In The Rush To Strengthen Antitrust Law, We Could Kill Useful Mergers And Acquisitions

from the be-careful-what-you-wish-for dept

Last week, Senator Amy Klobuchuar introduced a major antitrust reform bill, entitled the Competition and Antitrust Law Enforcement Reform Act. This isn’t much of a surprise, as Democrats have made it quite clear that they seek to use antitrust much more aggressively than it’s been used over the past few decades. I’m a big believer in the need for more competition, in general, but often worry that antitrust is not the best way to get there.

The bill will put more budget and power in the hands of the DOJ and the FTC, and also would change the legal standards for anticompetitive mergers, as well as put the burden on merging companies to prove that they are not violating antitrust, rather than as it stands now, with the burden being on the DOJ to show that the merger violates the law. Better funding the DOJ and the FTC on competition issues strikes me as a sensible move here (more the FTC than the DOJ, but no need to get that picky). However, a lot of the rest of the bill seems like it could have the opposite of the intended effect.

I get the thinking behind this, but as structured, it appears like it could have significant unintended consequences that actually decreases competition rather than increases it. In a lot of ways, the key thing this bill would do is to significantly reduce merger and acquisition activity. It has two main mechanism that would basically kill a significant number of deals:

  • Update the legal standard for permissible mergers. The bill amends the Clayton Act to forbid mergers that ?create an appreciable risk of materially lessening competition? rather than mergers that ?substantially lessen competition,? where ?materially? is defined as ?more than a de minimus amount.? By adding a risk-based standard and clarifying the amount of likely harm the government must prove, enforcers can more effectively stop anticompetitive mergers that currently slip through the cracks. The bill also clarifies that mergers that create a monopsony (the power to unfairly lower the prices to a company it pays or wages it offers because of lack of competition among buyers or employers) violate the statute.
  • Shift the burden to the merging parties to prove their merger will not violate the law. Certain categories of mergers pose significant risks to competition, but are still difficult and costly for the government to challenge in court. For those types of mergers, the bill shifts the legal burden from the government to the merging companies, which would have to prove that their mergers do not create an appreciable risk of materially lessening competition or tend to create a monopoly or monopsony. These categories include:
    1. Mergers that significantly increase market concentration
    2. Acquisitions of competitors or nascent competitors by a dominant firm (defined a 50% market share or possession of significant market power)
    3. Mega-mergers valued at more than $5 billion

On that first one — changing the standard to “create an appreciable risk of materially lessening competition” seems potentially insurmountable for nearly any merger. Any merger decreases competition in some form, because (definitionally) it’s removing one competitor from the market. But that doesn’t mean that it’s necessarily damaging to the market, to innovation, or to consumers. Say, for example, there’s a market with 10 firms, and one of them is struggling and likely to go under. A merger between it and one of its more successful competitors technically “lessens” competition, but it might mean that that same firm doesn’t go out of business at all. Or, it might mean that by combining two of the companies in the market that they can better compete with some of the others.

I recognize this becomes a very different story when the market is down to just a few players — and that’s certainly true of a few too many industries these days. But that’s why the standard is set at the current “substantially lessen competition” not “creating a risk” that it might “materially lessen competition.”

The second one, on the burden shifting is perhaps equally problematic. And, here, the real risk is in killing off new startup creation. When VCs invest in a startup, their hope is that the startup is their unicorn or rocketship — becoming a multi-billion dollar market leader. These are the deals where VCs make all their money — on the huge success stories, the 100x return investments. But only a very small percentage of investments are such hits. The second best result for a VC is to have the startup acquired for a decent gain. A 10x gain is nothing for them to write home about, though it’s nice. A 2 to 3x gain is a failure in the world of VC, but it’s better than… nothing at all.

So, for an investor to fund startups, it helps to know that the backup plan for companies that don’t become billion dollar unicorns is that they can sell out to someone else, and at least get some return. But under this bill, the deal flow for those kinds of deals will dry up. The big companies that startups and VCs rely on for decent (but nothing special) exits go away. As a result, it makes VCs less interested in investing. Because the expected returns drop significantly. That means it’s likely that they’ll invest in fewer startups, thereby diminishing innovation and competition.

This is the exact opposite of the intention of this bill, but it (tragically, again) suggests how little regulators understand how startups, investments, and competition actually work.

