How Antitrust Regulators Are Affecting M&A Transactions

Speaker A: Sam?

Speaker B: Mhm.

Speaker A: Foreign.

Speaker C: And thank you for joining another one of our Wednesday morning panel discussions for entrepreneurs, innovators and investors. So today's topic is, um, is regulatory approval of M and A transaction. So uh, the FTC has been, uh, pretty active in the last year or so blocking uh, deals on an antitrust basis. Everything from Microsoft and Activision which went through, but the SEC required it be restructured to Adobe and Figma. Um, and although I'm in Silicon Valley, so I think of everything as being tech deals. Uh, there's also the Kroger Albertsons uh, deal which is pending regulatory, uh, approval. And so all of this kind of casts some sort of an effect over the M and a World for 2024. And joining me this morning to talk about, uh, all of this is, uh, Natasha. Natasha.

Speaker D: Hey.

Speaker B: Hey. How's it going?

Speaker C: Good. So, uh, brief background around you.

Speaker B: Uh, so Natasha Allen, partner in uh, Foley in the Silicon Valley office as well as San Francisco, Love, uh, everything M and A. So I'm also a venture attorney as well as an M and A attorney. So life cycle of uh, corporation is in my wheelhouse.

Speaker C: Uh, love everything M A. Yeah, there's a good pickup line.

Speaker B: Hey, I'm a lawyer.

Speaker C: Also joining us is Louis Lowe.

Speaker A: Hey Louie. Good morning Brett. You know, um, M and A is very relevant to startups because it is one of the critical path exits. It's why investors put in money. And if there is no M A exit, then we have a problem. Houston. And so thank you for putting this uh, webinar together and I'm really excited to uh, share with everyone our partner Greg Kneppel, and uh, more about our FTC and antitrust team. Greg, please give, uh, us a 30 second backgrounder on yourself before the gong rings.

Speaker D: Louie, thanks much. My name is Greg Knupple. I'm an HSR antitrust lawyer in Foley's D.C. office. Been with Foley over 20 years. Before that did in house M and A work at Lytton, Northrop Grumman, and before that spent six years as a staff attorney with the antitrust division of the Department of Justice reviewing HSR notifications.

Speaker A: So you've seen a few of these, eh, Greg?

Speaker D: Seen a few of them, reviewed them from the government side, um, filed them in the defense and aerospace context. And at Foley we file a very large volume of HSR notifications, uh, on behalf of companies in every industry you can imagine.

Speaker A: Well, thanks for joining, Greg. And I'm curious if there's any statistic about the number of second requests that get Issued after these HSR notifications are filed in the current administration versus the prior administration. But maybe backing up a step for our audience of entrepreneurs and investors. Maybe, um, let them know, what is hsr, what is the Sherman act and what is it that we're trying to comply with?

Speaker D: Yeah, HSR stands for Hart, Scott Rodino. It's a merger notification regime in place in the United States. We have a merger notification regime. 100 plus countries around the world have merger notification regimes. The standards for filing are all different depending upon where you are. In the US you have to meet a size of person test and a size of transaction test and not have any exemptions that allow you not to file, uh, your transaction. The size of transaction test is about to rise to 119.5 million, uh, as of March 6th. Which means that if you're making an acquisition or divestiture of assets, voting securities or non corporate interests, and you trigger that $119.5 million threshold as of March 6, you very well may have an HSR notification obligation. Both the buyer and the seller have to file forms. You have to report lots of information to the government. The government then has a chance to review the filing and if they want to do an in depth investigation, they can issue what's called a second request for information which extends the 30 day uh, HSR waiting period.

Speaker A: So you file, you wait 30 days and if you don't hear from the government, you can go ahead and close after that 30th day.

Speaker D: It's the one example where silence is beautiful. And uh, if the government does not actively reach out to you and extend the waiting period, you can close. Sometimes the government will reach out and say, well gosh fellas, we're just not sure here. And they'll encourage you to do what's called a pull and refile, where the buyer uh, pulls its notification and then within a day or two refiles it. That restarts the 30 day clock and gives the government an additional 30 days. If you know, however, at the end of the day you're going to get a second request. Doing the pull and refile technique really just gives the government an extra 30 days and you might as well just take the second, um, if you're certain you're going to get the second request anyway.

Speaker A: Um, and tell me about early termination.

