How Antitrust Corporate Breakups Should Be Good For Shareholders and Society

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Curse Of Bigness - AntitrustThe first time you heard of antitrust laws being used to break up large companies you likely thought that that it would result in a destruction wealth.  Depending upon your political persuasion or past experience with the company, that may or may not have bothered you.

However, it is important to remember that the driver behind antitrust law is to increase competition and innovation, there by creating more wealth.  In fact, breaking up large companies is usually advantageous to the shareholders of the companies being broken up.  Antitrust actions by Governments is analogous to a board of directors determining that the value of a company can be unlocked by dividing the company into separate entities.

The idea is that a company with 5 divisions can be divided into 5 separate companies worth much more than original company.  Expressed algebraically: 5 / 5 = 1.3 .  This is because the parent company often holds back innovation in its divisions and that reduces value.

Today, this is happening with many multinational conglomerates like General Electric, United Technologies and HP (Hewlett Packard) .  Shareholders and boards of directors are constantly pushing to maximize returns by taking non-core or competing products/divisions and spinning them off in to separate companies.

Sear’s can be thought of in the same way.  Sear’s as a parent company to Sears Home Services, Viking Appliances, Sears Real Estate Holdings… was worth vastly more in its component parts than it was as a whole.  It is sad to see the Sear brand die out, but the shareholders of Sears were well rewarded for the breakup and Sears assets have lived on under other owners to benefit society.  In the end, only the remaining hulk of the company, the retail stores died.

In Canada, one famous example of this was the Wendy’s / Tim Horton’s tie up came to to an end when Tim Horton’s wanted to move into sandwiches and complete with Wendy’s.  Shareholders and consumers were better served with two separate companies.

Google Amazon Facebook AppleIn the case of Google, Amazon, Facebook and a few other tech giants, there is a strong case to be made for considering them as near monopolies in their fields that acquire and build new products primarily to build a defensive firewall against startups.

Think about Facebook.  If you were an venture capitalist, are you going to give a startup money to a company with a messenger product?   I doubt it.  But why does Facebook, a social media company, have 3 separate messaging products (Facebook Messenger, WhatsApp, Instagram) that used to compete and innovate.  Today, those products have lost their edge and just plod along taking idea’s from smaller firms.

Messaging is not core to Facebook’s business but it operating these three platforms to stifle competition by creating a massive barrier to entry into the social media space.

We don’t blame Facebook for this; we would do the same thing if we were in their position and it is their job to protect their market.  But what is good for Facebook in the short term is very very bad for society in the long run.

If Facebook were to spin off their messaging apps, Facebook itself would be worth less than it is today, but:

  1. it would not reduce shareholder value as Facebook shareholders would either be given cash or shares in the newly formed spin offs
  2. it would not reduce utility because users would almost certainly have an increase in features and functions as the new company is forced to compete to stay alive
  3. it would not be beneficial to any given political party because in the U.S. both Democratic and Republican members are in favor of considering the application of antitrust legislation to the big three

Of course there are winners and losers with any change, but current shareholders and society at large would almost certainly end up better off.

Google Antitrust EUI personally think there are better ways of dealing with tech companies that have too much power than just breaking them up. One fundamental of market economies like those in the West (UK, Canada, Germany, US, …) is that companies which own market can not participate in that market.

This means that Amazon should either be able to run the “Amazon Marketplace” OR sell things in a digital store, but not both.  This is because it is just too easy for Amazon to rig the system… and they have.  Did you know that until this week, when Amazon bowed to government pressure, they required sellers to NOT sell their products for less money on other platforms?  For example if you sell laptops on Amazon, you can’t sell them directly for less money.  It is none of Amazon’s business what your companies does outside of Amazon.  This rule is intended to kill other marketplaces and lock small vendors in.

Because in many retail sectors Amazon Marketplace is so dominant, it leaves smaller firms with no choice.  If you are Dell or HP, you have a choice but if you are Johnny’s Computers and you want to scale up, you have not choice but to sell on Amazon.  That is clearly anti-competitive and just wrong.

Amazon Prime and PunishmentDid you know that Amazon uses the sales data from small vendors on its Marketplace (Amazon.com) to decide what Amazon should sell itself?  So after a small company builds a market for a new product, Amazon can easily determine profitability and sell the product directly, putting the smaller company out of business.  Again, it is just too easy for a near monopoly to take advantage of the information it, and only it, has.

One way for Amazon to continue to operate is to split the company into two:

  1. Amazon Marketplace – www.Amazon.com
  2. Amazon Fulfillment – products & logistic using the mighty Amazon Warehouses

If the companies are separated it would be illegal to conspire and vendors, consumers, competitive startups and shareholders would be better off.

There were certainly errors in the background foundational arguments for using antitrust laws to break up Facebook, Google, and Amazon recently made by US Presidential Candidate Elizabeth Warren when she called for Big Tech Breakups.  However, while we do not necessarily agree with that position, it is worth noting that such breakups are common in the private sector and are often good for both shareholders and society at large.

Watch these two short videos to understand the issue better.

 

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