And, of course, none of this even touches on the fact that we just had a DOJ and Attorney General in place who, it was revealed, deliberately used antitrust as a weapon against companies the president disliked. It’s kind of amazing that not even a year after that was revealed, Democrats are quick to make it even easier for a future Bill Barr to have even more power to do that.

Yes, competition is important — and there are certainly many industries that have become too consolidated. Indeed, I’ve been coming around to the belief that almost every “problem” people describe when talking about the tech industry (and a bunch of other industries) simply comes down to a lack of viable competition. But assuming that the only tool to increase competition is via antitrust, you run the risk of having exactly the wrong result. It can lead to a world in which you get less investment in startups and new competitors, since the risk becomes much greater.

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Comments on “In The Rush To Strengthen Antitrust Law, We Could Kill Useful Mergers And Acquisitions”

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11 Comments
bshock says:

Can we quantify "useful mergers and acquisitions?"

It’s quite possible that I’m biased against mergers simply because every time I learn about one, it turns out to be extremely negative for consumers. I acknowledge that there could be thousands of mergers that benefit consumers, with only a tiny percentage causing the damage.

I also wonder if there is a bit more nuance to this. It matters what businesses are merging and how much money is involved. What if horrifically negative mergers like the ones in airlines, cellphone networks, health care organizations, and entertainment are horrifically negative not because all mergers are inherently bad, but because these particular sets of mergers screw the public to a ridiculous degree? Can we put a dollar figure on good, useful mergers vs. twisted, evil mergers?

This comment has been deemed insightful by the community.
James Burkhardt (profile) says:

Re: Re:

Bshock,

You are decades behind the discussion. Mergers happen all the time. You just only hear about the big ones, and only remember hearing about the bad ones that you keep hearing about because the process goes on as people challenge them. Anti-trust has never been about preventing mergers. Its about protecting the market from large actors using their money to dominate and control the market.

Nuance is of course the important question. Its all this article discusses.

But asking for a dollar amount is the antithesis of nuance. Its asking for a simple proxy to a nuanced issue. The issue isn’t how much is being spent. The issue is the effects the merger will have on the market.

It wouldn’t have mattered if T-Mobile bought sprint for a Dollar. It still would have been a bad merger because historically that was expected to result in massive job losses and reduced competitive price pressures. But its not that simple, sprint has for years claimed imminent bankruptcy, but that is questionable as after the failed AT&T merger, Sprint had financials that showed it was in a recovering financial situation, potentially eliminating that excuse. Debt is a big factor. Because TMobile had to borrow to make that purchase, that means it needs immediate returns from the purchase that puts increased price pressure.

You can’t answer the question with dollars, you have to look at the industry and the market and assess complex questions of how the combined entity would effect the market and how the merger will effect the compined entity.

Anonymous Coward says:

Makes the way venture capital is practiced sound like a major source of the problem, to be honest, rather than a thing to be concerned with dissuading or whatever. It should adjust to a better form of capitalism, like pretty much everything else.

Not going to argue this particular bill is a way to accomplish better merger oversight or something, just that i am hardly convinced "what happens to VC" is any kind of argument against it.

I don’t know about quantification of anything such as bshock asks about above, but hell i will take anecdotes about any M&A that was good for more than a handful of people.

Anonymous Coward says:

Re: Re:

Nobody gives a flip about VC’s sake – they already have sizeable amounts of disposable wealth to risk. What they are worried about is the ability for new businesses to grow. If you were from Bizzaro World where promoting monopolies was an end in itself stopping the flow of VC funding would be a high priority.

Big money is also needed for better industrial competiveness – it is literally the thing that gives developed nations an edge in labor competiveness – either in infastructure or the tools themselves. Economies of scale have been a concrete fact of life for at least centuries and we need to acknowledge that if we don’t like the taste of failure.

Devonavar (profile) says:

The VC Business Model is the problem

The second one, on the burden shifting is perhaps equally problematic. And, here, the real risk is in killing off new startup creation. When VCs invest in a startup, their hope is that the startup is their unicorn or rocketship — becoming a multi-billion dollar market leader. These are the deals where VCs make all their money — on the huge success stories, the 100x return investments. But only a very small percentage of investments are such hits. The second best result for a VC is to have the startup acquired for a decent gain. A 10x gain is nothing for them to write home about, though it’s nice. A 2 to 3x gain is a failure in the world of VC, but it’s better than… nothing at all.

