3 min read.Updated: 01 Oct 2021, 07:00 AM ISTChris Cumming, The Wall Street Journal
Tougher antimonopoly enforcement in Washington is complicating buyout firms’ efforts to close acquisitions
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New federal antitrust enforcers want to toughen up regulation of the private-equity industry, putting a spotlight on ways that buyout firms might be warping competition.
While private equity wasn’t a priority for the agencies charged with antitrust enforcement—the Federal Trade Commission and the Justice Department—in the Trump administration, under President Biden agency leaders say change is coming.
The FTC has already begun looking at all mergers more thoroughly, vexing some private-equity buyers who had grown accustomed to an easier review process, say people who work with buyout firms.
To some, the attention is overdue. Antitrust authorities “are really beginning to appreciate the competition consequences of some of the private-equity tactics. Particularly in markets where there are existing competition problems, they supercharge those problems," said Laura Alexander, vice president of policy at the American Antitrust Institute.
FTC chairwoman Lina Khan has said she would investigate whether the private-equity investment model encourages unfair business practices. And antitrust experts see growing FTC concern over roll-up transactions, a common private-equity strategy of buying and combining small companies.
The agency has proposed, but not finalized, a rule to require buyers to disclose information on their parent companies and subsidiaries, which attorneys say would subject more private-equity roll-ups to antitrust review.
“There’s no doubt that the enforcement regime now is more aggressive. Across the board, there are more questions about deals that in the past we would not have expected them to have questions about," said Andrew Lacy, a partner in the antitrust and competition group at law firm Goodwin Procter LLP.
The regulators’ new assertiveness comes as President Biden seeks to put fair competition and combating monopolies at the center of his economic agenda. In a July executive order, he asked federal agencies to resist corporate consolidation and anticompetitive practices. He named two critics of Big Tech as his top antitrust watchdogs: Ms. Khan to lead the FTC, and antitrust attorney Jonathan Kanter to run the Justice Department’s antitrust division. Mr. Kanter hasn’t yet been confirmed by the Senate.
Ms. Khan plans to take a tougher approach to private equity. In a Sept. 22 memo on her priorities as FTC chairwoman, Ms. Khan said she would investigate whether private-equity firms contribute to “extractive business models," in which companies use a dominant market position to raise prices or muscle out competitors.
“[T]he growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations," Ms. Khan wrote.
The FTC may also take the private-equity model into account in deciding whether to approve an acquisition. Holly Vedova, head of the FTC’s Bureau of Competition, wrote in a blog post Tuesday that merger reviews will now consider “how the involvement of investment firms may affect market incentives to compete," in order to “identify and challenge the deals that will illegally harm competition."
It is not clear how effectively the FTC can take on the well-bankrolled private-equity industry. Attorneys say any challenge to a private-equity deal could lead to a legal fight.
“Just because you have a new enforcer who says you should turn back the clock to Teddy Roosevelt and trustbusting, it remains to be seen whether they will have any traction with the courts," said Philip Bartz, a partner in antitrust and competition at law firm Bryan Cave Leighton Paisner LLP.
However, changes to the merger-review process, though not focused solely on private-equity deals, are beginning to concern some firms. Amid a historic boom in mergers—2,436 merger notifications were filed with antitrust agencies in the first eight months of 2021, more than in a typical year, according to Ms. Vedova—the FTC has sought to slow the process and give itself more time to parse these deals.
The FTC has suspended its previous practice of approving some deals before the end of the typical 30-day waiting period, and withdrew guidance on mergers of companies in separate lines of business. Along with the Justice Department, it plans to revise merger guidelines, a change expected to make the process more stringent.
The FTC under Ms. Khan asks many more questions—some unexpected—about proposed acquisitions, antitrust attorneys say. Issues now on the agency’s radar include a merger’s effects on the labor market in their industry, said Kevin Goldstein, an antitrust lawyer at Winston & Strawn LLP.
“Private-equity firms need to anticipate those questions and be ready to answer them," he said.
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