FTC, DOJ tighten merger guidelines

Narrower review may squeeze private equity managers.

Washington antitrust enforcers will take a narrower look at how potential mergers or acquisitions and private equity managers could feel squeezed under new guidelines adopted by the Biden Administration on Monday.

The Federal Trade Commission and the Department of Justice’s antitrust division say they will now review proposed deals under at least 11 different criteria, all stemming from the central question about whether a given merger or acquisition “substantially reduces competition” as laid out under Section 7 of the Clayton Antitrust Act. The new guidelines address horizontal and vertical mergers. They are significantly tighter than anything Washington has produced in years.

‘Distort incentives’

The new merger guidelines had been a long time coming. FTC chairwoman Lina Khan and Department of Justice Antitrust Division leader Jonathan Kanter have adopted a structuralist critique of antitrust law that is at once radical – it openly seeks to overthrow the consumer welfare standard that has dominated American jurisprudence since before the Reagan era – and conservative – it harkens back to the earliest days of trust-busting, when Washington was worried that market concentration was a barrier to full citizenship.

“Antitrust enforcers must be attentive to how private equity firms’ business models may in some instances distort incentives in ways that strip productive capacity, degrade the quality of goods and services, and hinder competition,” Khan and her fellow Democrats said in a joint statement in August 2022, after forcing a series of divestments before approving a veterinary merger led by German private equity manager JAB ($50 billion in AUM).

“While private equity firms can support capacity expansion and upgrades, firms that seek to strip and flip assets over a relatively short period of time are focused on increasing margins over the short-term, which can incentivize unfair or deceptive practices and the hollowing out of productive capacity.”

The FTC and DOJ proposed the new merger guidelines earlier this year. Private equity managers and their allies – including the Managed Funds Association and the American Investment Council – lobbied against them.

New FTC/DOJ merger guidelines

Antitrust officials say they will use 11 basic guidelines in determining whether a given merger or acquisition is legal. Under Monday’s new guidelines, regulators say they will look out for:

1. A “significant” increase in concentration in an already concentrated industry;

2. A deal that eliminates “substantial competition” between firms;

3. Deals that “increase the risk of co-ordination”;

4. Proposals that “eliminate a potential entrant in a concentrated market.”

5. Mergers or acquisitions that “create a firm that may limit access to products or services that its rivals use to compete.”

6. Deals that “entrench or extend a dominant position.”

7. Transactions that “increase the risk a merger may substantially lessen competition or tend to create a monopoly” in a market that’s trending toward concentration.

8. A deal that’s part of a series of acquisitions, in which case the FTC or DOJ might examine the whole series of deals.

9. Deals that involve “a multi-sided platform,” in which case antitrust officials will “examine competition between platforms, on a platform or to displace a platform.”

10. Proposed mergers with “competing buyers,” in which case officials will examine whether a given deal “may substantial competition for workers, creators, suppliers or other providers.” And

11. An acquisition that involves “partial ownership or minority interests,” in which case officials will “examine its impact on competition.”