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Wall Street Deal Making Faces Greater Scrutiny, Delays Under FTC’s Lina Khan

Agency questions mergers likely to have gone unchallenged in years past, drawing complaints from deal makers who say scrutiny is excessive

The Wall Street Journal


The Biden administration’s antitrust enforcers are throwing sand in the gears of Wall Street’s deal machine.


Under Chairwoman Lina Khan, the Federal Trade Commission is questioning mergers that likely would have gone unchallenged in years past—a change Ms. Khan says is needed to prevent companies from building up too much power and stifling competition.


“In all too many areas of our economy, including agriculture, airlines, healthcare, we’ve seen significant consolidation and reduction of competition,” Ms. Khan said in an interview. “Mergers have played a role in that.”

The FTC issued 42 letters of investigation over mergers or similar transactions during the 2021 fiscal year, according to the latest available data, almost double the number for 2020 and the highest in more than 10 years. Deal makers, antitrust attorneys and Republicans complain that in some cases the FTC is simply trying to slow down deals where there isn’t a credible threat to competition.


“The emphasis is on using process to make doing deals more expensive and to heighten the risk, delay and uncertainty of doing those deals,” said Christine Wilson, a Republican commissioner who has been critical of Ms. Khan’s management.


Bankers and boards of directors are now more aware of the risk that antitrust enforcers will investigate, which has sometimes led companies to postpone merger plans, said Eric Swedenburg, co-head of the mergers and acquisitions practice at Simpson Thacher LLP.


“Boards are well aware of the aggressive antitrust enforcement regime right now,” Mr. Swedenburg said. “You have to assume you’re not going to get a pass on anything.”


Companies will still pursue deals, Pfizer Inc. Chief Executive Albert Bourla said at a recent conference. “But I foresee challenges, particularly large-scale acquisitions,” he said. Pfizer has agreed to a $5.4 billion deal for another drugmaker, while Amazon.com Inc. has announced two acquisitions in recent weeks valued at a total of about $5.6 billion.


The FTC can sue to block deals, but it can also reach settlements that require companies to undo some effects of a merger.


Those settlements have grown stricter under Ms. Khan, who revived a tactic the FTC abandoned more than 20 years ago: requiring the merged company to seek approval for future deals, even those below the $101 million threshold that triggers disclosure to the agency.


The agency has also stopped giving companies early assurance that deals won’t be investigated, while dealing with a surge in the number of mergers it must review.


Ms. Khan, a former law professor who has never tried an antitrust case, is seeking to unwind decades of legal precedent favoring corporate expansion through acquisition. She contends that prevailing antitrust theories focus too heavily on consumer prices while neglecting the downside of markets dominated by large companies, such as less innovation and fewer choices for consumers.


“Congress created laws that embed a certain default skepticism of mergers,” Ms. Khan said. “That’s a law that we’re charged with enforcing.”


Business groups contend that mergers benefit everyday Americans through lower prices and better service. They had expected the FTC and Justice Department under the Biden administration to intervene more often than previous administrations, given that Ms. Khan and other officials argue previous enforcers let too many inappropriate deals slip by.


One of Ms. Khan’s first moves at the FTC was to withdraw guidelines adopted in 2020 that had outlined the FTC’s policy toward vertical mergers, or deals that don’t fuse direct competitors.


Typically, these involve a large company buying a supplier or distributor of their products. The former guidelines said that in evaluating whether to challenge vertical deals, the FTC would consider whether they lower a company’s production costs, and with that, potentially lead to lower consumer prices.


In repealing the guidelines, Ms. Khan and other Democrats said federal law bars any merger that substantially lessens competition, “even if a merger does create efficiencies.”


A few months later, the FTC challenged two vertical mergers, semiconductor giant Nvidia Corp.’s purchase of ARM, a global chip design company, and Lockheed Martin Corp.’s plans to buy a rocket motor manufacturer.


