Never let a pandemic go to waste.
As reports heighten about a potential Uber and GrubHub merger, four members of the U.S. Senate are calling on both the Department of Justice and the Federal Trade Commission to gear up for a vigorous antitrust investigation into the potential combination of two of the three largest food delivery services in the United States.
In a letter dated May 20 to the FTC, the senators implored that it is "particularly troubling" that this merger is "being contemplated during a pandemic."
The antitrust hawks have clearly been circling Big Tech for some. Heck, executives from Amazon, Facebook, and Google might as well rent second apartments in Georgetown given how often they frequent the Capitol. However, a new theme is emerging from the cacophony of would-be antitrust enforcement agents: advancing old agendas under the guise of a new pandemic.
Congressional admonishment of the Uber-GrubHub deal is just the latest in a groundswell of antitrust sentiment among lawmakers. Selected members of Congress are also rallying behind the Pandemic Anti-Monopoly Act, sweeping legislation that would outlaw most mergers and acquisitions until the COVID-19 pandemic ends — with limited exception for those transactions involving companies that are bankrupt or about to fail. (How kind: at least the retail industry can die with dignity.)
More specifically, the Pandemic Anti-Monopoly Act sets its sights on companies with more than $100 million in revenues or market capitalization, and anything involving hedge funds and private equity firms. How encompassing would this proposed merger ban be? Some observers estimate that it would shut down more than 80% of M&A transactions — overnight. That's big. Huge.
Why the attack? The argument is that antitrust agencies — which, like most organizations, are under strict work-from-home orders to support social distancing — are overwhelmed and incapable of keeping pace with filings. This, in turn, might allow "giant corporations and private equity vultures" to "gobble up struggling small businesses and increase their power through predatory mergers," thereby thwarting competition, reducing innovation, and raising prices, according to a statement by Senator Elizabeth Warren.
Let's think about this practically. Are the antitrust regulators truly overwhelmed at this moment? M&A volume in North America declined roughly 25% year-over-year in the first quarter, with deal volume nosediving sharply in March as the epidemic gripped New York, our country's financial capital. By many accounts, deal volume is expected to decline by as much as 50% year-over-year in the second quarter.
How does this decline compare to the Great Recession? Well, from 2007 to 2008, the total number of M&A transactions in North America eased a mere 15%. Even if we were to extend the timeframe from 2007 to 2009, the aggregate decline in deal volume was roughly 28%.
Painful at the time? Of course. Compared to today? Hmm… Not so much. In fact, FTC Commissioner Noah Phillips went so far as to appear on CNBC to denounce the Pandemic Anti-Monopoly Act, citing a dramatic decline in M&A and defending his agency's enforcement efficacy.
To compound matters, the acquirers in some large transactions have been trying to back out of deals signed pre-Covid. Likewise, the second week of April was the first time since September 2004 that no M&A deal worth more than $1 billion was announced globally. Simply stated, the M&A cycle is at its lowest point in 15-plus years and regulators are not overwhelmed.
Moreover, the plain truth is that the vast majority of M&A transactions are so small that the antitrust regulators haven't historically even cared about them in the first place. In 2018, only 22% of M&A deals were large enough to land on regulators' desks for review. So why outlaw 80%-plus of transactions?
Now, let's also put the Pandemic Anti-Monopoly Act into some political and legal perspective. The bill is essentially the reincarnation of the Consolidation Prevention and Competition Promotion Act of 2017 (the "CPCPA" bill), which sought to make it significantly easier for antitrust authorities to challenge M&A transactions.
Under the CPCPA, as it was originally proposed, the burden of proof in large transactions would have shifted the burden of proof from the government to the merging companies to prove that efficiencies, synergies, and other pro-competitive benefits would outweigh any anti-competitive harms. Can you imagine any other legal scenario in which the defendant is guilty until proven innocent?
Similarly, the CPCPA would have reduced the burden of proof for the government in blocking any merger (not just large transactions) that might have "materially" lessened competition (which was defined as "more than a de minimis amount") rather than "significantly" lessened competition. These revisions would have overturned more than a century of well-settled antitrust law. Here again, that's big. Huge.
The Pandemic Anti-Monopoly Act takes the proposed injustices of the CPCPA a significant step forward by overreaching even further to solve a purported problem that doesn't exist. Nobody — not even the regulators themselves — have declared a state of emergency here. These were bad ideas in 2017, and they are still bad ideas in 2020.
Peter Nesvold is a former chief operating officer of Financial Services Investment Banking at Raymond James. Prior to that he was managing director and head of strategy at Silver Lane Advisors.
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