A federal judge on June 13 temporarily blocked Microsoft from acquiring video game maker Activision Blizzard. The injunction had been sought by the Federal Trade Commission (FTC), America’s self-styled trustbuster, even though together the two companies would have a total share of just 11% of the highly segmented sector.
The move comes three months after the U.S. Department of Justice Department (DoJ) sued to prevent JetBlue from buying Spirit Airlines in yet another sign of aggressive antitrust enforcement under the Biden Administration. Combined, JetBlue and Sprint would have just a 10% share of the air passenger market.
American businesses have to understand that it’s a whole new world. When it comes to mergers, DoJ and the FTC see their mission as “No!”
Examples abound. The DoJ filed a lawsuit in November to stop a deal between book publishers Penguin Random House and Simon & Schuster, and the FTC in March sued to stop two mortgage-origination firms from merging. The FTC in December filed a lawsuit to block the Microsoft deal but then turned to other countries to impose an agenda Congress won’t pass. Now, the regulator wants to speed things up with an injunction.
Meanwhile, U.S. regulators’ attempts to block UnitedHealth Group’s acquisition of a technology firm, a combination of two sugar refiners, and Meta’s purchase of Within, maker of a virtual reality app, were all blocked in the courts. “They don’t seem to be afraid of losing cases,” Florian Ederer, an antitrust expert at Yale University, said of the FTC. “They’re hoping that if they win some, that will set a precedent and help them deter other mergers that they view as anti-competitive.”
The FTC has even gone so far as to try to prevent vertical combinations of companies that don’t compete but are in the same supply chain, like the semiconductor maker NVIDIA and chip designer Arm Ltd. Until the Biden Administration, there was only one attempt to litigate a vertical merger in 40 years – the unsuccessful effort to block AT&T from buying TimeWarner.
Don’t expect animosity to mergers to end if the White House changes hands. The problem isn’t the hard-working rank-and-file at these agencies. It’s their political bosses. In its neo-populist incarnation, the Republican Party has also become more anti-corporate. It won’t matter who is the next president. Antitrust is ascendant for the long haul.
I’ve have been an advisor on many mergers and a close observer of others, and I’m convinced that business leaders still haven’t adjusted to the new reality. So here is some advice:
- Assume from the start that the merits won’t be considered and that regulators will want to kill your deal. Build a multi-dimensional team but be prepared to lose. Figure out how to limit your losses if you do.
- Practice real due diligence before you make an offer to buy. Don’t just listen to merger lawyers and financiers. They have a bias for “yes” for obvious reasons. Get out the wire brush and do your own analysis. Trust but verify.
- Invest in public affairs. Find your friends among unions, interest groups, and government officials. If they will benefit from the deal, get them to advocate on your behalf. Try, especially, to find benefits for the Administration by showing that a merger will increase employment or lower prices. And spend the money necessary to get the message across. By contrast, the Albertson-Kroger grocery deal may be killed not by government but by a well-organized coalition of labor, consumers and local communities.
- Know your red line – a date, a lawsuit, a decline in stock price. Don’t hesitate to walk away if the line is crossed.
- Realize that no one is off-limits. The FTC sued last year to block Lockheed Martin’s acquisition of Aerojet Rocketdyne, a vertical merger that would help the U.S. build hypersonic weapons to compete with China. Regulators tried to kill another vertical merger – between Illumina and Grail -- that would speed to market a blood test that will help millions of Americans avoid dying of cancer. And the NVIDIA deal would have benefited the U.S. in the AI race.
- Structure the deal so that your interests and those of the company you’re acquiring are closely aligned. You have to devise a mutual strategy for merger success and to devote the resources needed to close the deal. Activision will receive a $3 billion break-up fee if Microsoft’s proposed purchase isn’t consummated by July, so the two companies’ incentives to consummate are very different.
- Even if government regulators are trying to stop you, be ready to close – and then litigate. The FTC sued to stop the Illumina-Grail deal and enlisted fellow European regulators. But, with court action continuing, Illumina went ahead anyway; “regulators be damned,” as one headline put it.
Of course, regulators can’t often be damned. The new policies are having an effect. Bain & Co. reported that in 2022, the value of merger & acquisition deals fell 36% compared with 2021. There were only three big-ticket (over $10 billion) global M&A deals in the first quarter of 2023, compared with eight in both 2021 and 2022.
The atmosphere in the U.S. has grown extremely unfriendly – and will stay that way. Deterring mergers like Microsoft-Activision and JetBlue-Spirit may be bad economics, but it’s a fact of life. Deal with it.
