Private equity firms that make their money rolling up companies to dominate a market could be among the hardest hit as agencies in the Biden administration execute on their expanded antitrust policy shift.
The Federal Trade Commission last month announced it would take a more standalone approach to antitrust enforcement by clamping down on companies it views as a threat to competition even if their actions don’t appear to violate the country’s two main antitrust laws, the Sherman and Clayton acts.
“Congress … clearly commanded us to crack down on unfair methods of competition,” FTC Chair Lina Khan said in announcing the policy shift. “Enforcers have to use discretion, but that doesn’t give us the right to ignore a central part of our mandate.”
Incipient impact
The core tenet of the shift is to go after companies if their actions could lead to anti-competitive impacts down the road even if the actions by themselves don’t appear to harm consumers under the rule-of-reason analysis that’s been used historically in Sherman Act cases.
Instead, the FTC is citing its authority under Section 5 of the Federal Trade Commission Act, which prohibits unfair practices, to take action if it believes a company is using coercion, deception or some other tactic that can lead to skewed competition.
If it sees a company it thinks could end up skewing a market, even if it’s not technically violating the letter of antitrust law, it can charge the company under Section 5.
Broad government approach
Although the FTC is attracting headlines with its policy change to replace the more conservative approach taken by the Obama and Trump administrations, the broader Biden administration is taking an equally aggressive approach, with some success.
Just a few weeks ago, for example, the antitrust division of the Department of Justice won a lawsuit to block the merger of two of the largest book publishers in the United States even though the argument wasn’t about any immediate harm to consumers. Rather, the incipient, down-the-road anti-competitive impact was on the labor-market side. The concern was the advances paid to writers would eventually drop as fewer publishers competed for the rights to works.
PE business strategy
Going forward, it’s likely to be private equity that’s hard hit because the business model it follows in many cases is about market domination by rolling up competitors.
“Sometimes [the motive of a private equity firm is] designed to hollow out or roll up an industry and essentially cash out,” Jonathan Kanter, DOJ’s antitrust chief, said in a Financial Times interview earlier this year. “That business model is often very much at odds with the law, and very much at odds with the competition [the DOJ] is trying to protect.’”
FTC Chief Khan has indicated she views private equity the same way, telling the Financial Times there are “life and death consequences” to roll-ups, and she went as far as to say it might even be anti-competitive for PE firms to buy assets that are being divested by other companies to clear antitrust reviews.
That’s about as aggressive as an agency can get, analysts say.
“Private equity firms that have not encountered strong antitrust scrutiny in the past should be prepared for a very different experience with future acquisitions,” Arindam Kar of the law firm Polsinelli has said.
Troutman Pepper attorneys in an analysis of the FTC shift said it’s probable PE-backed roll-ups will be in the crosshairs.
“We would not be surprised if … ‘roll-up’ acquisitions that in isolation would not raise concentration concerns” are subject to FTC scrutiny, said Daniel Anziska, Barbara Sicalides and James Lamberth of Troutman.
Other actions that could end up under review, according to the Troutman attorneys, are supply chains in concentrated industries that are built on loyalty discounts, rebates or similar benefits, and some below-cost pricing strategies.
Exchanges of nonpublic, competitively sensitive information, even exchanges that are algorithm based, could come under scrutiny if agencies think they could facilitate price coordination.
“The new Policy Statement is a dramatic assertion of regulatory power,” the attorneys said. “The FTC has made clear that Section 5 may be used to expand antitrust enforcement for conduct previously not found anticompetitive by courts.”
Although all companies are on notice, private equity firms could come under particular scrutiny, according to this analysis.
