FTC-DOJ Inquiry into Serial Takeovers: Crackdown on PE Roll-ups?

On May 23, 2024, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) jointly announced a request for citizens to provide information that the agencies can use “to identify serial takeovers and roll-up strategies across the economy that led to consolidation that harmed competition” (RFI).

It’s the latest step in a multi-year effort by the Biden administration to more aggressively police what RFI defines as “corporate consolidation strategies, which occur when a company becomes larger – and potentially dominant – by purchasing several smaller companies from the same or related business sectors or industries.” Agencies believe that roll-up strategies, often used by private equity firms, are particularly harmful because individual deals can fall below Hart-Scott-Rodino (HSR) reporting thresholds and thus escape agency scrutiny.

The focus on roll-ups is nothing new. Both the agency’s new merger guidance and proposed changes to the HSR filing process reflect the agency’s concerns. However, the timing of the request for information inadvertently highlights some of the challenges agencies face when trying to increase enforcement in this area. Notably, the RFI was disclosed just days after the court dismissed the accused PE firm from the FTC’s first real challenge to the alleged roll-up strategy (discussed below). This echoes the prediction we made following the development of the new Merger Guidelines that courts may be reluctant to apply the novel theories of harm reflected in the new Guidelines. See our December 21, 2023 Client Alert, “Issuance of Final 2023 Department of Justice and FTC Guidance on Mergers, Formalizing Aggressive Merger Enforcement Playbook.”

Despite this setback, the agencies undoubtedly continue to seek more test cases with favorable facts, which are likely to include a relatively small set of transactions involving large aggregate market shares and direct evidence of anticompetitive effects (e.g.., increase in prices).

We do not anticipate that the RFI will significantly enhance the agency’s enforcement efforts. However, the exercise is a reminder of the agency’s strong interest in roll-ups, and companies making multiple acquisitions in the same industry should be aware of the greater risk of antitrust scrutiny and consider ways to mitigate it.

Content of the request for information

RFI asks citizens to provide agencies with examples of the so-called serial takeovers and roll-up strategies that they believed were anti-competitive. Seeking information across all sectors of the U.S. economy, RFI has particular attention to the following sectors: housing, agriculture, defense, cybersecurity, distribution, construction, aftermarket/repair and professional services.

Categories of information sought in the RFI include examples of serial acquisitions and their impact on competition, customers, employees and suppliers; the specific business practices in which the buyer has engaged; the stated business objectives of the acquisition; and information about ownership and control of the PE firm after the acquisition.

Agencies seek assistance from a wide range of stakeholders, including consumers, workers, businesses, advocacy organizations, professional and industry associations, local, state and federal elected officials, and scientists. The comment period ends on July 22, 2024, and comments received will be posted publicly.

More difficult conversations about serial acquisitions

The RFI is the latest in a string of agency enforcement actions aimed at serial takeovers.

In November 2022, the FTC issued a policy statement providing a broad interpretation of its enforcement authority under Section 5 of the FTC Act, which specifically listed “a series of mergers, acquisitions, or joint ventures that tend to result in harm that the antitrust laws have had on purpose of prevention” as a potential unfair method of competition that could violate Section 5. Here, as with the FTC’s recent rule prohibiting employees from competing, the Commission is seeking to extend the application of Section 5 beyond the limits of how the agencies have enforced the antitrust laws over the past several decades. See our April 24, 2024 Client Alert, “FTC Final Rule Prohibiting Employee Non-Compete Clauses: What It Means for Employers.”
In June 2023, the agencies proposed changes to HSR’s pre-merger notification forms that include disclosure of each party’s prior acquisition history, an apparent effort by the agencies to more easily identify serial acquirers. See our July 6, 2023 Client Alert, “FTC and Department of Justice Propose Dramatically Expanding the Scope of HSR Filings.”
When the agencies issued their final revised merger guidance in December 2023, they clearly stated that “(a) company that engages in an anticompetitive pattern or strategy of multiple acquisitions in the same or related lines of business” may violate more than just Section 7 Clayton Act, but also potentially Section 2 of the Sherman Act and Section 5 of the FTC Act.
Earlier this year, the agencies and the Department of Health and Human Services launched a separate joint public study aimed at obtaining information on the impact of PE investments on the health care market.

Test case failure

These principles were put to an initial test in federal court in Texas, where in September 2023, the FTC filed a complaint against US Anesthesia Partners (USAP), alleging that USAP engaged in the illegal consolidation of the Texas anesthetic market in violation of the FTC’s Operate Under Roll-Program regulations. up, as well as other conduct, including pricing arrangements with independent anesthesia groups and a market allocation arrangement with another large anesthesia provider. The FTC also named as a defendant PE firm Welsh Carson, a minority owner of USAP with a 23% stake and two of the 14 board seats.

In a May 13, 2024 decision, the court granted Welsh Carson’s motion to dismiss, finding that the FTC did not sufficiently allege that Welsh Carson was “‘violating’ antitrust law” because the mere “act of receiving profits from USAP is not a continuing violation.” antitrust laws.”

The court also ruled that the FTC failed to establish that “a non-controlling minority investor – regardless of how much direct influence it has – (should be) liable under Section 13(a)” (b) because the company he co-owns has made anti-competitive acquisitions. The court decided that “this interpretation of Sections 7 and 13(a) (b) would expand the FTC’s reach further than any court has yet found appropriate.”

Additionally, the court ruled that the FTC “improperly alleged that Welsh Carson was ‘about to violate’ antitrust law.” In this case, the court held that “the mere ability to do something does not satisfy the test of likelihood of that thing happening again.”

Although the court dismissed the PE firm due to its minority ownership and lack of control over the operating company, it allowed the FTC’s claims against USAP to proceed, finding that the complaint adequately alleged that “USAP continues to own classes of anesthetics that it unlawfully acquired and still charges high prices; USAP currently maintains two pricing agreements that result in higher prices; and USAP’s overall monopolization plan remains intact,” which was sufficient to conclude that USAP “is currently or soon in violation of the antitrust laws.” The court cited USAP’s business records, including statements by its business executive, as evidence that the acquisitions could plausibly have anticompetitive effects.

To go

The FTC and Department of Justice investigation into serial takeovers and roll-ups once again confirms that agencies are paying attention to these types of takeover strategies, and the takeover practices of PE firms more generally. Some public comments could lead to new investigations into past acquisitions. Despite the difficult conversations, however, agencies are likely to focus their enforcement efforts on transactions that present traditional evidence of high aggregate holdings or price increases and other anticompetitive effects. As seen in the FTC’s anesthesia, business records that show clear strategies for business expansion and post-acquisition price increases will also attract particular attention.

However, if agencies challenge serial takeovers without traditional evidence (such as high shareholdings or anticompetitive effects), they are likely to face skeptical courts. The government must also come to terms with the fact that roll-ups can provide a number of pro-competitive benefits, such as providing target companies with management, industry and operational expertise, thereby improving their overall performance; injections of needed capital into operating companies (e.g. to rescue neglected assets); and reducing costs, increasing production and creating employment opportunities.

Companies making or considering a series of acquisitions should be aware of the continued agency interest in this space and be mindful of how they run their respective operating companies to avoid falling into the agency’s crosshairs.

This note is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.