The Election's Impact on Big Tech Mergers

The future of big tech mergers and acquisitions or M&A, remains uncertain with the upcoming US elections and ongoing antitrust investigations. The tech industry has witnessed a significant slowdown in M&A activity among the most prominent players in recent years. This shift is primarily due to heightened regulatory scrutiny, especially from the Federal Trade Commission (FTC), making it increasingly difficult for tech giants to expand their reach through acquisitions.   

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As big tech companies have grown into global behemoths, lawmakers worldwide have noticed. Their increasing influence over vast segments of the economy has sparked concerns about data privacy, reduced competition, and market consolidation. The concentration of vast amounts of consumer data within a handful of tech companies sparks worries about the potential misuse of personal information. Regulators fear these mergers could limit consumer choice and stifle innovation.   

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Many countries have introduced stricter regulations governing data management, storage, and protection in an effort to stop monopolies. Similar legislation will likely be proposed in the United States, adding to the regulatory landscape that big tech companies must navigate.  

Major tech companies like Nvidia and Adobe have abandoned multi-billion dollar deals due to intense regulatory scrutiny. Nvidia's acquisition of Arm Holdings was terminated after facing opposition from major Arm customers and regulatory hurdles. Similarly, Adobe's merger with Figma was blocked despite attempts to convince regulators of its non-competitive nature. These high-profile examples illustrate the current state of antitrust enforcement.  

The upcoming November Presidential election is expected to shape the regulatory framework for big tech significantly.  

If Vice President Kamala Harris is elected and the Democratic Party retains control of the Senate, a continuation of the stringent oversight seen during the Biden administration is likely. Under Lina Khan's leadership at the FTC, regulatory standards have intensified, with thorough evaluations of significant deals, like Microsoft's acquisition of Activision, and smaller transactions, such as Amazon's purchase of iRobot. A continuation of this trend could lead to a further reduction in mergers and acquisitions.  

Conversely, the regulations could change if Donald Trump returns to the presidency. While his previous administration filed an antitrust suit against Google in 2020, a second Trump term might result in reduced regulatory oversight, allowing big tech firms more freedom. The Republican Party's general inclination towards less business regulation could create a more favorable environment for M&A activities, possibly enabling these companies to revitalize their acquisition strategies.  

Control of the Senate is critical in shaping regulatory outcomes, as it influences the confirmation of key positions within the FTC and the Department of Justice's Antitrust Division. A Democratic sweep could lead to legislative initiatives, such as the Reward Work Act, which aims to prohibit share buybacks. This type of legislation might shift the focus of big tech companies toward returning capital to shareholders through dividends rather than engaging in acquisitions.  

Tech firms have adopted alternative strategies to circumvent regulatory hurdles, such as internal investments, reverse "acqui-hires," and unrestrained investments in AI startups. However, these approaches may provide a different level of control and integration than traditional M&A.  

To navigate regulatory challenges, tech companies have focused on developing internal technology and implementing innovative investment strategies. With robust cash reserves, these firms have increasingly turned to investing in emerging tech startups and employing reverse "acqui-hires." This approach allows them to hire the founders and critical talent of targeted companies while keeping those companies as independent entities, thereby sidestepping the regulatory scrutiny that accompanies traditional acquisitions.  

In recent years, the surge in non-controlling investments, particularly in artificial intelligence startups, reflects a strategic response to a more challenging regulatory environment. Major players like Microsoft and Amazon have committed substantial resources to these investments, recognizing the potential of AI technologies. For instance, Microsoft's $10 billion investment in OpenAI not only secured a significant stake but also positioned Microsoft as a leader in AI integration with its existing products, enhancing its competitive edge. Similarly, Amazon's $4 billion investment in Anthropic solidifies its foothold in cloud services and AI, ensuring access to advanced AI models that enhance its offerings.  

As regulatory oversight continues to evolve, these investment strategies allow big tech to remain agile and responsive, ensuring they can continue to advance their technology initiatives while mitigating the risks associated with traditional mergers and acquisitions.   

The November election presents two pathways for big tech regulation: a potential continuation of stringent oversight with a Democratic administration or a shift towards a more lenient approach under a Republican party. Each outcome carries implications for M&A activity and the financial strategies of these tech giants, highlighting the election's importance in determining the industry's direction.  

The future of big tech M&A is uncertain, but several potential scenarios are emerging. Tech giants might focus on smaller, less scrutinized deals, invest heavily in organic growth, or explore partnerships and collaborations. 

Stay up to date as the technology industry shifts following the November election. Morningstar Direct offers data and analysis to help investors make informed decisions. With our comprehensive research tools, you can: 

• Track market trends and regulatory changes. 

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• Monitor merger and acquisition activity.  

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