The U.S. government’s aggressive stance on antitrust is chilling merger activity among the country’s biggest companies, with some deals never making it past the boardroom as executives fear lengthy and expensive approval processes.
U.S. enforcers have roughly doubled their efforts to block mergers under the Biden administration: in the 12 months through September, the antitrust agencies filed complaints against a record 13 transactions compared to an average of six per year over the previous five years, according to data compiled by Bloomberg.
Though deals involving U.S. companies have steadily increased, the recent pace of interventions by the Justice Department or the Federal Trade Commission has stunted that growth: The agencies are also claiming credit for another 26 mergers that they say were abandoned in the face of antitrust investigations, some of which were pulled before they were even made public.
The approach has discouraged some companies from pursuing unions they would’ve leapt at in the past, according to dozens of conversations with M&A advisers, corporate executives, former regulators and antitrust practitioners. Many of them described an environment that’s generally hostile to dealmaking, even for transactions that they wouldn’t have expected to raise antitrust concerns. While antitrust laws haven’t changed, the stepped-up enforcement means dealmaking has gotten costlier, as well as more uncertain and time-consuming, they said.
Last year, for example, Alphabet Inc.’s Google put aside internal discussions about potentially acquiring another large technology company because of concerns it would attract too much antitrust scrutiny, according to a person familiar with the matter, who declined to identify the potential target. A representative for Alphabet didn’t immediately respond to a request for comment.
A different person, who pitched the head of a $50 billion company on a $20 billion takeover, said the executive immediately cut him off because he thought the deal would never fly. Several years ago, the person said, he would’ve expected the same proposal to pique the CEO’s interest and lead to a discussion about how to get it done.
Though deal volumes have slipped significantly this year, plenty of M&A is still getting done. The vast majority of transactions don’t rise to the level of significant regulatory oversight, and many executives are willing to weather the increased scrutiny if they really want a deal. Much of the slump in activity can be explained by a poor macroeconomic environment for dealmaking: CEO confidence is low in the face of a potential recession, interest rates are high and financing is tough to come by.
But after decades where the U.S. favored a light-touch approach for almost all but the biggest deals, President Joe Biden’s administration has altered that strategy, souring the environment. A sweeping executive order signed by Biden in 2021 encouraged government agencies to “enforce the antitrust laws to combat the excessive concentration of industry,” an approach that’s become a key tenet of his administration’s economic policy.
Biden appointed prominent antitrust hawks to follow through on the pledge: Jonathan Kanter helms the Justice Department’s antitrust division while Lina Khan oversees the FTC. Both have argued publicly that previous administrations were too permissive, leading to a rise in corporate concentration that’s limited choices for consumers and contributed to a spike in prices.
“We have much more to do to reverse the decades of concentrated corporate power,” Biden said at an event on May 4.
In some prominent cases, the international reach of large companies is pulling in regulators from all over the world and bolstering the U.S. agenda.
Last month, the UK’s Competition and Markets Authority vetoed Microsoft Corp.’s $69 billion takeover of Activision Blizzard Inc., further cementing its position alongside the U.S. and EU at the center of global antitrust decisions. The FTC had already sued to block the deal, and hearings are scheduled to start in August in a bellwether case for Khan’s agency. The European Commission is due to rule on the transaction later this month.
One M&A lawyer wryly joked that his firm’s antitrust partners are billing more hours than their M&A counterparts as companies spend as long as six months assessing competition risks before even starting discussions or due diligence. Several M&A bankers complained about the hours they have to spend on lengthy phone calls with antitrust lawyers.
For every multibillion-dollar merger that doesn’t happen, corporate America’s network of M&A bankers — whose job it is to pitch and advise on transactions — miss out on hundreds of millions of dollars. Investment-banking fees across the five biggest Wall Street banks plummeted 49% in 2022, according to Bloomberg Intelligence, while the industrywide bonus pool sank by 21%.
One of the main hurdles that worries advisers is the amount of time it’s taking regulators to review deals that would have previously been straightforward. Companies have to bake in more time for deals to close and get longer-term bridge financing, an expensive type of debt that’s meant to be a stopgap. The longer a deal is in limbo, the bigger the risk that clients and employees move on.
In some cases, the length of antitrust reviews has meant that a merger’s financing will fall through, said Amanda Wait, who heads the U.S. antitrust practice at Norton Rose Fulbright LLP.
One large drugmaker abandoned plans to acquire a smaller rival after estimating the deal would take 24 months to get the necessary approvals, a person familiar with the matter said. It would revisit the deal, which includes some overlap between each company’s drugs, if there’s a change in administration that brings friendlier regulators, the person said. Meanwhile, the FTC has already been investigating Tempur Sealy International Inc.’s proposed deal with Mattress Firm Inc., announced on May 9, since last year, Bloomberg News reported.
Sellers are also pushing for higher reverse breakup fees to protect them if a deal falls apart under regulatory pressure. Covenants are being written into contracts that spell out exactly how much effort the parties will put in to push through an antitrust review, including so-called hell or high water clauses that require one or either party to do everything necessary to get approvals.
When it doesn’t completely halt deals, the increased scrutiny is narrowing the pool of potential buyers that make a target’s shortlist.
Prometheus Biosciences Inc., which last month agreed to sell to Merck & Co. for $10.8 billion, decided against a competing bid from AbbVie Inc. in part because its board and advisers thought such a deal posed “significantly increased antitrust risk.”
One lawyer said many of his software clients won’t even contact public companies in the same industry — often seen as the most logical buyers — because they view the risk as too high. That leaves private equity firms as potential buyers, which are flush with capital but struggling to finance deals because debt has gotten more expensive.
But even buyout firms aren’t being let off the hook. The Justice Department is investigating Thoma Bravo’s $2.3 billion deal to buy ForgeRock Inc., the third identity software company that the private equity firm has purchased in the past year. Thoma Bravo firm lost out to Silver Lake Management in its bid to buy Qualtrics International Inc. because of antitrust concerns, people familiar with the deal said.
“In many cases, sellers do not want to go through that exploratory process of waiting a year to see if the deal will close,” Thoma Bravo founder Orlando Bravo said in a CNBC interview this month. “It’s taking a lot longer and people have to be a lot more thoughtful about what they’re engaging in.”
Representatives for Thoma Bravo and Qualtrics didn’t immediately respond to requests for comment.
Though most deals never make it to court, U.S. regulators have a mixed record of success with the ones that do. Of the 17 mergers challenged in court since July 2021, seven were abandoned, while enforcers clocked up one litigated win and lost three other cases. Four remain pending, and one is on appeal. On Friday, the Justice Department proposed a mid-trial settlement in another case involving Sweden’s Assa Abloy AB’s $4.3 billion acquisition of a Spectrum Brands Holdings Inc. unit.
One loss in particular is giving deal-hungry companies hope. In September last year, UnitedHealth Group Inc. won court approval for its $7.8 billion acquisition of Change Healthcare Inc., defeating a Justice Department lawsuit that had sought to block the deal. And with so many cases still on the regulators’ books, some companies and their advisers are simply betting that the understaffed agencies won’t have the resources to tackle every big deal they try to push through.
If a company is “willing to put in the time and resources, I’d say go for it,” said Norton Rose’s Wait. But in the current environment, “companies have to think hard.”