A coalition of venture capital firms has asked the court not to invalidate California’s venture capitalism-based economy on the altar of political expediency.
At immediate issue is the Federal Trade Commission’s challenge to Microsoft acquiring game developer Activision Blizzard. A California court has already rebuffed the Commission’s challenge, stating that all the evidence points to this acquisition increasing competition and consumer access to entertainment games. Now, however, the FTC is appealing the decision, putting the fate of the acquisition in the hands of the San Francisco-based United States appeals court, which heard oral arguments from both sides in December.
Make no mistake: the outcome of this case will impact far more than the future of the video game industry.
A September 13 friend of the court brief from a coalition of venture capitalism firms expressed fear that the FTC stopping this merger can set an anti-venture capitalism precedent that stops the VC industry entirely. The firms wrote that “venture capital investment is not intended to sustain a business throughout its lifecycle, from startup to maturity. Rather, the goal of venture capital is to invest in a startup company at its infancy and support it until the company reaches a sufficient size, performance level, and credibility so that a successful exit is possible.”
In December, a coalition of over 30 venture capital firms and investors that manage a combined $130 billion in assets echoed their claims. They wrote, “If the FTC’s approach were adopted, many more acquisitions would be subject to lengthy and expensive regulatory review and litigation that few if any transactions would be able to withstand. As a result, many transactions will be abandoned upon challenge or never pursued, grinding American innovation to a halt.”
I agree with this assessment. Venture capitalists invest in companies like Activision Blizzard under the expectation that larger firms will acquire them once they reach maturity. There is nothing wrong with this arrangement. These acquisitions are how they receive the capital and liquidity needed to continue funding the next generation of startups.
The FTC fears that these acquisitions will give established companies excessive market share. While monopolization is undoubtedly something to monitor, it is often far from what results from mergers and acquisitions.
In the case of Microsoft-Activision, a California court already rejected this concern from the FTC because Microsoft has already offered game licenses to its leading competitors.
If the FTC can stop this venture capitalism-fueled acquisition, where there is an abundance of evidence of it being a pro-competitive merger, it would have all the precedent it needs to stop every other VC case that comes after it. That would pose problems for California because venture capitalism is the backbone of its economy.
In writing about the potential long-term consequences blocking the Microsoft-Activision acquisition could have for the state, Ilya A. Strebulaev, the David S. Lobel Professor of Private Equity at Stanford University and a research associate at the National Bureau of Economic Research, wrote, “In the second quarter of 2023, the Bay Area received $9.1 billion in venture capital investments — 31% of all the dollars invested in the United States.”
He’s right: Venture capitalism generates a significant chunk of the Bay region’s impressive $577 billion gross domestic product and 2.5 million jobs. It is how many California companies, like Apple, Google, and Uber got their start and became the forces to be reckoned with that they are today.
The San Francisco appeals court has an opportunity to reject the FTC’s appeal and set a precedent that protects venture capitalism for the years, months, and decades to come. Hopefully, it carefully reviews the case facts and does just this. The livelihoods of tens of thousands of residents depend on it.
Dr. John Paglia is Professor of Finance at Pepperdine Graziadio Business School. He is an expert in mergers and acquisitions, venture capitalism, and private equity.
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