Speaker D: Early termination is an HSR option that the parties can elect and it asks the agency to review the merger notification and if it gets done with its review prior to the end of the 30 days to terminate the 30 day waiting period early. Now we have used that for you know, 20 odd years in making notifications here at Foley. But at the beginning of COVID the FTC said gosh, we're just kind of overwhelmed. We are not going to grant any requests for early termination. Well Covid's sort of behind us now. But the FTC has not gone back to reinstate grants of early termination. So at least as of today it's sort of a non issue. You can request it, but it's just a box checking exercise and you have no expectation of getting it until the FTC announces a policy change of granting second or early termination requests which it currently does not grant.

Speaker A: And last question, is any of this public, Greg? And when does it get public? So assume you've got Series B company acquiring another series B company and it happens to be $120 million flat and no exemption applies. So you neither company's public but, but you have to file what's what, what, what uh, gets disclosed to the world

Speaker D: and when, um, as of now nothing gets disclosed by the FTC or doj. Filings are confidential, they're protected from foia. Uh, in the past if you requested early termination and it was granted, the FTC would post that information on its website and publish it in the Federal Register. It didn't tell, it didn't disclose all of the terms of the deal, but it would report, you know, party A's name, party B's name. So that was actually an interesting uh, uh, series of postings to follow because you could see what people are doing, uh, in the form of notifiable transactions before the transactions actually close. But as long as early terminations aren't being granted by ftc, we no longer have that uh, uh, transparency into HSR filings.

Speaker A: Now if the government doesn't like one of these private, private deals and issues a second request and then, and then, and then at any point does any of that become public and do they ever go to the courts or how does that, how does that work if the government really doesn't like can become

Speaker D: public in a few ways. If the government decides to launch an investigation, uh, the staff has to request second request authority from their respective managers. Once they have that investigation authority, they can reach out to third parties. So if you're doing a transaction and there's an overlap in um, Industry X, the agency staffers may reach out to other businesses doing business in Industry X, they could reach out to customers and competitors and they can do interviews, they can send CIDs or civil investigative demands for documents. Um, so even though the agencies are not supposed to alert the public or tell the public that an HSR notification has been filed, once a staffer starts making calls to the industry, um, word gets around pretty quickly. So any expectation of, uh, confidentiality at that point is gone.

Speaker A: Um, and back to my question before Greg, which uh, we needed to set the table before you could answer it. Since the beginning of the Biden administration, what's changed? Uh, is it the number of second requests? Is it, it the commissioner, um, tell us what's, uh, why we're here?

Speaker D: You'll see various press reports on the, the rate of second requests. And historically it's been something like 2 to 3% of filings, maybe 4% of filings. And it's bounced in that range. It's, it's always been, you know, low single digits. And I don't think the rate of second request has gone up that much. You'll, and the articles you see that say that, you know, the agencies have gone crazy and they're issuing second requests right and left. Probably not mathematically correct, but there still are, you know, many second requests being issued. What's really changed is the, the sentiment of the agencies. And we have what I will just characterize as an anti merger sentiment. The, the Biden administration came into office and one of the first things it did was issue an executive order calling for the agencies to engage in aggressive antitrust enforcement. And then the Biden administration appointed um, leaders at FTC and doj, uh, who are, you know, basically progressives. They believe that the antitrust laws uh, should be used uh, aggressively and that in the past they had not been used aggressively. Uh, Lena Khan especially, who is the FTC chair, she was an academician teaching um, in a law school for a few years and she was appointed the chair of the ftc. She did not have antitrust enforcement experience. She did not even have antitrust practice experience and yet she's now running the ftc. Now you can say that's good, you can say that's bad. Maybe it's fresh blood, maybe it's not helpful fresh blood. But we've got agencies that have a, they certainly have an agenda to investigate many deals, including deals that you know, are pretty surprising and pre Biden administration probably would not have gotten a second look. So if anything has changed, I would say it's an aggressive anti merger enforcement sentiment that is driving the agencies.

Speaker A: And what's driving the sentiment is it, is it because they think mergers are killing jobs, that it's Killing competition, it's killing privacy. You, uh, know what's, what is the, the driving force that, that is behind this sentiment?

