Episode 3: Terry Kawaja on the Impact of the FTC on M&A and a Potential Google Spin-Out

Release Date: October 23, 2024
Podcast: The Monopoly Report
Host: Alan Chappelle
Guest: Terry Kawaja, Founder of Luma Partners

Introduction

In the third episode of The Monopoly Report, host Alan Chappelle welcomes Terry Kawaja, a prominent figure in mergers and acquisitions (M&A) and the founder of Luma Partners, an investment bank specializing in the ad tech sector. The conversation delves deep into the Federal Trade Commission's (FTC) influence on M&A activities within the tech industry, with a particular focus on the ongoing antitrust actions against Google and the potential ramifications of a forced spin-out of Google's ad tech assets.

Background on FTC and DOJ Roles

Alan begins by setting the stage, explaining the FTC's mandate to protect consumers through privacy enforcement and maintaining competitive landscapes alongside the Department of Justice (DOJ). The discussion underscores the increasing scrutiny the FTC and DOJ are applying to large tech companies, particularly regarding their M&A strategies.

"The FTC along with the Department of Justice are in charge of supporting and enforcing competitive landscape." — Alan Chappelle [04:37]

Terry Kawaja’s Perspective on Antitrust Enforcement

Terry Kawaja offers a nuanced view on antitrust enforcement, acknowledging its necessity while critiquing its current application. He argues that while the FTC and DOJ's intentions to curb big tech's dominance are justified, their aggressive stance may inadvertently stifle broader M&A activities, weakening competition.

"Antitrust enforcement is not bad per se. ... it's has far more control and influence over our lives." — Terry Kawaja [04:48]

Positive Aspects of Antitrust Scrutiny

Kawaja praises the increased attention to tech giants, emphasizing their growing economic and societal impact. He notes that unlike traditional industries like transportation and energy, tech companies wield significant control over information and democracy, justifying the need for rigorous oversight.

"Anything around media and communications has an implication around information and disinformation and truth and elections and democracy." — Terry Kawaja [06:10]

Negative Consequences of Overzealous Enforcement

Despite acknowledging the good intentions, Kawaja criticizes the FTC and DOJ for creating a "pall" over all M&A activities, not just those involving the largest firms. This blanket approach hampers smaller companies from scaling through acquisitions, inadvertently strengthening the already dominant players.

"Instead of creating a more competitive landscape, it's created a pall on M and A activity across the board writ large." — Terry Kawaja [07:00]
"It has the effect of them saying nah, let's just, let's just stay focused on our own for now because it's, it's too risky an environment to even pursue an M and A deal." — Terry Kawaja [12:12]

Impact on M&A Activities

The host and guest discuss the tangible effects of increased antitrust scrutiny. In 2022 alone, there were 50 antitrust enforcements, a significant jump from previous years, leading to the blockage of numerous deals that might not necessarily harm competition.

"In 2022, there were 50 enforcements. That's up from usually, you know, it's about triple the sort of run rate for the prior five years." — Terry Kawaja [09:09]

Kawaja highlights cases like the DOJ blocking Penguin Random House's $2 billion acquisition of Simon & Schuster, questioning the rationale behind such decisions and their broader implications on the media landscape.

"It's like they're applying, you know, monopoly situations from, from the 1950s. It just seems to not make sense." — Terry Kawaja [10:45]

Potential Google Spin-Out: Analyzing the DoubleClick Case

A significant portion of the discussion centers on the DOJ's case against Google’s ad tech operations, particularly the potential forced spin-out of DoubleClick’s sell-side assets such as GAM (Google Ad Manager) and ADEX (Ad Exchange).

Economic Implications of the Spin-Out

Kawaja provides an in-depth analysis of the financial ramifications of spinning off DoubleClick’s assets. He estimates that the independent entity could be valued between $75 billion to $100 billion, making it the most valuable ad tech company globally, surpassing major players like The Trade Desk.

"I applied a series of multiples, the conclusion of which was this thing is worth, I don't know, 75 to 100 billion depending upon what components are put in it." — Terry Kawaja [29:24]

He breaks down the components, noting that GAM alone, with a projected $3 billion in net revenue by 2024, could be valued around $30 billion based on a 10x multiple.

