The Biden Administration’s aggressive antitrust enforcers have trained their sights on private equity companies. They have signaled through enforcement activities, formal policy statements and informal interviews and speeches that they are considering all options to address perceived or imagined impacts on competition from the acquisition by private equity companies of portfolio companies that compete with one another. Private equity companies should be aware of heightened attention from the Federal Trade Commission (FTC) and U.S. Department of Justice’s Antitrust Division (DOJ) as they make investment decisions.
The antitrust agencies have, through their words and actions, revealed the following as their principal areas of concern:
- So-called “roll-up” strategies, under which private equity firms acquire a significant share of an industry through a series of small transactions that, because of their size, are overlooked by the antitrust agencies. The agencies have threatened retroactive action to undo prior transactions that produced a level of market concentration they find inappropriate.
- Focus by private equity companies on cost cutting and short-term returns, an approach the agencies regard to be inconsistent with robust competition and innovation. This concern arises principally when private equity companies are under consideration as purchasers of assets to be divested to address antitrust concerns with larger transactions.
- “Interlocking directorates” that can violate the Clayton Act and, because they can involve one private equity company having representatives on boards of multiple competitors, can allow inappropriate sharing of competitively sensitive information and lead to reduced incentives to compete.
In the current enforcement environment, where the agencies appear to be in constant search for new enforcement targets and new ways to convey the seriousness (or recklessness) with which they are approaching their missions, these concerns are not going away. Private equity companies should not assume that any transaction is too small to attract antitrust attention and should involve antitrust counsel at earliest stages to evaluate potential risks.
Attacks on “Roll-Up” Strategies
Both agencies have expressed concern about so-called “roll-up” strategies by private equity firms that acquire multiple players in a single industry. They have asserted that, even if each individual acquisition avoids antitrust scrutiny or would be unlikely standing alone to provide a basis for an antitrust challenge under Section 7 of the Clayton Act (which prohibits mergers or acquisitions that might “substantially … lessen competition [or] tend to create a monopoly”), the agencies might still challenge the cumulative effect of multiple separate acquisitions.
Andrew Forman, Deputy Assistant Attorney General at the DOJ, in a speech in June 2022 (specifically about healthcare markets, but with comments that are applicable generally) stated that the DOJ is “thinking a lot about enhancing antitrust enforcement around a variety of issues surrounding private equity,” and referred specifically to “private equity ‘roll-ups,’ namely whether … a series of smaller transactions can cumulatively or otherwise lead to a substantial lessening of competition or tendency to create a monopoly.” Forman’s boss, Assistant Attorney General Jonathan Kanter, observed in an interview with the Financial Times that “[m]any of the mergers we’re confronting are a result of [private equity] roll ups,” and stated that “[i]f [the DOJ is] going to be effective, we cannot just look at each individual deal in a vacuum detached from the private equity firm.”
FTC Chair Lina Khan echoed Kanter’s and Forman’s comments in another interview with the Financial Times, stating that “[e]very individual transaction [by a private equity firm] might not raise problems, but in the aggregate you’ve got a huge private equity firm controlling, say, veterinary clinics. So that’s a concern.” Khan’s veterinary clinic example referred to the FTC’s antitrust enforcement action against private equity firm JAB Consumer Partners based on JAB’s acquisition of a series of veterinary clinics. According to Holly Vedova, Director of the FTC’s Bureau of Competition, “Private equity firms increasingly engage in roll up strategies that allow them to accrue market power off the Commission’s radar.” In order to prevent JAB from continuing with that strategy – which the FTC characterized as “serial acquisitions or ‘buy and buy’ tactics” – the FTC demanded that JAB agree to obtain prior approval from the FTC before acquiring any further veterinary clinics within 25 miles of any other clinics the company owned in California or Texas and to provide prior notice to the FTC of any clinic acquisitions anywhere in the U.S. (even if not reportable under the Hart-Scott-Rodino Act (HSR)). The FTC’s prior approval demand in the JAB matter followed its controversial policy decision in October 2021 to once again insist on such provisions in merger settlements, returning to a position it had abandoned 25 years earlier. The FTC has since sought to insert such a provision in all merger settlements. Although ostensibly generally applicable, this requirement might fall most heavily on private equity companies with likely more frequent involvement in mergers and acquisitions (M&A) activities.