Speaker D: Well, 40 years ago, the Chicago School of Economics took foot and it basically said you, despite a whole lot of Supreme Court law that talked about mergers and merger standards, unless a transaction, uh, harmed consumer welfare, the government shouldn't care about it. And the consumer welfare standard for, again, the last 40 years or so has been the North Star of, um, merger enforcement that has been criticized. It's been criticized by a group called Neo Brandiceans or uh, antitrust hipsters who say that if, if you just look at consumer welfare, you're leaving a whole lot of other factors, um, untouched. And some of these antitrust hipsters hipsters have said in either instead of, or in addition to consumer welfare, we should be looking at things like impacts on labor, environmental impacts, racial impacts, wealth inequality, and the list goes on and on. Now, uh, the problem with this agenda is the antitrust agencies have a very narrow statute, section 7 of the Clayton act, that bars transactions that tend substantially to lessen competition. It doesn't talk about impacts on labor. It doesn't talk about racial inequality or wealth inequality, environmental impacts. It. So the statute itself doesn't speak to these topics. You might think that as a matter of public policy, that would be a good thing. My argument would be that the agencies have a tough enough time applying section 7 as written, and if you want to pursue other public policy agendas, that's fine, but go use a different agency with a different set of staff who have professional expertise in those areas and don't ask antitrust lawyers at DOJ and FTC to do it.

Speaker A: Okay, um, I want to stop there. I want to stop there, Greg. I want to stop there because this is a perfect transition. So Natasha, whether or not you agree with the anti hipsters or the University of Chicago School uh, of Economics, uh, uh, theorists, what has been the impact here in Silicon Valley on, of the new administration on startups and on venture financing and on M and A, so

Speaker B: on all of it? I think here we've seen slowdown, right. I think people are very much concerned. Uh, that's why this topic is very topical, because everyone does want to understand when am I going to step on a landmine. Right. So I do think it slowed down a lot of the activity. Um, yeah, I just think it's cause for slowdown and concern all around, especially for the big tech companies. Right. They've been targets for a little while, so I'm sure they're gonna really think twice about acquiring any companies or technology that may, you know, enhance their businesses.

Speaker A: Um, so to set the stage here I think it was two years ago, in one of her first acts, Lina Khan issued a subpoena to the five largest tech companies, um, asking them to report on all of the M and A transactions that they had done that were below the HSR threshold and were not required to do filings. And of course you know, if you're, if you're one of these five companies, uh, you know, that are the Magnificent Seven we used to call them,

Speaker C: we're

Speaker A: uh, not going to say their names for conflict reasons Greg, but if you're one of these big tech companies and you get one of these subpoenas, you know, how does that land with you and what do you do next?

Speaker D: Well if you're asking me, it's, and it's a subpoena, you respond to it. I mean you can object but, but good luck. The government has fairly wide discretion to investigate. Um, if it's a merger specific investigation, the government's under a clock, uh, the HSR clock. If it's just a conduct investigation as many of these tech companies are under, uh, there's really no clock. So the government can subpoena documents, it can go out to third parties and subpoena documents and it can spend about as much time as it wants trying to put together a case that the company has done something that's anti competitive, that it's a monopolist and it's used anti, uh, competitive practices to either achieve its monopoly position or preserve its monopoly position. And you then fight the government, uh, best you can through discovery and at trial if the matter goes to trial.

Speaker A: That was a very thoughtful answer. I think the short answer is if I'm uh, somebody in charge of innovation or corporate development and finding startups, uh, that will help make uh, my company bigger. I'm probably going to stop doing that uh, because it's going to cause the FTC to look into my boss's email and my boss isn't going to like that. So pretty much all M and A has stopped out of, out of the large technology companies. And uh, for those of you in the audience, if this isn't obvious, when a startup gets formed and an investor comes in one of their, they're hoping that they're going to have a 10x return. Um, but most startups fail and they know that um, and at some point along the line, if it fails at series A or after series B, one of the outcomes is that potential outcomes is that there's an acqui hire or there's a sale to a large tech company. A large tech company comes in, buys really the team, uh, and whatever intellectual property they've created, sure, they'll buy that just to make sure they're not infringing on something else. Uh, and if it builds their portfolio, why not? Um, but now we've got all of that taken away. And so the impact on early stage and financing all through is that you don't have M and A as from big tech as, as a, as a potential exit. You don't have the safety, if you will, the safety outcome or, you know, like the, the walk or the base hit, if I can give you a baseball analogy, uh, is really off the table. And so, um, it's really hurting innovation in Silicon Valley, in my humble opinion. But Brett, I think I've said too many humble opinions already.

