In January of 2017, the Yale Law Journal published a paper entitled “Amazon’s Antitrust Paradox.” The author was a then-law student by the name of Lina Khan. Khan argued that Amazon was a massive piece of “essential infrastructure” for many industries, chief among them e-commerce and cloud storage.

Khan argued that Amazon’s massive size and scope created “anticompetitive concerns.” But the company had largely escaped scrutiny.

How?

For one, the company’s massive growth had not resulted in massive profits. For years, Amazon posted meager profits, opting instead to reinvest capital into the business to fuel future growth.

For another, Amazon’s size had not resulted in higher prices for consumers. After all, most items on the Amazon e-commerce platform are reasonably priced and often cheaper than other retailers. And their cloud services are priced in-line with the rest of the industry.

This posed a paradox, Khan argued, because the standard for anticompetitive activity in the United States has been, for decades, consumer harm. Put simply, anticompetitive activities should lead to higher prices for consumers. This had been the standard since the days of Standard Oil and the Gilded Age.

But, as mentioned above, that simply wasn’t happening. Amazon may have been large, but it wasn’t harming consumers by exploiting its size to raise prices. Khan concluded that America’s standards for antitrust ought to be reexamined to stimy the growth of these “anticompetitive market structures” (her words).

Khan must have stuck a nerve. The paper was picked up, read, and discussed within the realm of Yale law students and American jurisprudence. But it didn’t stop there. The paper gained traction among many analysts, executives, and writers.

The purpose of this report is not to litigate the status of antitrust in America. And I certainly don’t hold any personal animosity towards Lina Khan. In fact, I respect her thorough examination of the topic.

But Khan would have an important impact on corporate America in the years ahead. And that topic is certainly worth examining. And it all started in 2021.

Ms. Kahn Goes to Washington

In March of 2021, the Biden Administration nominated Khan as the commissioner of the powerful Federal Trade Commission (FTC). One month later, on June 15, Khan was confirmed by the Senate, making her the youngest-ever FTC chair at just 33 years old.

It might be overstating things to say that some of the world’s largest companies were “afraid” of Lina Khan, but they certainly weren’t happy about her appointment. A few weeks later, Amazon officially filed a request with the FTC to have Khan recuse herself from any investigations regarding the company.

The Amazon executives, it would seem, had read her paper. From the filing:

Given her long track record of detailed pronouncements about Amazon, and her repeated proclamations that Amazon has violated the antitrust laws, a reasonable observer would conclude that she no longer can consider the company’s antitrust defenses with an open mind.

As it turned out, the large tech companies had good reason to be nervous about the Khan era at the FTC. The young chair took to her new job with gusto.

Nvidia Loses an Arm

In December of 2021, the FTC sued Nvidia (NVDA) to block the proposed $40 billion acquisition of Arm, a British chipmaker. The Arm acquisition would have likely been a great long-term play for Nvidia. Arm’s processor architecture had become increasingly important. Arm-based processors can be found in all modern Macs and MacBooks from Apple. But after initially fighting it out in court, Nvidia eventually abandoned the acquisition in February 2022. Lina Khan had her first big victory.

And even when her agency wasn’t successful, it proved very good at creating “friction” in many high-profile deals.

In July 2022, Khan’s FTC attempted to block Meta from acquiring Within Unlimited, a virtual reality fitness app.

Meta eventually prevailed and was allowed to go through with the acquisition in February of 2023. But the company still had to spend months in court – not to mention money on legal fees – to get the deal done.

That sort of “friction” is not conducive to a healthy M&A environment. And it shows in the numbers.

This chart – courtesy of the Institute for Mergers, Acquisitions, and Alliances (IMAA) – shows the broad environment for M&A activity.

What you should notice is the boom in activity in 2021, and then the steep drop-off as Lina Khan’s FTC rolled into action. 2023 was especially bad, with total value of M&A clocking in at levels not seen in 10 years.

To be fair, this slowdown was not entirely caused by the newly aggressive FTC. It’s a strong agency, but it’s still just one agency. Alongside the Khan era was a sharp increase in interest rates. From 2021 to the present, the Federal Funds rate rose from essentially zero to around 5.25%, where it sits as I write this.

Rising interest rates make it more expensive for companies to finance acquisitions. Combine this with a combative FTC, and many companies decided it wasn’t worth the headache.

After all, why bother when you could simply collect 5%+ risk-free? For many companies, it was a no-brainer. And as a result, many of the world’s largest companies are sitting on a mountain of cash.

• Berkshire Hathaway: $189 billion

• Apple: $162 billion

• Alphabet: $108 billion

• Microsoft: $80 billion

• Meta: $58 billion

But I suspect this will change… and soon.

Under Pressure

In many ways, the state of M&A is like a champagne cork, and the pressure is building.

At the recent Bitcoin 2024 convention, Donald Trump promised to fire SEC Chair Gary Gensler on “day one.” Without getting into detail, Gensler has been the bane of the crypto community for years. His combative actions have been criticized and challenged by even the most buttoned-up players in the space, like Coinbase (COIN).

It remains to be seen if Trump’s promise would also apply to Lina Khan, although it seems likely. But at the very least, an SEC without Gensler would be a boon to M&A in crypto and the broader market. Even Kamala Harris is flirting with the idea of a new regulatory era.

No matter who wins the presidential election, it seems likely that a new regulatory environment is close at hand. But even if Khan manages to hold onto power, there’s another trend that should kickstart a boom in new M&A activity

It’s widely expected that the Federal Reserve will cut its rate at the upcoming FOMC meeting in September. And for the first time in a long time, the market is feeling very confident that will happen.

And once interest rates come down, the headwind for slower M&A will become a tailwind. Financing acquisitions will become more affordable. The risk-free 5% from Treasurys should slowly fall.

This, combined with the potential for a friendlier regulator environment, should be all the incentive companies need to restart the M&A machine and find accretive deals for their shareholders.

Time will tell what the figures ultimately are, but I wouldn’t be surprised if we see all-time high levels of deals and deal value in the years ahead.

Regards,

Brad Thomas
Editor, Wide Moat Daily