By Jay Antenen and Joseph Tipograph with analytics by Elizabeth Lim
The universe of viable mergers may have shrunk last Tuesday when the Democrats won control of the U.S. House of Representatives.
Dealmakers thinking of pursuing large strategic tie-ups in the U.S. face increased risk that transactions will draw heightened public scrutiny in Washington, D.C. and perhaps even become a topic on the 2020 presidential campaign trail.
Opponents don't just have a bigger megaphone. They also have at their disposal a new vocabulary to explain their opposition and antitrust authorities that appear interested in entertaining their ideas.
The changing dynamics in D.C. come as consolidation among U.S. firms has been on a tear over the past decade and transactions keep getting bigger, according to Mergermarket data back to 2001.
Average deal size for disclosed strategic transactions in the U.S. hit $680 million this year, just shy of the all-time high of $736 million in 2015 and well above pre-financial crisis levels that peaked at $408 million in 2006. The gain is no doubt driven in part by elevated valuation multiples, but it also suggests companies are pursuing consolidation plays.
In response, deal skeptics have raised concerns about what this means for the US economy, consumers and workers. Much of the criticism has so far been aimed at tech giants, but the theories carry over to other industries.
The so-called antitrust hipsters have moved from the fringe and now have a seat at the table with growing support from a now more progressive House that come January will decide which hearings to hold and which subpoenas to issue.
With the 2020 presidential coming into focus, candidates may seize on the public's increasing attention on the state of big business and big data, as Mergermarket's sister publication PARR recently reported.
President Donald Trump's administration, meanwhile, also seems interested in casting a critical eye on consolidation and may welcome support from the left side of the aisle.
The Federal Trade Commission (FTC) has notably been holding a series of hearings this fall on the state of antitrust enforcement in which agency officials and staff have questioned certain principles of the Chicago School paradigm that has prevailed over the last four decades.
Chairman Joe Simons opened the proceedings in September by saying he wants to examine claims that markets are too concentrated and less competitive and the push for antitrust to consider issues beyond consumer welfare when examining the impact of mergers.
The Department of Justice (DoJ) has emphasized that the goal of antitrust enforcement is to keep industries in check through competition, rather than regulation. The DoJ leaned heavily on this core value when it refused to accept a behavioral remedy offered by the parties and instead chose to challenge the vertical AT&T/Time Warner merger.
While DoJ’s new remedy means companies cannot expect all proposed vertical transactions will continue to have a path to receiving an easy pass, it also means some transactions that previously might have been encumbered by commitments might now survive antitrust review unconditioned.
At the top of the list for both the FTC and DoJ now in the deal-making space is issuing new vertical merger guidelines to reflect current thinking. Key to watch for is what conditions, if any, give rise to a “presumption” of anticompetitive harm. Those conditions will determine which supply chain integrations face the most risk.
Outside the beltway, state enforcers, regulators and legislatures are finding new ways to assert power over the largest transactions. CVS Health’s pending acquisition of health insurer Aetna, after sailing through DoJ review, has run into meaningful resistance in New York and California.
Which industries need to show extra caution?
Expect healthcare deals to be in the crosshairs. Democrats have said reining in high drug prices will be a top priority in 2019 and Trump has indicated he may be on board.
Pharmaceutical giants have already largely stopped pursuing blockbuster mergers and are instead fine-tuning portfolios. To date in 2018, there has just been a single pharma transaction that cracked $10 billion, according to Mergermarket data.
Health insurers and services providers have turned to vertical tie ups and private equity buyouts after effectively being blocked from attempting mega horizontal transactions by the Obama administration.
Cigna, CVS and UnitedHealth Group now face the challenging task of proving to investors, patients, doctors and politicians that vertically-integrated healthcare delivers real benefits. Further deal making before there is solid evidence may be a hard sell.
Technology, media and telecom companies offer another ripe target for merger opponents. Relatively small, but still well-known groups in media and telecom are looking at deals as a way to better compete against giants like Amazon and Alphabet's Google.
Should these companies be allowed to go ahead with deals? Or is the solution to take on the giants and push demergers? Perhaps perversely, existing antitrust theory is best equipped to challenge transactions spurred by antitrust bogeymen like Amazon — see Staples/Office Depot.
The debate is only starting, and it will play out in public, leaving executives wondering if it is worth the risk to move ahead before there is some clarity.
T-Mobile USA's second attempt at buying its wireless peer Sprint offers an early test for evidence for how thinking in D.C has changed.
Jay Antenen is Deputy Managing Editor for Mergermarket and Dealreporter Americas. He is based in New York and can be reached at Jay.Antenen@acuris.com. Joseph Tipograph is Dealreporter’s Washington DC Bureau Chief. He can be reached at Joseph.Tipograph@acuris.com. Elizabeth Lim is Mergermarket’s Research Editor for the Americas based in New York. She can be reached at Elizabeth.Lim@acuris.com.
