iThe Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ,” and collectively with the FTC, the “Agencies”) issued new Merger Guidelines on December 18, 2023 (the “Guidelines”)[1]. The Guidelines, while not legally binding, provide insight into how the Agencies review and analyze mergers and the potential anticompetitive effects.
The Guidelines contain 11 principles used in determining if a merger is unlawful under U.S. antitrust laws. Guidelines 1-6 describe frameworks the Agencies use to identify if a merger raises obvious concerns that it would violate antitrust laws. Guidelines 7-11 describe how those same frameworks would be applied in specific settings. Those guidelines are as follows:
- Mergers raise a presumption of illegality when they significantly increase concentration in a highly concentrated market.
- Mergers can violate the law when they eliminate substantial competition between firms.
- Mergers can violate the law when they increase the risk of coordination.
- Mergers can violate the law when they eliminate a potential entrant in a concentrated market.
- Mergers can violate the law when they create a firm that controls products or services that its rivals may use to compete.
- Mergers can violate the law when they entrench or extend a dominant position.
- When an industry undergoes a trend toward consolidation, the Agencies consider whether it increases the risk a merger may substantially lessen competition or tend to create a monopoly.
- When a merger is part of a series of multiple acquisitions, the Agencies may examine the whole series.
- When a merger involves a multi-sided platform, the Agencies examine competition between platforms, on a platform, or to displace a platform.
- When a merger involves competing buyers, the Agencies examine whether it may substantially lessen competition for workers, creators, suppliers, or other providers.
- When an acquisition involves partial ownership or minority interests, the Agencies examine its impact on competition.
In general, it is important to note that the Guidelines move away from the traditional consumer welfare focused approach to merger enforcement and emphasize protection for workers and suppliers. In addition, the Guidelines create a higher bar for parties seeking to defend mergers on the basis of expected synergies and efficiencies.
This shift in focus also signals how private equity deals are evaluated and is consistent with the spotlight the Biden administration has placed on the perceived impact of private equity transactions. Simply stated, the Buy-Optimize-Sell standard for private equity is under increased scrutiny. This scrutiny may impact traditional private equity tactics and create challenges for investment strategies. It is clear in the Guidelines that the Agencies prefer organic growth over acquisitions. This preference is further illustrated by the reduction of merger concentration level thresholds in evaluating market concentration under the Horizonal Merger Guidelines and Herfindahl-Hirschman Index (HHI)[2] analysis. As a result, more transactions that may in the past have been deemed to have a moderate impact on competition are now more likely to be deemed anti-competitive.
Given the Biden administration’s focus on the private equity industry, it should come as no surprise that the Agencies have adopted Guidelines that challenge traditional private equity investment strategies. Private equity transactions account for more than half of those acquisitions or mergers reported to the antitrust regulators via the Hart-Scott-Rodino (HSR) Antitrust Improvement Act’s premerger notification process, and the Guidelines certainly highlight the increased scrutiny the Agencies place on these transactions.
Both DOJ Assistant Attorney General Jonathan Kanter and FTC Chair Lina Khan have made several public statements indicating they see private equity buy out groups as detrimental to a competitive market, marking a clear departure from the Trump administration’s preference for private equity backed transactions over strategic backed acquisitions. This more focused examination of private equity mergers and the impact on markets is also consistent with the FTC’s notice in June 2023 of a proposed overhaul of the HSR Act process.[3], The Agencies propose extensive changes that would create significant additional burdens and expense for filing parties, especially private equity firms.[4]
While parties are wise to consider all of the Guidelines and their interplay with each other, four Guidelines in particular highlight the Agencies’ concerns regarding private equity transactions.
Guideline 6: Mergers Can Violate the Law When They Entrench or Extend a Dominant Position.
While the Agencies have always considered whether a merger may entrench or extend a dominant market position and thereby lead to additional anti-competitive effects, this Guideline signals that the Agencies intend to evaluate market entrenchment over a longer term. The Agencies will consider the immediate and longer term impact of whether a party has the ability to raise barriers to entry, impact product quality and the behavior of other industry participants, and whether a dominant position chills investment and innovation among other industry participants in both the immediate and longer term. The Administration, including AAG Kanter and FTC Chair Khan, have made multiple statements signaling their belief that mergers, particularly with private equity, chill competition.
Guideline 7: When an Industry Undergoes a Trend Toward Consolidation, the Agencies Consider Whether It Increases the Risk a Merger May Substantially Lessen Competition or Tend to Create a Monopoly.