"GAM was has about 10 billion of ad spend. It's got, it had about a billion 6 of, of net revenue in 2020. So grow that by 40%, you're talking about 3 billion in net revenue." — Terry Kawaja [32:46]

Strategic Outcomes for Stakeholders

Kawaja discusses the broader implications for various stakeholders:

• Google Shareholders: Likely to benefit as the separated unit could thrive independently.
• Ad Tech Ecosystem: Increased competition and innovation due to the entry of a substantial new player.
• Advertisers and Publishers: Enhanced ROI and more choices in the marketplace.
• Alphabet (Google’s Parent Company): Potentially stronger focus on core businesses like search and cloud services.

"It's a clean sweep. It's great for Google shareholders... it's great for advertisers and publishers and consumers because increased competition means either higher yield or better ROI or more choice." — Terry Kawaja [34:35]

Industry Consolidation and Future Outlook

Kawaja advocates for further consolidation within the ad tech industry to reduce fragmentation and enhance efficiency. He argues that the current landscape, with over 5,000 companies, fosters "shenanigans" and inefficiencies that hinder innovation and market performance.

"Most industries go through a phase of new company formation, maturity and then rationalization, consolidation... In ad tech, it's completely there in Thousands." — Terry Kawaja [22:41]

He predicts that rationalizing the supply chain through consolidation will lead to fewer players with better quality and lower take rates, drawing parallels with industries like railroads and airlines.

"These four attributes tend to be ... fewer players doing higher volumes at lower take rates with better quality." — Terry Kawaja [27:31]

Political Influences and Regulatory Environment

The conversation shifts to the political landscape, particularly the role of Lina Khan, FTC Chair, and the broader implications of upcoming elections on antitrust policies.

Regulatory Uncertainty

Kawaja expresses skepticism about the longevity of Lina Khan’s tenure, especially with the political volatility surrounding upcoming elections. He suggests that regardless of the election outcome, there might be a shift towards a more pro-business environment, potentially easing antitrust pressures.

"I think that, ... We are likely to see a more pro business environment." — Terry Kawaja [36:56]

Recommendations for the FTC

Kawaja proposes that the FTC should focus solely on consumer protection, allowing the DOJ to handle antitrust enforcement. This separation could streamline regulatory efforts and reduce conflicts between the two agencies.

"I think the M and A aspect should be removed from the FTC. ... Just leave that with the DOJ and let the FTC do what it was initially intended to do, which is to protect consumers." — Terry Kawaja [39:47]

Conclusion

The episode wraps up with reflections on the critical need for increased industry literacy on antitrust issues. Kawaja emphasizes the importance of understanding the intricate dynamics between regulation and innovation to foster a healthy, competitive ad tech ecosystem.

"We need more attention on these issues." — Terry Kawaja [40:27]

Host Alan Chappelle concurs, highlighting the lack of widespread awareness and its detrimental effects on the industry.

"We're lacking in literacy on these types of topics throughout our industry, and I think that's to our detriment." — Alan Chappelle [40:31]

Key Takeaways

• FTC and DOJ's Role: While aimed at curbing excessive dominance, their stringent antitrust actions may inadvertently suppress broader M&A activities, reducing overall competition.
• Google's Potential Spin-Out: A forced separation of DoubleClick's assets could create a highly valuable independent ad tech entity, fostering increased competition and innovation.
• Industry Consolidation: The ad tech sector's extreme fragmentation hampers efficiency and fosters unethical practices, necessitating further consolidation.
• Political Implications: Upcoming elections may influence the regulatory landscape, potentially leading to a more business-friendly environment that could alleviate current antitrust pressures.
• Call for Industry Education: Enhancing understanding of antitrust dynamics is crucial for navigating and thriving in the evolving ad tech ecosystem.

Notable Quotes

• "Antitrust enforcement is not bad per se. ... has far more control and influence over our lives." — Terry Kawaja [04:48]
• "The intention was to limit big tech ... it has created a pall on M and A activity." — Terry Kawaja [07:00]
• "Most industries go through a phase of new company formation, maturity and then rationalization, consolidation..." — Terry Kawaja [22:41]
• "The consumer protection side of the FTC...should probably rationalize the supply chain." — Terry Kawaja [39:47]

This episode provides a comprehensive analysis of the intricate balance between antitrust enforcement and the vitality of M&A activities within the ad tech industry. Terry Kawaja's insights shed light on the unintended consequences of regulatory actions and advocate for strategic consolidation to propel innovation and maintain a competitive marketplace.