Regulatory Focus on Consolidation May Present Opportunities for Private Equity Buyers | Skadden, Arps, Slate, Meagher & Flom LLP


Key points

  • Antitrust regulators in major jurisdictions are taking a more aggressive approach to merger reviews, causing delays and making the eventual closing of some deals uncertain.
  • U.S. regulators have expressed skepticism about the effectiveness of divestitures or behavioral remedies in restoring competition, and appear more willing to block deals they believe could lessen competition.
  • Regulatory aversion to transactions involving corporate consolidation could favor private equity acquirers with no operations in a particular industry.
  • However, roll-up deals from multiple companies in the same industry, a staple in the private equity playbook, are likely to come under scrutiny.

Merger regulators in many jurisdictions are taking a more aggressive and expansive approach when reviewing industry consolidation transactions, and some are using the merger clearance process to advance policy objectives involving areas well beyond those of traditional competition. Additionally, more than 50 countries have regimes in place giving antitrust regulators discretion to review any transaction, regardless of minimum income or asset thresholds. Accordingly, companies must plan for the possibility that their deals will attract the attention of regulators, even when the targets have little or no revenue.

In the United States, the Biden administration and congressional leaders are influencing the agendas of antitrust agencies, leading to a broader set of issues being raised in merger reviews under new enforcement theories. For example, merging parties are now routinely asked to provide information regarding the potential effects of consolidation activities on all stakeholders, with a particular focus on employees.

These broader investigations have significantly extended the timeline for some transactions. Meanwhile, new theories of competitive harm advanced by agencies are adding uncertainty to the final results of reviews, which no longer focus exclusively on consumer price effects.

Additionally, U.S. regulators have expressed reluctance to consider solutions to address concerns about the impact of a deal on competition. Agencies are skeptical of the effectiveness of divestitures and behavioral remedies, and have said they are more willing to block any deal they believe could lessen competition.

If the agencies do not consider recourse, more transactions involving companies in the same or adjacent sectors could be dropped unless the parties are willing to take legal action against the regulator ― a process that could involve significant costs and delays, and which may ultimately not come to fruition.

Opportunities for private equity buyers

Regulatory aversion to transactions involving corporate consolidation could favor private equity buyers without further investment in the sector.

U.S. antitrust regulators say many industries have become too concentrated due to record levels of merger activity in recent years, as well as decades of loose merger enforcement. Regulators’ belief that further consolidation is harmful, combined with their newfound focus on factors well beyond a merger’s effect on consumer prices, may make it more difficult for companies to pursue consolidation. inorganic growth through consolidation. While the current regulatory environment may chill the M&A ambitions of some corporate buyers, a desire for growth will continue to fuel deal activity for parties willing to accept longer lead times and closing uncertainty. .

Companies will continue to shed non-core operations and pursue sales that maximize shareholder value. But sellers will face new challenges in closing a deal once it’s announced. A seller may not choose the higher price in a sale process if an alternative transaction has greater certainty of closing or is more likely to close without delay. Private equity buyers can use this dynamic to their advantage when competing against bidders in the same industry as the target company.

Historically, transactions involving private equity buyers have not attracted much attention from antitrust regulators, unless the transaction involves the acquisition of a majority stake in a target that had an overlap. directly competitive with a buyer’s portfolio company. Regulators are now asking more questions about private equity transactions involving the acquisition of a target in the same industry as other companies in the buyer’s portfolio, particularly regarding the effect that a transaction will have on target employees. Regardless, if a private equity buyer and its affiliated funds do not have investments in portfolio companies competing with the target, the risk of the deal being stalled or significantly delayed remains low by compared to business buyers in the same sector.

Private equity buyers should expect regulatory scrutiny when making multiple acquisitions in the same industry.

US regulators have expressed concerns about the business model of private equity firms, particularly when they buy or invest in multiple companies in the same or adjacent industries. Acquisitions made as part of a “roll-up” strategy ― acquiring and combining businesses to gain scale and efficiency ― will be subject to increased regulatory scrutiny, even if the target company is not directly in competition with other portfolio companies of the private equity sponsor, and regardless of whether existing portfolio investments are held in the same fund or in different funds. The agencies said private equity transactions will be an area of ​​focus in revised merger review guidelines expected to be adopted later this year.

Private equity sponsors pursuing a roll-up strategy may therefore face additional information requests from regulators which could extend transaction times. However, the guidelines do not have the force of law. Without changes to the law, it will be difficult for US antitrust regulators to block a transaction based on new enforcement theories. We recommend that private equity sponsors considering multiple acquisitions in the same industry consult with an antitrust attorney early in a transaction to identify any potential impediments or delays.

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