This seems like a fairly perfect description of the problem. VC’s are trying to create companies so big they overpower all existing competition … a monopoly, in other words. A world dominated by "multi-billion dollar market leader[s]" is not a world that allows for much depth in competition. VC funded "disruption" functions by dumping so much money into one company that it gains enough market power to force the rest of the industry out of business. That’s the goal.

And if the consolation prize is a merger, and the consolation prize is the result 99% of the time the companies don’t outright fail, in what sense are VCs ever creating competition? There is no final outcome that results in a genuine competitor; either the VC-backed company dominates and pushes all the other companies out of the market, or it "fails" and serves to bolster the market share of one of its competitors — likely one that is already on the large side, since larger companies are usually the ones that can afford acquisitions.

So, for an investor to fund startups, it helps to know that the backup plan for companies that don’t become billion dollar unicorns is that they can sell out to someone else, and at least get some return. But under this bill, the deal flow for those kinds of deals will dry up. The big companies that startups and VCs rely on for decent (but nothing special) exits go away. As a result, it makes VCs less interested in investing. Because the expected returns drop significantly. That means it’s likely that they’ll invest in fewer startups, thereby diminishing innovation and competition.

There was a time when we argued that record labels had no right to their business model, which was true. The same applies here: VC’s have no God-given right to the VC business model of fishing for unicorns. If we change the rules to make unicorns harder to create and the consolation prize (acquisition) harder to achieve, yes we’ll force VCs to adapt, but so what? Things change. The question we should be asking is, does the rule change make for a more competitive marketplace? Which, I would argue, it probably will.

Saying it will make VCs less interested in investing because they can’t exit so easily sounds to me like the notion that artists will be less motivated to create because they don’t have copyright. In both cases, it misunderstands the motive involved. VCs are motivated to invest, and they will still have money they want to invest if the rules change. If they can’t make money from acquisitions, they’ll find a different business model.

If we are lucky, maybe they’ll invest permanently in exchange for a share of the profits (i.e. dividends), which means they’ll be incentivized to ensure that the company remains independent, and thus a viable competitor in the marketplace.

This comment has been deemed insightful by the community.
Jeroen Hellingman (profile) says:

I don’t think we need to prevent mergers and acquisitions as such, we need to prevent abusive monopolies and cartels. I call it the paradox of the free market, that you have to regulate it (make it less free) to keep it free, that is, to continue to allow market mechanisms to function correctly and competition to drive innovation and effectiveness, and also to have a wide field of contenders to grow diversity and allow creative cross-pollination..

I think especially with the regard to the latter aspect, current anti-trust legislation is not up to it’s task. Theoretically, you can have two suppliers and maintain perfect competition, but this is falling short on the second aspect: especially with regard to media that is showing: it is unconvincing to have outlets with opposite political leanings to be owned by the same owner.

Solving this is will be tricky. My own thinking is that we should make it less attractive to be a monopolist: a kind of progressive tax on profits proportional to your market share, kicking in modestly when you reach 25%, and going to 100% when you reach 100% — but defining markets is hard, and we do not want to destroy economies of scale.

I also think having a few brick walls between certain markets will be a good thing — you cannot be active in one if you are active in the other: e.g. I would prohibit being both an insurer and a bank, a distribution channel and a publisher, or a sales platform and a shop, because such combinations have shown to be very liable to abuse.

Scary Devil Monastery (profile) says:

Re: Re:

"I call it the paradox of the free market, that you have to regulate it (make it less free) to keep it free…"

That’s basically a version of Karl Popper’s "Paradox of Tolerance" which states that if everyone is given complete freedom it’s inevitable that some will abuse that freedom to take it away for everyone. You can not tolerate the intolerant, and similarly you can not allow a market so free companies can build themselves functional monopolies.

Hence why what you need is an impartial ruleset everyone agrees to follow.

Yes, I know I'm commenting anonymously says:

There are companies that should not merge. These can, however, afford the lawyers to write incomprehensible proof that that should be allowed. Furthermore, the ‘experts’ needed to evaluate that proof make more money from allowing mergers than from denying them.

This looks like a combination of ISDS-tribunal and the patent process to me, with a bit of ‘for the people’-sauce on top for partisan colour.

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