Antitrust isn’t headed to an inflection point; it’s already there
The truth is most companies have not had to think too much about antitrust regulations. The basic rules are pretty well known. But that is potentially changing quickly as antitrust concerns focus on not only high-tech companies, but businesses across the economy, from startups to global conglomerates.
It means antitrust is at an important inflection point. Changes are occurring at multiple levels — from rule reform to new applications of existing rules to increased enforcement. Some of these changes are a reflection of the economic upheaval ushered in by the digital economy, which has prompted businesses and governments to look to antitrust rules to solve their problems. Witness President Biden’s July 9 executive order whose 72 provisions include requests ranging from asking the FCC to reinstate net neutrality rules to directing the FDA to issue rules to allow more competition in the hearing aid market.
It’s a reflection of a general zeitgeist whose goal is to slow the onslaught of consolidation in technology across industries, from news media to healthcare to agriculture. And it’s gathering momentum as new rules are being proposed from both sides of the aisle.
Many look to the 449-page “Investigation of Competition in Digital Markets” report from the judiciary committee on antitrust as the opening salvo. The report took aim at Amazon, Apple, Facebook, and Google, outlining how those once scrappy startups now leverage their market position in ways not seen since “the era of oil barons and railroad tycoons.” The judiciary report’s conclusion: prevent big tech from acquiring smaller tech with tougher policing — and reform antitrust laws.
Both Democrats and Republicans have since voiced their support for such ideas.
Aimed at the seemingly intractable challenges of the digital era, Sen. Amy Klobuchar’s (D-Minn.) “Antitrust Law Enforcement Reform Act” would create barriers to prevent consolidation across industries, not just in tech, but in any business that might be connected to “dominant digital platforms.” The legislation would have a prescriptive force, creating a presumption against certain mergers, whether they be in biotech or burgers.
Meanwhile, on the Republican side, Sen. Josh Hawley (R-Mo.) has rolled out a bill that looks even more severe, blocking some mergers and acquisitions outright. The “Trust-Busting for the Twenty-First Century Act” would ban any acquisitions by companies with a market cap of more than $100 billion. The act would also make it easier for the FTC to classify a company’s behavior as anti-competitive, and then extract penalties (including profits) based on that behavior.
And it’s not just the Federal government. Several states have proposed their own legislation to prevent and punish what they see as anti-competitive behavior. Arizona narrowly passed initial legislation that would prevent app store operators, specifically Apple and Google, from forcing developers to use their payment systems.
Meanwhile in New York State, the Twenty-First Century Anti-Trust Act (S933) includes a first-of-its-kind state merger notification of any deal in which the buyer would end up with more than $8 million in assets of the target. It would also create an “abuse of dominance” offense and give the N.Y. attorney general rulemaking authority — whether or not the company was based in New York.
These proposals have a long way to go before becoming law, but they demonstrate potentially significant antitrust adjustments coming.
Expanding antitrust view
The ripple effects will be profound, affecting transportation, communications, banking and healthcare companies. Incumbents looking to diversify their business are vulnerable, as are startups looking for profitable partners. Unhappy competitors who feel stymied may look to antitrust rules for remediation. And private equity moves to consolidate fledgling, fragmented industries will face tougher questions about overlap and industry concentration.
So, we are going to see antitrust being used in industries and in ways that haven’t been considered in many years, with views about market concentration expanding to encompass what used to be considered diverse or vertical markets. In fact, both Sen. Klobuchar’s and Sen. Hawley’s proposals specifically target consolidation across industries. Sen. Hawley’s $100 billion ban explicitly targets vertical acquisitions. It would certainly prevent deals like Facebook’s acquisition of WhatsApp or Google’s purchase of Fitbit.
It’s this expanded view that can scuttle what were once thought to be relatively uncontroversial deals. Witness what happened to the proposed $5.3 billion Visa acquisition of Plaid, which designs middleware to help banks work more easily with companies like Venmo. After more than 12 months of work on the deal, Visa abandoned the acquisition after the Department of Justice filed suit to block it on the grounds that it would “eliminate a nascent competitive threat.”
Forewarned is forearmed
From now on, proposed mergers will be examined in more detail than ever before, thus exposing businesses and investors to more risk.
So what to do? Companies still need to move forward and do the deals that make sense to their businesses. However, given the new antitrust scrutiny, they should also be proactive and not draw unnecessary attention to proposed mergers, for example, by particular business behaviors.
Businesses should also look more closely at their own industry in considering a deal. Is there a growing concentration of market share that could draw more regulator attention? Is there “nascent competition” that could be stifled? Can the proposed acquisition endure a protracted examination by authorities and still be worthwhile?
More than ever before, no matter what the proposed merger or acquisition may initially look like, companies will need to establish a pro-competition story beforehand that they can deliver to antitrust regulators. Part of that new narrative will involve explaining how a deal will benefit consumers — and how it can strengthen the competitive landscape. On the other side of the antitrust inflection point, companies need to adopt a new perspective to tell their stories.
Gary Zanfagna is an antitrust and competition partner at Paul Hastings LLP.