More recently, the FTC adopted a formal policy statement concerning the purported scope of its powers under Section 5 of the FTC Act and, in that November 2022 statement, claimed the power to challenge private equity companies’ “roll-up” strategies even if the FTC could not prove under Section 7 of the Clayton Act that those acquisitions might substantially lessen competition. The FTC’s statement observed that it would be an “unfair method of competition” for a company to engage in “a series of mergers, acquisitions, or joint ventures that tend to bring about the harms that the antitrust laws were designed to prevent, but individually may not have violated the antitrust laws.”
Concerns About Private Equity Firm Practices and Incentives
The heightened attention the antitrust agencies are directing to acquisitions by private equity companies appears to be driven by more than merely the potential for increased market concentration, the traditional focus of any antitrust analysis of a proposed acquisition. The antitrust agencies instead also appear to be considering how the incentives and past behavior of private equity companies might affect competition in the market in which an acquisition occurs. In her interview with the Financial Times, Khan referred to a study showing an increase in mortality rates after cost cutting that followed private equity company acquisitions of nursing homes, causing the FTC to take private equity acquisitions “very seriously.” The DOJ’s Forman also suggested that the DOJ considers whether an acquisition by a private equity company might cause the acquired company to curtail maverick or disruptive market practices as it focuses “solely on short-term financial gains and not on advancing innovation or quality.”
The agencies are also increasingly questioning the suitability of private equity companies as acquirers of assets that merging parties divest in order to address potential antitrust concerns with a transaction. Former FTC Commissioner (and current Consumer Financial Protection Bureau Director) Rohit Chopra was a vocal opponent of private equity companies as divestiture purchasers based on what he regarded to be past behavior and incentives that were inconsistent with the intended purpose of divestitures as remedies for anticompetitive mergers, the restoration of competition that would be lost from the merger. Chopra observed, for instance, that “opportunistic asset sales” and other behavior by private equity firms might be inconsistent with the “long-term competition” that is the goal of any antitrust divestiture.
The DOJ recently made its skepticism with the incentives of the proposed purchaser of assets a central part of its unsuccessful challenge to the acquisition by UnitedHealth Group of Change Healthcare Inc. To address the DOJ’s concerns with the transaction, UnitedHealth proposed to divest a competing business line owned by Change to private equity firm TPG Capital. The DOJ argued at trial that the proposed divestiture would not cure the problems with the transaction because “private equity firms can have incentives that run different to the strategic buyers” and that they are not committed to innovation. Although the court rejected the DOJ’s view, finding that TPG’s incentives were “geared toward preserving, and even improving, [the divested company’s] competitive edge,” skepticism by the antitrust agencies of private equity companies as purchasers of divestiture assets will surely remain. As the DOJ’s Kanter explained to the Financial Times, where settlement divestitures involve private equity firms, the motivations of the purchaser to reduce costs at the acquired company “will make it less competitive. … In many instances, divestitures that were supposed to address a competitive problem have ended up fueling additional competitive problems.” (The DOJ appears for now to have abandoned altogether the use of divestitures to remedy alleged anticompetitive mergers but, if it revisits that decision, will likely continue to question the appropriateness of a private equity company as a potential purchaser of divested assets.)
One tool the DOJ has employed recently to address concerns with private equity company ownership of (or involvement with) competing companies is Section 8 of the Clayton Act, which prohibits “interlocking directorates” – simultaneous service as an officer or director of competing companies. Section 8 had received little enforcement attention for decades, but both antitrust agencies have committed publicly to a renewed focus, and the DOJ in October 2022 announced the resignation by seven directors of five companies in response to DOJ concerns about potential interlocking directorates. Among the resignations were representatives of Thoma Bravo who served on the boards of competing software providers. Based on these resignations, the DOJ interpreted Section 8 broadly to prohibit not only the same individual from serving on the boards of both competitors, but also the service by different people representing Thoma Bravo on the competitors’ boards. This broad interpretation of the scope of Section 8’s prohibition on interlocking directorates will be of obvious interest to private equity companies with stakes in competing companies that might come with board representation.
Stepped-Up Scrutiny of HSR Filings
In his speech in June 2022, the DOJ’s Forman noted as a possible further concern that private equity firms “may not be taking seriously enough their obligations under the HSR Act” when making premerger filings. Although the antitrust agencies have, for now, taken no public actions in response to Forman’s statement, it likely calls for increased attention to HSR filing requirements and the details of any HSR filings.
Statements by the antitrust agencies make clear that private equity companies are under the antitrust microscope. Where antitrust review in the past might have been regarded as merely an inconvenient possibility, firms should consider from the outset of any exploration of a potential acquisition that antitrust review (and its associated delays and risks) could be likely and bring in experienced antitrust attorneys to evaluate potential risks at a transaction’s earliest stages.