Speaker C: Well, let me ask you guys a question. So, um, you know, as Greg mentioned, a lot of these statutes go back to like the railroad era, right, Greg?

Speaker D: Yeah. Sherman act is 1890.

Speaker C: Oh, even further.

Speaker D: Yeah, 1914. So we're talking about old statutes. And keep in mind the antitrust statutes are not detailed. They just basically give a policy direction. You know, in Sherman act, it says no collusion, no monopolization. Doesn't define with in any detail what that means. So it's, it's almost a common law where the courts have to fill in the blanks as to what Congress meant. Uh, and at least until the Biden administration in the M and A sphere, we had a pretty good sense of when a transaction was problematic or not problematic. And you could give advice. You get handicapped to a client. You know, this is a 95 chance that you're not going to have any problems with the agency, or it's a 95% chance that you're going to get a second request and there's no way in Hades you're going to be able to complete this deal. You could give those kinds of, uh, predictions. Now, things you can still give predictions, but the range of confidence is a lot less, especially when it comes to looks at transactions. So, for example, I have filed a fair number of HSRs that I would have five years ago told the client, you're not going to hear from the agency on this one. There's either no competitive overlap or there's a competitive overlap, but there are so many other competitors in this space that nobody in their right mind should take an interest in this. Well, we get calls on those deals and the agencies say, you know, I want to learn a little bit more about your industry. And then you have to, you know, have meetings with the staff, sometimes you generate white papers, uh, you produce people for interviews and there are transactions again that 5, 10, 15, 20 years ago you could have told the client with a high degree of certainty, this is going to be what we call a file and forget. I just need to get the paperwork in and then the deal is done, no longer the case. And I can't handicap at all like I used to.

Speaker A: If you're negotiating a deal and you're thinking, well, geez, I'm the target, um, and I used to think there's no that I'd file my HSR and I'd be done in 30 days. Now I have a high likelihood of getting a second request. That's before I even think about what the Europeans are gonna think or God help us, what the Chinese are gonna think, uh, about the competitive impacts to their economy. Uh, what am I gonna ask the buyer for? Greg?

Speaker B: Greg?

Speaker D: Yeah. The, the anti merger sentiment we're talking about affects a transaction from start to finish. Ah, and Louie, you mentioned basically just at the consideration phase, do I even think about this transaction? If I'm big tech, I might not. I might wait 12 months and see if the White House flips. If you're smaller, lower cap, you might go ahead and say, well, the antitrust risk should be small. So there's that consideration phase impact that uh, the agencies are having on M and A. But then we get to the negotiation stage, which goes to your question. And there are lots of provisions in a merger agreement, whether it's structured as a merger or equity purchase or an asset purchase that is antitrust sensitive. So for example, we see more interest, um, during the Biden administration negotiating contract terms like undertaking obligations. What does the buyer have to do at the antitrust agency to get the deal completed? And those types of contract provisions range all the way from what we call hell or high water. The buyer has to do anything, uh, including moving hell to get, get it done, down to basically no obligations other than perhaps a, a mild, a mild standard of, you know, good faith or best, reasonable best efforts or commercially reasonable best efforts, often capped with a divestiture limit. I have a reasonable best efforts obligation, but I don't have to divest more than, you know, assets representing $10 million in revenues. So you and all of that, all of those nuances of the antitrust undertakings provision of the contract now get negotiated really, really heavily. Um, you'll also negotiate the drop.

Speaker A: Bottom line is there's a chilling effect for buyers and for sellers, because if you're a seller and you're, you're, you're in play, uh, and you're subject, you can't close your, can't get your, your deal done until after, uh, the antitrust authorities clear it, you're not going to want to do that if, if, if it's going to take an unknowable amount of time. And if you're a buyer, you're not going to want to inherit this risk that the seller is going to want you to take to go and move hell or high water or sell your other division, uh, to close this deal. So there's a chilling effect and nothing happens. And that's where we are now. There were some new guidelines that the FTC published, uh, late last year. Greg, is there anything in there that we haven't already covered or. Pretty much is 2024 going to be frozen, too? Although there have been some big deals announced, HPE is acquiring Juniper Networks and Synopsis acquiring Ansys. Uh, there have been some large deals.

