Proposed changes to antitrust investigation guidelines represent a unique and specific threat to a growing private equity value-boosting strategy.
Roll-ups—commonly employed by middle-market PE firms—are in the crosshairs.
New guidelines would encourage the Federal Trade Commission and the Department of Justice to look at successive small acquisitions to analyze M&A’s impact on competition in local markets, according to a PitchBook analyst note about the changes.
While dealmakers are monitoring the proposed changes and their relevance to future transactions, Jinny Choi, a PitchBook analyst and author of the research, found that a large part of the industry thinks that the agencies’ threats could be all bark and no bite.
“That’s what a lot of dealmakers are obviously hoping for,” said Choi.
Under existing guidelines, dealmakers are required to notify the DOJ’s Antitrust Division and the FTC of planned acquisitions if their value exceeds $111.4 million, allowing the agencies a period to review and setting the stage for potential investigations. Among other provisions, the proposal specifies that “when a merger is part of a series of multiple acquisitions, the agencies may examine the whole series.”
In a roll-up, also known as buy and build, an investor—typically a PE firm—acquires or launches a company to serve as what is known as a platform. Targeted industries range from commercial lawn care services to dental practices. Over a handful of years, the financial sponsor grows the platform through acquisitions of smaller companies that serve the same markets. The add-ons are often, but not always, in the same geography.
The FTC’s case against Dallas-based U.S. Anesthesia Partners, a platform created by Welsh, Carson, Anderson & Stowe in 2012, represents the first litigated test of the agency’s ability to enforce roll-ups it perceives as anti-competitive, according to the report.
Beyond rolling up at least a dozen anesthesia services in Texas, creating the largest such provider in the state, the FTC alleged that U.S. Anesthesia Partners and Welsh Carson struck price-setting agreements with independent practices as well as a deal to divide the market with another competitor.
“These guidelines are agnostic as to particular business model, but we wanted to make sure we are being clear-eyed about business trends that we’ve seen in the markets,” FTC chair Lina Khan said in a July interview with CNBC. “One trend we have seen is roll-up strategies.”
Resistance inside the FTC to roll-ups dates back years. In 2020, then-commissioner Rohit Chopra—now director of the Consumer Financial Protection Bureau—authored a report to Congress calling for a shift in policy to allow the agency to investigate add-on deals, which he believed were flying under the FTC’s radar.
In the report, Chopra noted that add-on deals represented an outsize share of PE deals. Since 2020, add-on deals have grown from 56% to 60% of all PE deals, according to PitchBook data. A decade ago, add-ons made up just 45% of all PE deals.
Beyond U.S. Anesthesia Partners and the healthcare industry, the FTC has been pursuing cases against tech behemoths.
In September, the DOJ announced a renewed attempt to block Microsoft‘s $69 billion acquisition of video game developer Activision Blizzard, after a federal judge ruled in July that the deal could go ahead.
In another case, the FTC has been litigating the biggest antitrust trial in two decades against Google, which stands accused of holding a monopoly over online search and related advertising markets.
The scrutiny on Big Tech in recent years has deterred some corporate acquirers—like Amazon, Apple, Alphabet and Meta—from expanding inorganically, M&A attorneys and dealmakers have said. Those strategic buyers’ caution has impacted VC-backed companies seeking exits.
Some people see the FTC and DOJ’s failures to win lawsuits as signs that they might not be able to enforce the new proposed guidelines, even if they go forward as the agencies drafted, according to the PitchBook analyst note.
“A lot of people are pointing to the court losses and saying that the perceived increase in antitrust risk is not actually there,” said Choi.
Featured image by Symphonie/Getty Images
