Mergers and acquisitions are a popular target of economic populists on the left and right. Populists blame mergers for increasing the power of large, dominant corporations who make their smaller competitors an offer they can’t refuse—which is to sell their company or be driven out of business by the dominant firm. These attacks distort the vital role mergers and acquisitions play in the economy—and how small firms benefit from merging with, or being acquired by, a larger competitor.
An example of how a small business can benefit from being acquired by a large business is the social media company Instagram. Formed in 2011, the photo-sharing app grew to over 30 million users in a short time. Instagram’s growth caught the attention of Facebook (now Meta), which bought it for $1 billion in 2012. Critics of the acquisition say that Meta bought Instagram to ensure it would never grow large enough to threaten Facebook’s position as the world's largest social media site.
This argument ignores that fact that since being acquired by Meta, Instagram has continued to innovate; adding videos, expanding messaging services, and even opening an online store. Meta’s investment has paid off as Instagram is now the third most popular social media site in the world (behind Facebook and YouTube) with over 2 billion users, proving that Instagram, and their parent company, remain creative and responsive to changing consumer tastes. For example, Instagram has started focusing on Meta's Reels feature. Reels are short form videos like the type that have attracted many young people to TikTok.
Instagram may have succeeded without Meta’s investment of time and money. However, it is doubtful it could have grown so fast on its own in such a relatively short time. A similar story can be told about the fourth most popular social media site, WhatsApp. WhatsApp allows users to send text and video messages using wifi and cellular data instead of having to rely on SMS technology. WhatsApp is particularly useful to people in parts of the world where cell phone service is expensive or unavailable. Despite its growing popularity, WhatsApp lost $138 million in 2013, the year before Facebook spent $22.8 billion to acquire the site.
Meta bought WhatsApp because of the potential growth of its messaging services and the benefits to existing platforms (including Instagram) from interfacing with WhatsApp. This would expand the popularity of Meta’s properties in the areas where WhatsApp was widely used. Today, WhatsApp has nearly 3 billion users, many of whom have also joined other Meta platforms.
The benefits of Meta’s acquisitions of Instagram and WhatsApp to workers, investors, and consumers should be obvious to all. Yet, the Federal Trade Commission(FTC) is suing Meta, claiming its acquisitions of Instagram and WhatsApp served no other purpose than to remove them as potential competitors. Accordingly, the FTC wants the courts to force Meta to sell both.
The government’s argument ignores the fact that neither company was likely to become a threat to Facebook at the time when they were acquired. It also ignores how both companies have become powerhouses in their own right since becoming part of Meta. The biggest flaw in the government’s case is the idea that a company would spend billions on acquisitions so that it could kill the acquired company—thus depriving the acquiring company of a future revenue stream and turning what might have been a lucrative deal into a guaranteed loss. This defies both common sense and good business strategy. The FTC also fails to realize that these types of acquisitions encourage new entrants into the market seeking a payday from big business.
Meta’s purchasing of Instagram and WhatsApp proves how mergers and acquisitions benefit both the acquiring and acquired companies, as well as consumers. We need to protect mergers and acquisitions from government bureaucrats who think they know how large a business should be “allowed” to grow, or when a small business must be “protected” from merging with a larger rival. Instead of limiting mergers and acquisitions, those who want to ensure that today’s small startup can become tomorrow’s dominant firm should encourage the FTC, the Justice Department Antitrust Division, and all federal agencies to stop attacking these legitimate market transactions.
