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:
- Mergers that significantly increase market concentration
- Acquisitions of competitors or nascent competitors by a dominant firm (defined a 50% market share or possession of significant market power)
- 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.