Instead of litigating with the FTC, Nvidia and Lockheed called off the deals.


On July 27, the FTC, on a partisan vote, announced an unusual merger challenge: alleging Facebook owner Meta Platforms Inc.’s deal to acquire a virtual-reality fitness game creator would impede potential—not necessarily current—competition.


The FTC said Meta could have improved choices for consumers by developing its own VR-exercise app. That would have enhanced competition, and conversely the decision to buy a competitor’s app would do the opposite, the FTC said.


“I think they looked at the merger and thought, ‘we need to stop it, what is our best theory?’ ” said John E. Lopatka, an antitrust law professor at Pennsylvania State University. “They came up with the ones they have, which one can doubt are very strong.”


Meta says the FTC’s lawsuit is based on ideology and speculation about how VR works and whether Meta could have developed its own game. The market for VR games is competitive, it says, and big companies such as Apple Inc. or Peloton Interactive Inc. could introduce their own VR-oriented fitness services, it says.


FTC officials counter that the acquisition reflects a pattern in which tech companies gobble up potential rivals to gain dominance, when consumers would be served better if these tech giants competed by creating their own products and services.


One example: Facebook’s 2012 purchase of Instagram, a potential rival in social media, for $1 billion.


The deal didn’t directly affect user prices, since both social-media services are free. But in a 2020 report that Ms. Khan co-wrote when she worked in the House of Representatives, congressional staff argued that “in the absence of competition, Facebook’s quality has deteriorated over time, resulting in worse privacy protections for its users and a dramatic rise in misinformation.”


Meta and other tech giants acquired hundreds of smaller companies from 2010 through 2019, according to an FTC report published last year, mostly through smaller deals that didn’t require disclosure.


The FTC is also suing to break up Meta, alleging it created a social-media monopoly through an illegal pattern of buying nascent competitors such as Instagram. Meta is fighting the suit, and argues it has improved Instagram and other services.


The number of reviewable mergers—deals valued at over $101 million—more than doubled in 2021, but the FTC logged fewer merger enforcement actions—including settlements and lawsuits to challenge deals—than during the last fiscal year of the Trump administration.


The number of enforcement cases is on track to rise this year, however, and antitrust lawyers attribute that partly to the fact that Ms. Khan can rely on the vote of a third Democrat, Alvaro Bedoya, who was recently confirmed to the five-member commission.


Many on Wall Street doubt whether some of the year’s biggest deals will be approved. Traders give Microsoft Corp.’s planned acquisition of game publisher Activision Blizzard Inc. a 60% probability of the deal being completed, according to Christopher Colpitts at brokerage Cowen Inc.


Ms. Khan also has targeted stricter oversight of private equity, an industry that can “strip and flip” companies and degrades their productive capacity, she says.


Twice in June, the FTC settled with private-equity firm JAB Consumer Partners, which was acquiring animal hospitals in Texas, California, Washington, D.C., Virginia and Colorado.


The agreements required JAB to tell the FTC about any other clinics it wants to buy near its existing assets in other states—even those under the $101 million threshold. That early-warning requirement was a first-of-its-kind condition in an FTC order and would “allow the FTC to better address stealth roll-ups by private-equity firms like JAB/NVA and serial acquisitions by other corporations,” Ms. Khan said in a June statement.

Roll-ups involve buying and combining small companies in the same industry with the aim to create a more efficient and profitable enterprise.

JAB said that it had no objections to the terms.

The FTC’s Republican commissioners supported the settlements but questioned the conditions, saying in a joint statement after the first deal that they appeared to be driven by Ms. Khan’s “evident distaste for private equity as a business model, instead of the facts uncovered in the investigation.”


Write to Dave Michaels at dave.michaels@wsj.com and Ryan Tracy at ryan.tracy@wsj.com

Appeared in the August 16, 2022, print edition as 'FTC’s Antitrust Posture Spurs Companies to Rethink Mergers'.