On Thursday morning, Amazon announced it was buying online pharmacy company PillPack for an undisclosed amount. Its stock rose by around 2.5 percent, adding around $20 billion to its value-or ten times what analysts think Amazon paid for PillPack.
That’s a very good one day return on Amazon’s investment.
Being on the other side of the trade was much rougher. Shares of big pharmaceutical retailers all tanked Thursday. The combined market value of Rite Aid, Walgreens and CVS Health plummet by $12.8 billion.
Normally, the stock of an acquiring company is expected to decline when an acquisition is announced. Acquisitions foreclose possible uses of corporate cash—including payments to shareholders through buybacks and dividends—and that loss of optionality subtracts from share value. Sellers demand premiums for their company, which often take years to pay off.
Even in the best scenarios—an all-cash acquisition in a growing business that is expected to be immediately accretive to earnings—the results are neutral to slightly positive.
Except for Amazon. When Amazon acquires a company, its stock soars. And its competitors get slammed.
To Amazon’s critics, this is evidence that the market believes Amazon exerts anticompetitive power over the markets it enters. Investors do not appear to fear that Amazon is getting involved in a sector—pharmaceuticals, groceries—where it has little or no experience. Instead, it is the experienced players in the market who investors fear will lose out.
One possible reason for this is that Amazon is not in the business of selling particular things. It is the in business of selling everything and it is better at it than anyone on the planet earth. That’s what Amazon’s defenders claim: Amazon is not a monopoly. It’s just the best there is at what it does, even if what it does isn’t very nice to its competitors.
But these two interpretations are not necessarily in conflict. If Amazon’s business is thought of as selling things to consumers rather than selling particular items, all of its acquisitions should be viewed as horizontal mergers—expansions of Amazon’s grip over the broad market for consumer goods.
Horizontal mergers, those where a company buys a competitor, typically receive much closer scrutiny from regulators than other acquisitions because of the potential to be anticompetitive. But Amazon acquires fearlessly and relentlessly.
If anything, Amazon seems to be growing even bolder. With the PillPack acquisition and February’s purchase of home security company Ring, Amazon has spent nearly $2 billion on acquisitions in the first half of 2018. That follows the $13.7 billion acquisition of Whole Foods last year, the first time in Amazon’s history that it has spent over $1 billion on deals two years in a row. In the past, Amazon needed time to digest its acquisitions. Now it just keeps gobbling up companies.
One likely reason for Amazon’s boldness is that its business model is optimized against the reigning interpretation of antitrust law. Ever since Robert Bork published his book The Antitrust Paradox, antitrust law’s primary concern has been whether a deal would threaten to harm consumers through higher prices or less consumer choice. But Amazon is famous for lowering prices and, by acquiring businesses in which it isn’t already operating, it does not appear to threaten consumers with fewer choices.
That should not be surprising. The Antitrust Paradox was published in the 1970s, when price inflation really did seem to be the worst threat to consumer welfare. Four decades is plenty of time for businesses to develop models that allow them to acquire incredible market power in ways that does not trip over regulatory hurdles.
Antitrust laws, however, were not developed in a vacuum. They were built over one hundred years ago to address concentrations of market power that many Americans thought were incompatible with democracy, hostile to American values, and a drag on the economy.
To put it differently, our ancient antitrust laws were not built around a theoretical threat of monopoly power—but to address anticompetitive practices that were rampant at the time. We should not be surprised if innovation has made those rules less relevant today.
Nor should we accept that just because traditional antitrust law does not present a challenge to Amazon that America is powerless. Afterall, that kind of thinking would have left the big trusts of the 19th Century intact.
America has confronted market power that did not cross antitrust laws before. In the wake of the stock market crash of 1929 and the ensuing Great Depression, Americans decided to break up vertically integrated financial companies into pieces—famously forcing J.P. Morgan to spin off Morgan Stanley. A few decades later, Congress went even further, passing a law that forbid bank holding companies from owning commercial businesses.
The stock market believes that Amazon wields almost unstoppable power in our economy, getting stronger with every acquisition and crushing competitors in every market it enters. But, at least today, this is a blind spot for our legal constraints on market power.
The question is how big will Amazon get before American lawmakers hear what the market has been hollering for years.