Proposed merger ban will do more harm than good

Author: John Crabb | Published: 30 Apr 2020
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If proposed moratoriums on US mergers were to go ahead they could have disastrous effects on the market and add increased pressure in areas already under stress.

Senator Elizabeth Warren and representative Alexandria Ocasio-Cortez are set to introduce legislation that "bans risky mergers and acquisitions -- and stops large corporations from exploiting the pandemic to engage in harmful mergers and strengthen the federal government's ability to respond effectively to future crises", known as the Pandemic Anti-Monopoly Act. 

"As we fight to save livelihoods and lives during the coronavirus pandemic, giant corporations and private equity vultures are just waiting for a chance to gobble up struggling small businesses and increase their power through predatory mergers," said Senator Warren. "We're introducing legislation to protect workers, entrepreneurs, small businesses, and families from being squeezed even more by harmful mergers during this crisis and any future national emergency."

However, the announcement has not been welcomed. "It seems like naked political grandstanding," said the COO at one NY based private equity firm. "Part of Elizabeth Warren's normal mantra about Wall Street eating the mainstream."

"The whole notion that a family would sell a business to a private equity firm or to a strategic buyer without advice or counsel and on terms that  were unacceptable seems weird to me," he added. "Banning all of that just seems gratuitous and deeply political." 

"Giant corporations and private equity vultures are just waiting for a chance to gobble up struggling small businesses"

Last week Congressman David Cicilline, head of the US House antitrust subcommittee, proposed including a temporary moratorium on all mergers in the next Covid-19 bill. Cicilline told Politico that: "As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree."

The proposal would allow for mergers of firms undergoing bankruptcy or on the verge of failure.

"This is not complicated. Our country can leave room for merger activity that is necessary to ensuring that distressed firms have a fresh start through the bankruptcy process or through necessary divestitures while also ensuring that we do not undergo another period of rampant consolidation," he added.

Sources have told IFLR that if this proposed ban were to gain traction and pass through congress the ramifications would outweigh the benefits.

"Allowing this proposal to move forward with these exceptions might actually create additional pressure or accelerate proposed acquisitions of smaller rivals. Bigger firms targeting smaller, potentially failing firms is not okay," said Diana Moss, president of the American Antitrust Institute. "That that is an exempted form of consolidation."

"This was a concern anyway given the higher levels of concentration, the emergence of large firms and a pattern of acquisitions," she added. "Allowing that to move forward under the moratorium might actually accelerate those types of proposals. That is not something that we would want to see in the longer term."

The proposed moratorium is predictable and understandable given the situation of the US economy. There is documented evidence of the underlying systemic problems in the US regarding competition, which has seen a stark decline over the last few years. The backdrop of the Covid-19 crisis provides a platform for legislative proposals temporarily to halt merger activity.

See also: Managing an extreme corporate crisis, lessons from Rolls Royce

Bruce Hoffman, former director of competition at the Federal Trade Commission (FTC) and now a partner at Cleary Gottlieb, understands the impulse behind the proposal but does not consider it necessary, going as far as to say that it would be harmful.

"There are a lot of reasons for transactions. Some transactions can increase efficiency, or improve the financial condition of firms that are actually providing a service that's relevant to responding to the pandemic," he said, adding: "The 'truly failing’ or bankruptcy exception would be grossly under inclusive for any circumstance where either firm might be able to improve the production or distribution of materials by those firms that might be in financial distress, or simply unable to provide the best service or distribution possible."

Merging could put these firms in a better position to provide that service, or result in a circumstance where two firms pool two different assets in order to address a specific part of the pandemic.

"There is a lot of potential for harm."

"There is a lot of potential for harm"

Other mergers, that don't involve failing firms that could have potentially significant deficiencies, could also help keep the markets afloat and the economy moving.

Political challenges

The biggest question is whether this would get politically would get any traction if it were to come out as part of a stimulus package or as a standalone bill. Either way it would require bipartisan support, which is unlikely.

"Sometimes mergers can be a form of rescue capital," said the COO. "If the alternative is somebody going bankrupt and employees losing jobs acquisition is a better outcome. Of all the things we could be talking about as a nation and as a group of people in Washington, this just doesn't seem like it should even be in the top-20." 
Any bill that were to move forward on a moratorium would have to be extremely specific and consider the potential ramifications of the incentives created. "After the moratorium there will likely be a lot of energy and pent up proposals for acquisitions and mergers, and legislation would need to address that," said Moss.

"One very practical question is if there is more pent up consolidation activity, incentives and proposals to consolidate, how the agencies will deal with this tidal wave coming at them afterward," she added.

There have also been suggestions that the proposal is based on a pre-existing antipathy for private equity in general. 

"That concern is just totally misplaced. There's no indication that acquisitions by private equity firms create any kind of competitive harm. To the contrary, private equity can have no involvement in a particular industry and shore it up, with financial assets and managerial capabilities," said Hoffman.

A private equity firm might not compete in a market where some of the companies who do are really struggling and might need financial support. In that situation, the private equity firm could provide that support without reducing competition. Some companies that are really struggling really need financial support. "The last thing the government should be doing is making it harder for companies to get financial support from acquirers that are not strategic presences in the markets in which they're competing," he concluded.

See also: Coronavirus, private equity investing in a distressed environment