Many tech startups including Amazon are created with the explicit goal of being acquired by a larger company. But when regulators reject procompetitive acquisitions based on a misguided crusade against self-preferencing, it harms both entrepreneurs and consumers (here).
Today, amazon terminated its planned purchase of iRobot, maker of the Roomba robotic vacuum. The companies agreed to a $94 million breakup fee.
No path to regulatory approval for Amazon
The e-commerce giant’s decision to walk away from its purchase of Roomba maker iRobot shows the limits of Amazon’s willingness to take on the burdens of a new company. The move also highlights the need for more regulatory flexibility to allow companies that grow rapidly through acquisition to do so without fear of antitrust enforcement.
The companies said they terminated the deal because they saw no path to European Union regulators’ approval. EU officials reportedly expressed concerns that the deal would restrict competition, for example by preventing rivals from selling their own robot vacuums on Amazon’s marketplace or limiting access to their products. Politico reported that Amazon did not offer concessions to the EU, which had until February 14 to approve or veto the acquisition.
It’s not the first time that an Amazon acquisition has run afoul of antitrust authorities. The company’s Audible purchase of audiobook publisher Audible in 2008 and its acquisition of used book seller AbeBooks in 2009 drew criticism from groups that called for antitrust enforcement.
In its statement, Amazon emphasized that “the Chicago School view of antitrust law is that excessive regulatory hurdles discourage entrepreneurs and hinder acquisition as a viable path to success.” It added that it has seen no evidence that the EU’s scrutiny of mergers and acquisitions hurts consumer welfare.
No path to profitability
If the acquisition of a new company is not accompanied by a clear path to profitability, it may be risky. This is why it is important to find a strategy that makes sense for the long-term. Otherwise, the company could lose its edge and be forced to retreat. This is what happened to Amazon when it decided not to move forward with the planned expansion of its campus in Queens, New York. The decision was a blow to the people who needed the jobs and local businesses that would have benefited.
The move also means that Amazon will not have access to the valuable intellectual property of iRobot, which is the developer of Roomba vacuums and other smart home robots. iRobot, which has an estimated 75% share of the US market for robotic floor cleaners, says it is moving on with its plan to make “thoughtful robots and intelligent home innovations that will make lives better.”
Some investors believe that Amazon’s retail business does not make money and that its wildly profitable AWS division is subsidizing its phenomenal e-commerce growth. But this is a misreading of the company’s core business model. Amazon’s classic fixed cost business model uses the internet to get maximum leverage out of its fixed assets, and it only turns a profit when transaction volume exceeds its fixed costs. The firm can wait until its sales grow to this point, or it can accelerate the process by reducing investment in the fixed asset base.
No path to growth
After years of waiting for regulators to clear its acquisition of Roomba maker iRobot, Amazon decided Monday to walk away from the deal. In a release, the companies said there was “no path to regulatory approval in the European Union,” and that they would instead focus on stabilizing iRobot’s business while advancing key growth initiatives. The company will also restructure and lay off 350 employees, or 31% of the workforce.
Affected workers are likely to be disappointed, but some will see it as a long-term win. Amazon’s willingness to take short-term pain in exchange for gaining long-term leverage has been critical to its success. Whether in Seattle, where the city’s relationship with Amazon deteriorated over a proposal to tax large employers, or in New York, where local politicians mobilized against the deal, the company has figured out how to make the most of its resources.
Amid the uncertainty, iRobot said it would accelerate its efforts in robot vacuums and other products that address real world challenges. But the company also said it would cut research and development spending by 50% and pause work on non-floorcare products. iRobot CEO Colin Angle promised to continue building thoughtful robots and intelligent home innovations that help people live better lives. He added that the termination of the deal was “disappointing.” Ghaderi’s complaint alleges that she was denied a promotion in her first performance review after returning from maternity leave because she didn’t meet a “high bar” set by Amazon. She also claims that she was demoted from her role as an engineering manager because of a comment made by department director Daniel Marcu about her being from Iran.
No path to innovation
When it comes to innovation, the ability to quickly acquire and meld new technology is key. That is why companies like Amazon pursue acquisitions as a way to gain a foothold in new markets and grow faster. But these deals often run afoul of antitrust regulators. And that may be a serious problem for the companies.
One of Amazon’s biggest mistakes was its inability to recognize anticompetitive behavior in the online marketplace, says Oliver Wyman’s Jim Fields. In a recent column, he cites the case of Amazon’s strategic pricing of e-books, which distorted the market and helped establish its dominance. But the company was able to dodge antitrust scrutiny by arguing that its pricing strategy was “loss leading” rather than predatory.
For instance, a lawsuit filed last week accuses Amazon of demoting and firing a high-flying AI scientist who raised concerns about the company’s internal rules on copyright infringement in her research. The company allegedly singled her out for this and other actions because she was a woman, says her complaint.
The move was a setback for Gov. Andrew M. Cuomo and Mayor Bill de Blasio, who had touted the deal as a way to diversify New York’s economy. The retreat also came as a blow to progressive activists, who had criticized the plan and argued that a tech giant shouldn’t receive nearly $3 billion in government incentives.
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