Speaker D: Yeah. The, the issuance of the new merger guidelines in December was a big deal. The agencies had had, uh, forecast that they were going to issue new guidelines. And so the $64,000 question was, what would those new guidelines say? Would they go full progressive on us, full hipster, and contain a whole mess of public policy considerations that the agency should consider?

Speaker A: And they did.

Speaker D: Um, no, I don't think so. The one change you see that is at least express is a concern for labor. That one is new. But we don't see the whole panoply of environmental concerns and racial inequality and wealth inequality in there. But what they did change, which is, you know, seminal, is they've moved from the consumer welfare standard, which basically asks the question, can you prove government that the transaction is going to either raise price or decrease price product quality for customers, to a more structural look. And so instead of using a 2500 HHI Herfindahl Hirschman index test for defining what is a concentrated market, the agencies moved it to 1800. Uh, they also imposed a 30% market share test on transactions that would be considered presumptively illegal. And so the, the notion is, let's get away from just looking at the impact on the consumer to kind of hard structural numbers that will simply make a group of transactions illegal or presumptively illegal without getting into the econometrics of the effect of the transaction. So the progressives have have certainly moved the goalpost when it comes to defining what is or is not a potentially illegal merger.

Speaker A: Well, Greg, we're going to be talking a lot about, about, uh, how the FTC is, is hurting the Silicon Valley in the next few, um, weeks. Uh, I will be, but, um, I know we're getting short of time and I wanted to shift over to Natasha, who leads our AI sector and ask the obligatory AI question. Yeah, about AI, Natasha.

Speaker B: So I think that AI is very interesting. I think that's one of the areas that may not have as much of a chill. And it's on two fronts, right? It's AI, uh, you can think of it in terms of making the process of M and A more efficient. Right? So you can get through diligence faster, you can get through dark woods faster. Uh, and that's something that is really going to change. Move the needle in 2024. And then also just as an acquisition play, right? Looking at companies that do have AI, uh, technologies to make them as a company or as a target, more efficient. Efficient and effective. Um, you know, I think that that is really what's gonna, we're gonna see in terms of trends, uh, on the side of when you're buying AI companies. Definitely thinking about different ways to approach diligence. Right. You can't use the same diligence request list you've used, you know, for many transactions. And uh, we've actually created a list that is specific for acquisitions of AI companies. Right. What other questions should you be asking outside of, you know, how many employees do you have, really digging into the tech, uh, to making sure you're covered off.

Speaker A: So Natasha, what is the ofTC doing about AI? And I think there was a subpoena that went to all the big seven companies and I think it's sort of the same thing. Hey, big seven companies. Um, everything you do in AI, I want to go read about it in your emails. And I think that is going to have a chilling effect too. And I'm going to put it back to you, Brett. What in the hell is happening on the ground with these new startups being formed? And are they, are they thinking about this? Are they worried about this? They're. What's the exit? Um, I, I guess we just have to go IPO.

Speaker C: Yeah, well, I mean, as you said, Louis, 2024 in Silicon Valley is all about AI. Um, all you got to do is change your domain name to Dot AI. You can raise a bunch of money. Um, and uh, I think most of the AI startups are too early stage to be worried too much about this. But I do think it's an interesting question that the Silicon Valley tech people are very concerned about the concentration of power in just a few of the large AI engines. It's an interesting question of when will that appear on the radar of the regulators, uh, that, as Greg said, antitrust regulation was created, created for a whole different era. Uh, but now there's a lot of concern about, you know, hey, if we allow too many AI companies to merge together, we're going to end up with a concentration of power that is unfair for the marketplace. I have no idea how that will play out, but, uh, but stay tuned. Well, guys, we are out of town, out of time, uh, but this has been a great conversation. We've covered everything from uh, the 19th century origins of antitrust, uh, statutes to, uh, 2024 Silicon Valley and um, AI. Um, so thanks to the three of you for this and, um, to our audience. Thanks for joining and uh, please join us every Wednesday morning as we continue to have discussions about, uh, the legal ramifications for stuff going on today in the world of entrepreneurship and innovation and venture capital. Thanks again to you all.

Speaker B: Thanks everyone.