Deal certainty and timing predictability are key issues in every transaction involving private equity investors. So, preparing apostilled versions of registry excerpts for merger control filings in jurisdictions where a-never-heard-of subsidiary of a portfolio company has negligible sales to two de-minimis-customers to get clearance in four months has understandably never evoked cheers by clients. However, private equity investors could normally rely on the fact that their deals do not face the same scrutiny on substance as acquisitions of strategic buyers with an industry background. Latest statements coming from the US indicate that this could change – also on the other side of the Atlantic?
The importance of private equity has grown significantly over the last couple of years. According to a McKinsey study, the private equity industry currently holds assets under management with a value of nearly USD 10 trillion. Almost 25 per cent of all transactions in the current year involved private equity dealmaking (as per a Financial Times piece). Many of these transactions related to IT and healthcare, so it does not come as a surprise that these sectors, in particular the latter, are also in the middle of the ongoing discussion.
The US debate – New theories of harm in the making?
Shortly after the Biden administration took over, various statements by officials indicated a course change regarding antitrust scrutiny of transactions involving private equity investors. The discussion gained momentum (and attraction!) when the DOJ’s Assistant Attorney General, Jonathan Kanter, stated in an interview with the Financial Times that the DOJ would be looking more closely at private equity transactions in the coming years. His general observations and concerns were shared by FTC Chair Lina Khan who went, not only in terms of language, a step further by saying that private equity transactions had an immediate effect on ordinary Americans. In her opinion, this is especially true for transactions in the healthcare sector.
While the debate has meanwhile broadened and touches all sorts of issues and the size and importance of private equity as a whole, the two agency heads seem to be in particular concerned with two issues in an M&A context:
- The key concern seems to relate to so-called “roll-up strategies”. This refers to a strategy whereby a private equity (or other) investor picks-up several smaller companies with the goal of ultimately creating one large player. The problem for regulators is that each of these transactions is often too small to be reportable under merger control, in turn making it difficult for the regulators to review the transaction in question. But Kanter argued that the roll-up model is nonetheless often very much “at odds with the law and very much at odds with the competition we’re trying to protect”.
- The regulators have also expressed doubts as to whether private equity investors should be considered and accepted as acquirers of divestment businesses in other transactions with antitrust concerns. Here, Kanter implies that private equity investors are either “motivated by reducing costs at a company, which will make it less competitive, or squeezing out value by concentrating [the] industry in a roll-up”.
Needless to say, not everyone has been too euphoric about these novel approaches. Critics mainly argue that the regulators would leave the normal evaluation standards of merger control by looking at transactions through a political lens (
someone should start a blog about the intersection of antitrust and politics!). Further, transactions should be assessed objectively without taking an overall industry as a factor into account.
Rolling up in the EU
Closing a (perceived) enforcement gap sounds familiar for European antitrust lawyers, as well. Only last month, the General Court confirmed, in the context of the Illumina/Grail-transaction, the European Commission’s self-confident stance to accept referrals and in turn to review cases that reach neither the merger thresholds of the European Merger Control Regulation nor of any Member State. Although the Commission had in particular killer-acquisitions in the tech and pharma (!) sector in mind when introducing its new policy, the recently confirmed rights would also help to review smaller transactions which potentially belong to a broader roll-up strategy.
In Germany, the Federal Cartel Office (FCO) even has the right to require notifications for deals in specific industry sectors even if the normal thresholds are not met. For this to happen, the regulator must first conduct a sector inquiry and, second, the transaction in question has to meet certain lower thresholds. The so-called “Remondis-Clause” was inter alia introduced because the perceived market leader in German waste disposal, Remondis, purchased a number of small competitors without triggering the merger control thresholds, even though the transactions potentially could have led to antitrust concerns, at least from the regulator’s perspective. The FCO has, by the way, recently also indicated to be increasingly sceptical of roll-up strategies in the healthcare sector.
However, these new rules only help regulators to review transactions, but do not immediately open the door for a stricter approach on substance. European regulators will need to continue to focus on the impact of a singular transaction on competition. The assessment is obviously not limited to horizontal concerns and high market shares, but also allows to take the financial power of investor, foreclosure effects etc. into consideration. In the end, however, under the current law it will remain difficult to tackle roll-up strategies as such.
A suitable choice
With a view to the second point currently debated in the US, the European Commission is already a step ahead (or back, depending on the perspective). Interested buyers of assets or businesses that have to be divested to address competition concerns in other transaction must fulfil certain criteria to be accepted as a suitable purchaser by the Commission. The Commission has traditionally been hesitant to accept private equity offers on a standalone basis, claiming that private equity companies do not have industry-specific expertise to the extent required by the Commission (there are exceptions to this, though, so private equity bids are not without chances). In some large industrial mergers, the Commission did not even accept private equity offers if they teamed up with experienced management teams.
No more certainty?
Overall, it seems to be fair to state that the latest developments and ideas will at least not lead to more deal certainty for private equity investors. This is true for transactions on both sides of the Atlantic and even more for global transactions with merger control in various jurisdictions potentially being required. The extent to which some of the announcements described above will actually lead to tighter scrutiny by the regulators or even to prohibition decisions remains to be seen and will probably also depend on further political developments.