The Agencies consider the recent history and likely trajectory of an industry as an important consideration in determining whether a merger presents a threat to competition. An industry trend toward consolidation heightens these concerns. Given that private equity firms often utilize the roll-up acquisition strategy (i.e., a series of acquisitions in a given sector), by default, roll-ups may lead to concentration within a given industry. The more concentrated or larger the investment by a private equity firm within an industry, the more risk of harm exists that competition is lessened or that coordination in the market might increase. Such a concentration could occur through eliminating market participants through consolidation, or vertical integration, with either event thereby reducing supply chain alternatives or presenting merging parties with greater bargaining leverage as a result of larger market power. According to the Agencies, such risks aggravate the issues discussed in Guidelines 1-6, leading to anticompetitive outcomes. Guideline 7 is closely connected to Guideline 8 discussed below, and together, they extend the lens through which the Agencies may seek to challenge transactions. This expanded lens has both future and historical aspects. The Agencies will not only be looking at potential trends, but may also examine prior transactions retroactively under the guise of evaluating a new merger in the same space. Given that private equity mergers are often a key driver in market consolidation as part of the investment strategy, acquirers may need to reevaluate the apparent risks that obtaining significant market share may have against the risk that the Agencies may seek to challenge traditional growth strategy models.
Guideline 8: When a Merger is Part of a Series of Multiple Acquisitions, the Agencies May Examine the Whole Series.
AAG Kanter has been vocal on his intent to take a tough stance against the roll-up and cash-out strategy employed by private equity firms. Guideline 8 addresses the concern that the Agencies have raised for years regarding smaller serial acquisitions that provide accumulative accretion of value or market share to private equity acquirers. This Guideline will challenge the common strategy of private equity firms to acquire multiple “roll-up” acquisitions that individually are below the pre-merger notification threshold of the HSR Act, but which in the aggregate may result in a private equity company holding significant market power. The Agencies can now address this issue by considering the cumulative effect of a series of such acquisitions and the impact an individual transaction may have to the whole.
The concepts expressed in Guideline 8 are playing out in ongoing litigation. In September 2023, the FTC filed a lawsuit against the private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson) and its portfolio company US Anesthesia Partners, Inc. (USAP).[5] The FTC complaint alleges Welsh Carson and USAP engaged in various forms of anticompetitive conduct in violation of antitrust laws over the course of a decade. Specifically, the FTC alleges that USAP became a dominant provider of anesthesia services in Texas as a result of a series of roll-up transactions. According to the FTC, USAP used its alleged dominance to create price setting and market allocation agreements with other providers. While this complaint was filed prior to the adoption of the Guidelines, it demonstrates the FTC’s focus and application of these Guidelines.
Guideline 11: When an Acquisition Involves Partial Ownership or Minority Interests, the Agencies Examine Its Impact on Competition.
Owning less than full control no longer permits an investor to assume protection from an antitrust investigation. Previously, minority ownership acquisitions were typically reviewed and handled through non-merger antitrust laws. Now Guideline 11 allows the Agencies to examine transactions where a party may only obtain a partial ownership or minority position under the guise that such transactions may still present competitive concerns, due to the actual or apparent control or influence such partial owner may exert. This has a significant impact for independent sponsors and their capital partners. The Agencies have now signaled they would be examining the acquisition of partial ownership and minority positions that when coupled with certain minority protections or “veto” rights that might influence or impact operational decisions or give the holders access to certain sensitive data. As a result, the Agencies may view these rights as granting such partial owners operational control similar to what one may have in the Agencies' analysis of a traditional full merger.
The Welsh Carson USAP case discussed above is an example of how the Agencies have put this Guideline into practice. Welsh Carson owned less than 50% of USAP for a majority of the time period which is the basis of the FTC complaint. As its basis for naming Welsh Carson as a defendant, the FTC alleges Welsh Carson controlled the strategy and decision making with respect to the actions described in the complaint, which allegedly increased prices for anesthesia. This signifies the Agencies are much more concerned about the actual control or influence that private equity investors may have over their portfolio companies, in what Chair Khan has characterized as “stealth consolidations.”
Conclusion
While the Guidelines proposes some new legal theories, their success and acceptance in the courts remain to be seen. Taking all relevant factors into consideration, however, private equity firms may need to evaluate the optimum level of market presence against the risk of potentially expensive and tricky divestitures. Investment firms with significant presence in an industry need to consider the new Guidelines and increased scrutiny they may face with continued expansion in an industry. Antitrust counsel should be consulted as early as possible to review and analyze the potential risk of acquisitions – even minority holdings.
[1] https://www.ftc.gov/reports/merger-guidelines-2023
[2] A transaction is presumed to be anticompetitive where: 1) the merged firm’s market share is greater than 30% and the change in the HHI is greater than 100; or 2) the post-merger HHI is greater than 1,800 and the change in the HHI is greater than 100. Merging parties may seek to rebut this presumption.
[4] Nelson Mullins - Federal Trade Commission Proposes Major Changes to Hart-Scott-Rodino Process
