the valuation prognosis for startups these days given that one of the most important exit options available is increasingly looking fraught?
Driving valuations higher of course are the markets themselves, which seem to be insatiable in their appetite for growth stocks. Affirm, which is debuting officially later today, priced much higher than expected at $49 a share, up from a revised price range of $41 to $44 and an original range of $33-$38 after it filed to go public. Other tech stocks debuting on the public markets have seen similar jumps in recent weeks.
Also driving valuations higher in the coming months are SPACs. In the design of a SPAC, these blank-check entities have limited periods to consummate an acquisition (typically two years or so, but the length can vary by SPAC). The very early first wave of SPACs are going to come due toward the end of this year, which means they are going to be hungry to find a company — any company — to acquire and throw out onto the stock exchange. That hunger is sure to buttress startup valuations and is also in line with the frothiness of the market.
All that said, acquisitions remain one of the most valuable means of exiting a startup and doing so in a way that can be far less complicated than an IPO. Up until the past year or so, exit by acquisition was the predominant way high-flying startups exited, since most other startups who wanted to continue just kept raising more and more mezzanine capital rather than go public. Now, with two dozen prominent tech IPOs behind us, that ratio might have changed a bit.
Nonetheless, acquisitions and the exit process behind them can quickly drive purchase prices up. Take NUVIA this morning, which exited to Qualcomm for $1.4 billion. The startup is about two years old with an experimental next-gen chip under design. There is no exit for this company by SPAC or IPO given that it would probably just file a single-page Form S-1 to the SEC with the letters “TBD.” Yet, the star talent it acquired and the technology it’s been developing is attractive enough that Qualcomm and presumably other chip giants were willing to buy it early at a high price.
Here’s the challenge: The companies with the deepest pockets and greatest penchant to buy an individual startup are generally the companies that have the most antitrust risk. Yes, there are occasional outcomes where a deep-pocketed company wants to expand into an entirely new market where antitrust concerns are minimal. Far more common though is an acquisition like Nvidia and ARM’s $40 billion proposed acquisition, where ARM would dramatically increase Nvidia’s footprint — and leverage — in chips.
Antitrust won’t kill acquisitions in general, but it could prevent the buyers with the highest reserve prices from entering the fray. Without that top bidder driving the price high, the market price for an acquisition could decline quite dramatically.
So far, valuations haven’t been broadly affected, although the excitement in the public markets might occlude our analysis there. There are certain markets though that are clearly coming under scrutiny where valuations are certainly going to be affected.
First and most obviously is in consumer-product goods, particularly in the popular thesis around DNVBs, or digitally native vertical brands. After the block by the FTC on Billie, and an earlier block by the FTC in 2020 against Harry’s, it seems clear that U.S. antitrust authorities want broad competition for consumers in household goods.
That affects a whole wave of startups that were born out of the rise of Instagram, influencer marketing and the DNVB thesis. Many of these startups are interesting growth properties, but lack the independent staying power to IPO. For some investors, a sale to P&G at the right price was always the intended goal all along. That route now looks perilous, and there aren’t great or obvious alternatives here for many of these brands. So I expect consumer goods startups to be hit on valuations harder this year as reality sets in.
A second area that is getting more attention these days are core “infrastructure” startups being merged into the tech giants. Think Google buying DoubleClick or Facebook buying Onavo. These acquisitions helped the now tech giants gain huge leverage over online advertising and their competitors with better data and more centripetal force around their marketplaces.
These sorts of acquisitions are where a huge amount of the attention in Washington, D.C. has been placed regarding antitrust reform, and I expect to see these sorts of acquisitions to slow to a trickle as the companies assess their power to get deals done.
Another market that’s getting tougher is fintech, where Visa and Plaid’s wave-off is indicative of heavier scrutiny of financial services, which is true not just in the United States, but also in China, India and Europe. There are huge concerns about concentration of tech companies in fintech and also with legacy companies buying tech companies to try to leverage their current market position to dominate in the next generation of technologies as well. So expect fintech to go the way of Affirm: It’s the public markets or … bust (or more likely, a PE buyout à la Vista Equity).
One broad area that hasn’t gotten a lot of scrutiny is SaaS. SaaS mergers and acquisitions seem to be mostly fine with regulators, perhaps given how early a lot of these companies are and the fact that there remain huge incumbents that these startups are fighting against. That’s not to say this market won’t get more scrutiny in due time, but at least for now, it seems to be much less visible. So a prominent deal like Salesforce buying Slack for $27.7 billion doesn’t seem to cause much consternation among regulators (at least so far).
With the Biden administration coming in shortly, we will know more about how his Justice Department under presumed attorney general and one-time Supreme Court nominee Merrick Garland will start setting policy here. Nonetheless, antitrust concerns need to increasingly be a part of the equation for startup valuations, and depending on the specific sector, could have pretty steep ramifications on values going forward.