Antitrust Updates for Private Equity Firms

In an era of robust merger enforcement by the U.S. antitrust agencies, opportunities abound for private equity firms to acquire divested businesses for value. These acquisitions of divested businesses are increasingly subject to review by the agencies prior to the closing of the main transaction, and private equity buyers should be well-prepared to demonstrate to the parties, and then again to the agencies, how they will ensure that the divested business will replace any competition lost between the parties. Private equity buyers should also account for the increased length of government merger investigations in their deal analysis. Finally, private equity firms should seek guidance before asserting the investment-only exemption to the HSR Act since the agencies have recently stepped up enforcement actions against firms that are improperly claiming the exemption. Investors should also have a compliance program in place since the maximum civil penalties for HSR violations recently increased to a maximum of US$40,000 per day for each violation. 

Divestiture Opportunities for Private Equity Purchasers 

As the Federal Trade Commission (FTC) and the Department of Justice (DOJ) continue to aggressively pursue merger control investigations, the agencies’ strong preference for resolving anticompetitive concerns through divestitures opens up numerous opportunities for private equity buyers to acquire high performing assets for value. The agencies' increasing insistence on identifying “upfront buyers” rewards those buyers who are well-prepared and can execute a carefully planned regulatory strategy. 

Over the last quarter century, the agencies have strongly favored remedying perceived anticompetitive effects of mergers and acquisitions with structural remedies (i.e., divestitures) and, since 2014, the agencies have required upfront buyers in approximately 85% of all investigations resolved with an agreed-upon divestiture. The upfront buyer requirement provides significant leverage for the proposed buyer: the parties to the main transaction may not close until the reviewing agency has investigated and approved the buyer of the divestiture package. Parties therefore favor upfront buyers who can pass regulatory muster quickly. 

While financial buyers are often attractive because they generally do not contribute to market consolidation, the agencies will carefully examine whether a financial buyer can utilize the divested assets to replace the perceived loss of competition in the marketplace, which is their primary concern in this setting. A financial buyer must therefore be prepared to demonstrate to the agency that it possesses the requisite expertise to ensure that the divested business will emerge as a strong competitor in the market. In this regard, proposed buyers should be prepared to demonstrate how prior investments made in the same or similar industry have succeeded, as well as commit to retaining key senior employees of the divested business. In addition, a financial buyer must commit to sufficiently capitalizing the divested business over the long term. More than simply demonstrating that the firm has sufficient resources to fund the acquisition and immediate capital needs of the divested business, firms should develop a robust model showing how anticipated capital needs (e.g., to fund expansion plans or R&D efforts) will be met over time. Conservative capital structures favoring more equity financing may be preferable to higher debt financing, as this can avoid agency investigations of proposed lenders as well as demonstrate the buyer’s faith in the strength of the divested business. Finally, financial buyers should be prepared to demonstrate that they intend to remain “in the game” for the long-term, as the agencies will be skeptical of divestiture buyers looking for a quick exit. 

Following the well-publicized bankruptcies of divested businesses that had been purchased by financial buyers, the agencies are likely to increase their scrutiny of such deals in the future. For this reason, financial buyers must be prepared on Day One to demonstrate to the agency that it has the ability to position the divested assets to compete effectively in the marketplace over the long-term. 

Lengthier Merger Investigations Must Be Accounted For In Transaction Agreements 

According to the Dechert Antitrust Merger Investigation Timing Tracker (DAMITT), the average length of a significant merger investigation by the FTC and DOJ was 9.5 months for the first half of 2016. Significant merger investigations include HSR-reportable transactions resulting in a closing statement, consent order, complaint challenging a transaction, or transaction abandonment for which the antitrust agencies take credit. 

Although the duration of significant investigations has stabilized, the 9.5 month average recorded during the first half of 2016 is more than 30 percent longer than the 7.1 month average recorded by DAMITT in each of the 2011, 2012, and 2013 calendar years. Significant merger investigations are taking longer to complete, which may in part be due to the increased use of “upfront buyers” for divested assets. Investigations ending with divestiture consents requiring an upfront buyer lasted about 2.4 months longer than consents with only post-order buyers. 

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