US antitrust regulators are directing their gaze on the role of private capital in mergers and acquisitions as they scrutinize the strategies of an industry involved in an increasing share of deals.
The Federal Trade Commission and Justice Department’s Oct. 10 updates to a merger notification program will require disclosures that the regulators say will shed more light on private equity firms and minority investors.
The new rule requires dealmakers to divulge a variety of details about the ownership structures of companies involved in a transaction, a change “clearly aimed at private equity,” said Mike Keeley, head of Axinn, Veltrop & Harkrider LLP’s antitrust practice in Washington.
Other disclosure requirements involve a deal’s rationale, investors in the buyer—including those with management rights—and prior acquisitions from the seller and buyer dating back five years.
They come as antitrust leaders in the Biden administration have pushed to examine private equity’s business model, including the rollup tactics firms have deployed in such industries as health care, and its effects on competition.
“It’s really about expanding the scope of their review,” Ryan Phair, a co-chair of Paul Hastings LLP’s antitrust practice in Washington, said of the new rule. “It’s this idea that private equity has stakes in multiple companies in the same industry, whether it’s a rollup strategy or interlocking directorates, that’s the intent behind it.”
Rollups
The update dropped as the Justice Department investigates
The new disclosure requirements appear designed to intervene in such strategies, according to Neely Agin, the head of the antitrust practice at Norton Rose Fulbright US LLP in Washington.
“That is exactly one of the things they’re trying to get at, identifying rollup strategies early on to get in front of things,” Agin said.
To be sure, the reforms are scaled back from the proposal floated last year, which would have required merging companies to disclose information on acquisitions dating back 10 years without any size threshold. The agencies also nixed a proposed requirement to create an organization chart, which would have placed a huge burden on private equity firms, Agin said.
The updated regulation is set to go into effect in January, but it could be subject to lawsuits.
“We are reviewing the new requirements to ensure they do not stifle innovation, discourage investment, and push an ideological agenda that undermines economic growth,” Drew Maloney, the president and CEO of the American Investment Council, an advocacy group for private equity, said in a statement.
Changing Landscape
Under the Hart-Scott-Rodino Act, a law enacted in 1976, companies making acquisitions valued at more than $119.5 million must submit a form giving antitrust regulators 30 days to review the deal.
The update represents the first large-scale redesign of the HSR form, according to the antitrust agencies, which said the overhaul was needed to address reporting gaps because of significant changes in the investment landscape over the last half-century.
In a document outlining the new rule, the FTC said the share of reported transactions in which the ultimate parent entity included “fund” or “LP” in its name increased to nearly 40% from 10% over the last two decades.
The “broad motive” behind the update is to “get more relevant information earlier in the review process to allow for better decision-making,” Nate Asker, a Fried Frank LLP antitrust partner in New York, said.
That will shift more time and cost burdens onto companies pursuing deals. The FTC projected that it will take 68 additional hours on average to prepare an HSR filing, with an average low of 10 hours and an average high of 120 hours.
Rule changes affecting private equity include requests for descriptions on product overlaps between parties, as well as some “ordinary course of business” documents, which could “unveil additional info about a company’s strategies,” Asker said.
Private equity filers will also now be forced to identify minority partners holding at least a 5% stake, Deidre Johnson, head of Ropes & Gray LLP’s premerger notification program, said in an email.
“But at least that is limited to partners who have a role in decision-making (which is fairly atypical in a standard PE structure),” Johnson, based in Boston, said.
PE Model
Private equity firms follow a strategy of buying companies and building portfolios in different sectors, with the goal of boosting growth and selling them years later for a profit. The industry has struggled in recent years because of inflation and high interest rates. Signals from antitrust enforcers have also produced some “anxiety,” Agin said.
The new merger program places a bigger target on the industry, but it’s still “too early to tell” what implications it will have, Agin said. HSR forms are a small percentage of legal and transaction costs, and the vast majority of deals reported do not give rise to deeper investigations.
The HSR overhaul still offers hints at FTC Chair Lina Khan’s priorities should she remain head of the agency.
In a statement accompanying the rule, Khan referenced the FTC’s focus on private equity rollup tactics in health-care and veterinary clinics, including its lawsuit against PE-backed US Anesthesia Partners over an alleged rollup strategy in Texas. The case remains pending, although the firm’s private equity partner, Welsh, Carson, Anderson & Stowe, won a dismissal.
“Private equity firms and other investors have deployed roll-up strategies across a range of industries, from healthcare to housing—with potentially major ramifications for the public,” she said. “To understand whether a proposed transaction is part of an anticompetitive roll-up scheme, the agencies need insight into what prior acquisitions the entity has made within the same lines of business.”
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