With so many firms raising funds off their industry expertise, it’s no wonder GPs are sourcing investments that can be built up with strategic acquisitions. But shopping sprees can catch the attention of antitrust regulators and it might too late by then to address them easily.
Firms plotting industry roll-ups should consult antitrust counsel as early as possible. More and more regimes around the globe require transactions to be filed and requirements can vary widely. Even if a transaction doesn’t need to be filed, regulators can still decide to review it in the future.
Documents should be drafted as if a regulator may read them, avoiding language that boasts of fewer competitors. In gauging market share, regulators may examine every portfolio company in the fund family, and even minority investments.
Few expect the Trump administration to ramp up antitrust enforcement, but other parts of the world are paying closer attention. For example, Mexico’s antitrust regulator fined Panasonic and related entities nearly $3 million over its acquisition of Spanish auto parts manufacturer Ficosa for failing to file the transaction in the country, since the deal gave Panasonic a 35 percent stake in Ficosa Mexico.
“More and more jurisdictions now have their own antitrust regimes with their own reporting requirements,” says Leiv Blad of Lowenstein Sandler. “And while avoiding legal problems may be relatively easy, it’s crucial to know when a transaction triggers requirements in those jurisdictions.”
And that means talking to antitrust counsel as early as possible, given how much regulations can vary among jurisdictions. “Not all regimes apply the same principles,” says Hector Armengod of Lathan & Watkins. “Some look at revenues of the target, others may also look at the revenues of the seller, and filing deadlines can vary widely.” For example, India requires parties to file within 30 days of any agreement or document binding the parties to do the deal, which can catch companies off-guard.
The scope and complexity of the regulations also mean counsel can help shape overall strategy. “If a GP wants to pursue roll-up strategies or add-on acquisitions within a space, there may be a strategy to the order of those transactions,” says Jane Willis of Ropes & Gray.
GPs should not assume smaller transactions are unlikely to warrant a regulatory filing, or even the price of checking with legal counsel. “In the fast-moving world of private equity, people may overlook the fact that whether a deal is reportable and whether it raises antitrust issues are totally separate questions,” says Paolo Morante of DLA Piper. “A deal that’s too small to report in a highly-concentrated market can be problematic, and there’s no statute of limitations on agency merger challenges under antitrust laws. In fact, non-reportable deals that raise antitrust concerns are challenged regularly.”
One lawyer recounts a situation where a GP acquired a company with revenues of less than $5 million that eventually required a divestiture. “The US antitrust authorities closely scrutinize the smallest of markets and deals, frequently with the same vigor they do mega deals,” says Harry Robins of Morgan, Lewis & Bockius. “Which is why it’s important to do an analysis on competitively aggressive deals no matter the size of the deal or the amount of affected commerce.”
Documents are another potential risk. As soon as they are assembled on a transaction, they may fall under the purview of regulators examining the transaction, and should have a lawyer’s input. “Private equity firms should be mindful that investment committee memos and other documents created in evaluating a potential deal may be reviewed by (and of particular interest to) antitrust authorities,” says Peter Guryan of Simpson, Thacher and Bartlett.
“Firms should aim for a balanced assessment of the deal rationale,” says Willis. “If the rationale includes a price or margin increase, then it needs to be articulated why, and it should also address factors such as new entrants in the space, and the likely competitive response.”
In short, when GPs argue for a deal’s merits on paper, they shouldn’t stress the adverse impact on customers. “Antitrust laws are focused on consumer welfare, so the authorities are generally assessing whether any diminished competition will result in higher prices or less innovation for the consumer or customer,” says Robins. “Economic analysis has become increasingly important, but authorities will still often fixate on statements from provocative business documents.”
Even if the documents are measured in tone, regulators can still consider the firm’s entire fund family, not just the fund acquiring the company. Lawyers explain if a private equity firm owns 14 or 15 companies in a specific sector across multiple funds, that can become part of the calculation of their market share for a single fund’s acquisition.
Even minority investments may catch a regulator’s attention. “Regulators may argue minority investments lead to perverse incentives, where two companies might not have the same incentive to compete because their profits are going to the same people, or some of the same people,” says Morante.
Given the many acquisitions and realizations of some GPs, it might be worth keeping track of antitrust data across the fund family. “Perhaps someone has the responsibility of keeping track of data, like worldwide revenues, derived by all portfolio companies in the fund family, on a country by country basis,” says Morante. “And if the GP keeps that current, they can make a quick determination of where reporting obligations may be.”
Regulators are also sensitive to what information is shared during due diligence. “If a GP has a portfolio company in the same industry as a target company, they need to set up clean teams or guardrails to ensure that competitively sensitive information isn’t shared with the portfolio company,” says Willis.
A partner who sits on the board of a current portfolio company can be privy to that information, provided they don’t share it with, say, the sales and marketing team of their holding. “There are real restrictions in what the current portfolio company and the target can discuss,” says Blad. “Two horizontal competitors can only exchange information prior to expiration of the waiting period that they could lawfully exchange as separate companies.”
That can be difficult in the period between the filing and its approval, with everyone eager to execute the integration plan. But that’s precisely when GPs should resist the temptation to do so.
“Companies have to be careful how they act during the waiting period before the waiting period expires,” says Blad. “If they’ve begun combining operations, that can cause real issues with regulators as something called ‘gun jumping.’”
Most antitrust risk can be mitigated by not jumping the gun. GPs that collaborate closely with counsel, are careful in document preparation and information sharing, and don’t merge operations too soon might find themselves buying and building as they always planned. ?