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No Khan Do: M&A Guidelines and Pending Deals
CreditSights Staff
EXECUTIVE SUMMARY
- On July 19, 2023, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) released a draft of proposed Draft Merger Guidelines, consisting of 13 guidelines in total, for public comment through September 18, 2023. Notable changes include evaluating the impact of a merger on labor services, increased scrutiny on deals involving platforms and restored concentration thresholds that had been loosed in the 2010 Horizontal Merger Guidelines.
- The Biden Administration and FTC, helmed by Chair Lina Khan, have changed the M&A landscape since 2021 by increasing regulatory scrutiny and a broader scope. In July 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy, which aimed to quell corporate consolidation to increase competition. The FTC changed its policy to state that its scope under Section 5 of the Federal Trade Commission Act “reaches beyond the Sherman and Clayton Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions,” a departure from its 2015 policy that constrained its scope to within the Sherman and Clayton Acts.
- The increased regulatory scrutiny comes after a wave of M&A transactions in 2021. The 2021 Hart-Scott-Rodino (HSR) Annual Report, released in February 2023, reported a significant surge in M&A transactions in accordance with the HSR Act to 3,520, a 115% increase from FY 2020. Since then, we found that pending and completed M&A deals fell from a peak of 1,198 transactions totaling $2,046.1 bn in 2021 to just 317 transactions totaling $639.5 bn YTD.
- We worked with the CreditSights analyst team to highlight a number of transactions that have failed to pass regulatory muster and also provide an overview of currently pending deals, ranging in size from $2.7 bn to $69 bn and totaling $215.7 bn. Across sectors, management appetite for M&A ranges from modest to robust, with some key issuers guiding to expect continued deal activity while other sectors have put deal activity on the back burner.
- Overall, we expect regulatory scrutiny to add a layer of complication to M&A, especially amid heightened economic uncertainty and elevated borrowing costs. We continue to expect that management teams will be focused on balance sheet management, though M&A that comes with the potential for material cost savings is still viewed as an opportunity given a greater focus on margins in recent quarters.
On July 19, 2023, the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC), collectively referred to as the “Agencies,” released a joint draft of proposed Merger Guidelines (the “Draft Guidelines”) for public comment. The Draft Guidelines follow a rise in M&A activity between fiscal years 2020 and 2021, when the number of mergers reported in accordance with the Hart-Scott-Rodino Act doubled to 3,520 totaling $3.04 tn in 2021 from 1,637 totaling $1.54 tn in 2020, prompting increased regulatory scrutiny in monopolistic players and market consolidation. Since guidelines on M&A activity were first introduced in 1968, the DOJ and FTC have made amendments six times, with the most recent version in 2020. The latest Draft Guidelines address frameworks established in both the Horizontal Merger Guidelines and Vertical Merger Guidelines introduced in 2010 and 2020, respectively.
Notable changes proposed in the Draft Guidelines further address:
- The potential for harm to all market participants, including the competition between buyers (employers) for labor services. The Agencies will evaluate the impact on labor as a stand-alone basis to challenge a proposed deal.
- Increased scrutiny in consolidation of platforms— a key focus of FTC Chair Khan and President Biden.
- Restoring the concentration thresholds for mergers between competitors that was loosened in the 2010 Horizontal Merger Guidelines. The original 1982 merger guidelines use the Herfindahl-Hirschman Index (HHI) to measure market concentration levels and set the threshold for what is considered a highly concentrated market post-merger at 1,800 HHI. Mergers that result in meeting or exceeding the 1,800 HHI threshold and increase the HHI by more than 100 points are deemed to substantially lessen competition or create a monopoly. The 2010 Horizontal Merger Guidelines had increased the threshold for what is considered a highly concentrated market to above 2,500 HHI and raised the change in HHI viewed to likely enhance market power to 200 points.
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