Antitrust laws in M&A: safeguarding market competition

Introduction

Mergers and acquisition (M&A) provide opportunities for business growth. M&A allows businesses to enter new markets, to adopt new technologies and to achieve greater operational efficiency. However, the merging of two companies is problematic when it involves two large companies that operate in the same sector. The outcome is the concentration of market power that can create risks in the area of competition and harm consumer welfare. This has led to the development of antitrust laws to regulate when M&A occurs, as well as the manner and extent where firms may be on the path towards monopolies or to be able to narrow consumer choice or reasonably restrict innovation. The purpose of antitrust laws is simply that of ensuring that any M&A activity does not hurt competition and harm consumers. Federal regulators such as the U.S. Federal Trade Commission (FTC), the Department of Justice (DOJ) and the European Commission regulate mergers and acquisitions and they do so based on market share, competitive conditions and even if consumer harm would occur. These regulators can approve a merger or acquisition, approve it with fine-tuning, and/or block it. In this article, I will discuss the importance antitrust laws have in the M&A process and highlight why these regulations are necessary to ensure a fair and open marketplace.

Understanding Antitrust laws

Antitrust laws, or competition laws, prevent unfair practices in the workplace to preserve competition in the marketplace in the context of M&A by preventing monopolies or overly dominant businesses, which ultimately create the potential for abuse. The objective is that consumers benefit from prices and quality goods and services and continued innovation. The most relevant are the Sherman Antitrust Act (1890), the Clayton Act (1914) and the Federal Trade Commission Act (1914) in the U.S. The laws give the bureaucratic regulators monitoring mergers and acquisitions the ability to review, investigate and challenge mergers deemed to lessen competition substantially or that may lead to monopolies. Similar laws exist across the globe, with the European Commission, the UK’s Competition and Markets Authority (CMA) and other similar organizations performing similar duties.

Why Antitrust laws matter in M&A

M&A transactions can generate a host of benefits—cost reductions, better products and improved access to resources. However, uncontrolled, they can also distort markets. When two competitors merge, they will be able to raise prices, reduce quantity or exclude smaller competitors from the market. This is especially concerning in industries where competition is already limited (i.e. telecommunications, pharmaceuticals, technology). Antitrust provisions are designed appropriately to ensure that these possible harms are considered before a merger is permitted. By taking this affirmative action to protect consumers’ interests, materially by restricting monopolistic conduct, it also opens up access and creates space for smaller competitors to flourish and incentivizes innovation.

How regulatory bodies review M&A deals

When companies have announced a merger, they often have to notify regulators. The regulators then consider a host of factors related to the merger, including:

• Market share: would the merged company control a significant portion of the market, thus threatening competition?

• Market concentration: regulators will assess whether the merger will materially increase market concentration. To do so, judges often use the Herfindahl-Hirschman Index (HHI) to measure company market control.

• Barriers to entry: will new entrants easily enter the market, or would the merger create undue barriers to entry to the benefit of the larger company?

• Potentially harmful to consumers: will it increase prices, decrease quality or reduce innovation?

• Efficiencies or benefits: are there cost benefits or services associated with the merger that outweigh the potential harms?

After considering these factors, if regulators decide that a merger presented to them has the potential to substantially lessen competition, they could deny the merger or require companies to take actions such as divesting part of the business.

Global cooperation in cross-border deals

As business is increasingly global, mergers and acquisitions are more likely to involve companies that operate in multiple or multinational jurisdictions. A merger may need to be reviewed by multiple regulatory agencies at the same time. For example, a merger between two global tech businesses may implicate regulators from the U.S., the E.U., China and others. While this situation has increased global cooperation and exchange of information among various international competition authorities, a global merger creates complications for merging businesses if some regulators have thresholds, legal standards and priorities that differ from others. A merger approved in one jurisdiction may face opposition—or even be blocked entirely—in another.

Remedies and conditions imposed by regulators

Not every deal is either entirely approved or placed in a block. In many situations, the regulators attach conditions to the approval to reduce the competitive risks. These remedies typically fall into either structural or behavioral categories.

Structural remedies involve the divesting of assets, such as business units or brands to maintain competition in the marketplace.

Behavioral remedies involve the regulator placing restrictions on how the merged entity operates after the merger, such as not being able to sign exclusive contracts and providing open access to certain technologies.

Essentially, the aim is to allow the merger to proceed while keeping the market healthy and consumers with choice.

High-profile cases of Antitrust intervention

Throughout the past few years, several major M&A deals have been altered - or prevented altogether - due to antitrust concerns:

• AT&T and Time Warner (2018): The U.S. DOJ attempted to enjoin this vertical merger on the grounds that it would lessen competition in the media marketplace. Even though the court ultimately allowed the deal, this case demonstrated that potential antitrust scrutiny can arise in non-horizontal mergers too.

• Illumina and Grail (2021): This merger was prohibited by the European Commission on the basis that Illumina could impede an avenue of access to Grail's cancer detection technologies, thereby reducing competition in the area of medical diagnostics.

• Google/Fitbit (2021): Concerns were raised on data privacy and control in digital health, as well as on market power and dominant position. When the deal was agreed upon by the EU, it required Google to take behavioral remedies, such as not using Fitbit data in advertising and keeping distinct data controls.

In these instances, we see that antitrust authorities are becoming increasingly concerned not only about the impact on price but about the control of data, innovation and the ecosystems in which players compete.

Antitrust in the age of tech and digital platforms

Modern antitrust enforcement will need to adapt to address the challenges facing investigators as a consequence of the large digital platforms, specifically Amazon, Google, Meta and Apple. In the digital space, it is hard to assess dominance based exclusively on price, since there are many services offered at zero prices. In making this determination, there are a number of factors to consider. These include:

• Network effects: The value of a service being offered increases as user base increases, inhibiting new competitors from entering the market.

• Control of data: If a company owns specific consumer data it can gain an unassailable advantage on service and/or price.

• Control of platform: If a company controls the platform that connects buyers with sellers, it may favor its brand in ways that are harmful to its competitors.

The legal interpretation of antitrust laws, and enforcements, are fundamentally shifting with these large tech companies. Regulators are becoming more proactive, including proposed legislation and announcing new guidelines. Proposed legislation in Europe and heightened scrutiny, aimed at evolving antitrust tools for the digital space, are being announced regularly.

The future of Antitrust and M&A

As markets continue to develop and evolve, antitrust laws must also adapt, and in recent years there has been much discussion about the potential shortcomings of existing antitrust frameworks in today’s fast-paced and evolving business environment. Some have advocated for more rigorous antitrust enforcement, while others are concerned that more aggressive enforcement would limit perfectly appropriate business growth and innovation. Nevertheless, there is no question that companies considering a merger must carefully consider possible antitrust implications from the beginning. Early engagement with regulators, investigative competitive analysis and flexibility in negotiating remedies could be the difference between approval and denial.

Conclusion

Antitrust laws are critical in assuring that mergers and acquisitions positively influence a fair, competitive marketplace and a consumer-friendly marketplace. They help prevent specific concentration of market power during a merger and maintain diversity, innovation and choices. Whether it be through blocking anti-competitive merger considerations or creating conditions that ensure a certain level of fairness, regulators significantly influence the landscape of business as agency authorities are effective in maintaining the criteria that regulators find appropriate. As industries become more complex and globalized, antitrust regulations will become increasingly effective and important during merger considerations. Companies contemplating a merger process need to understand the landscape and proceed accordingly, easily balancing the need to comply with federal and state laws and ensuring fairness to consumers at the same time.

CC: Alexia Rossi