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
"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
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."
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
"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
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
"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
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
"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
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.
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
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
"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
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