Back in April, we noted that Sen. Elizabeth Warren (D-MA) and Rep. Alexandria Ocasio-Cortez (D-NY) were teaming up on legislation that would ban virtually all mergers and acquisitions (M&A) during the course of the COVID-19 national and public health emergencies. We then led a coalition letter opposing the merger ban proposals, with nearly 30 free market and taxpayer advocacy groups joining us. Since we last wrote on the bill, new data and specific bill text for the proposal have been released. This new information only further highlights how unnecessary and destructive the merger ban proposal would be for the American economy.
On Thursday, Axios reported that M&A activity has plummeted in the U.S.:
Announced deal value for U.S.-based companies through July 9 were down 64% from the same period in 2019, according to Refinitiv. Aggregate deal value between Q1 and Q2 2020 fell by more than 40%. The number of announced deals did increase slightly between year-to-date 2019 and 2020, but relatively few of those were large transactions that would rearrange the competitive landscape. There also was a sizable decrease for private equity-backed deals, in terms of both value and number of deals.
This new data is critical to the debate over merger bans, because Sen. Warren and Rep. Ocasio-Cortez, along with Rep. David Cicilline (D-RI), argued that the pandemic and recession would lead to “rampant” and “predatory” consolidation by large firms. We argued in April that Great Recession data showed the “period of rampant consolidation” Warren, Ocasio-Cortez, and Cicciline warned about may never occur:
An analysis of merger activity during the 2008-2009 Great Recession indicates that merger and acquisition (M&A) activity significantly declined during the last economic crisis, while FTC and DOJ enforcement against alleged anticompetitive behavior remained steady compared to pre-crisis levels.
This new data from Refinitiv proves, in Axios’ words, that the “M&A feeding frenzy” “never materialized.”
While data in July are not necessarily predictive for activity in the late summer and fall, our prior argument stands - the Federal Trade Commission (FTC) and Department of Justice (DOJ) can utilize existing authorities to handle proposed M&A in the months and years to come. (If anything, FTC and DOJ need to apply an even lighter touch to antitrust enforcement than they do under current law.)
Unfortunately, Sen. Warren and Rep. Ocasio-Cortez do not feel the same way. The finer details of their new legislation make that clear.
The Pandemic Anti-Monopoly Act
All HSR Transactions Are Subject to the Ban
The bill not only bans M&A by firms with over $100 million in revenue, and by financial institutions or equity funds with over $100 million in capitalization, but it bans all acquisitions that have to be reported to the FTC under the Hart-Scott-Rodino (HSR) Act. In fiscal year (FY) 2018, that was over 2,000 transactions - only two percent of which were subject to FTC or DOJ antitrust investigation. The data make clear that neither FTC nor DOJ attempt to halt the overwhelming majority of HSR transactions, yet the Pandemic Anti-Monopoly Act would ban all of those reported transactions from taking place.
Proposed Exceptions to the Ban Are Poorly Defined or Ill-Advised
The bill proposes a number of waivers to the merger ban, but it does not clearly define the terms used for such exceptions. For example, firms can present “clear and convincing evidence that the transaction will advance critical national security, economic, or public health interests during the emergency.” However, Sen. Warren and Rep. Ocasio-Cortez do not bother to define what makes for “clear and convincing evidence,” other than to say the burden of proof is on the firm requesting a waiver.
Acquisitions can also go through if the firm being acquired is a “failing firm.” The bill’s authors write that a failing firm “would be unable to meet the financial obligations of the firm in the near future,” would not be able to successfully reorganize under Chapter 11 bankruptcy protections, and would be able to demonstrate “that the firm made good faith efforts to elicit reasonable alternative offers.” However, the bill does not define “the near future,” “good faith,” “reasonable alternative offers,” or many other terms that would be essential to FTC and DOJ understanding of when and how to issue exceptions to the merger ban.
The Pandemic Anti-Monopoly Act also proposes that the FTC can vote unanimously to approve a waiver, but it rather absurdly requires the “written concurrence of the Attorney General, the Secretary of Defense, the Secretary of Homeland Security, the Secretary of Labor, the Secretary of Health and Human Services, and the Administrator of the Small Business Administration.” Besides the Department of Justice, these agencies have never had a formal role in antitrust enforcement, and requiring their participation for certain exceptions to the merger ban creates overlapping layers of bureaucratic ‘mother may I’ that would all but ensure exceptions are never approved.
The Merger Ban Doesn’t End With the Conclusion of the National Emergency
Perhaps the most alarming aspect of this bill is that, despite media coverage suggesting otherwise, the merger ban would not end with the conclusion of the national emergency. Instead, the following benchmarks must be reached for the merger ban to end:
- The national emergency with respect to COVID-19 must be terminated;
- Every state, along with Washington, D.C. and the U.S. territories, must “have reopened their economies” (and the bill does not define what it means to ‘reopen’ an economy);
- After both of these conditions are met, another 100 days must pass by;
- The FTC must certify “small businesses and workers are no longer under severe financial distress” (and the bill does not define “severe financial distress”); and
- The FTC must vote unanimously to end the merger ban, with the written consent of “the Attorney General, the Secretary of Labor, and the Administrator of the Small Business Administration” (the Secretary of Labor and the Administrator of the Small Business Administration have never had a formal role in antitrust enforcement).
A cynical view of this process would have us believe that Sen. Warren and Rep. Ocasio-Cortez never want another merger or acquisition to occur in the United States. This process not only requires the end of the COVID-19 emergency and the full restoration of the American economy, which may take years or even decades, but it requires unanimous approval of a politically divided FTC and a series of agency heads with sometimes competing priorities.
The recent data reported by Axios and a closer reading of the bill text only further confirms what NTU and 28 other free market organizations wrote to Congressional leadership in May:
The proposals from Sen. Warren, Rep. Ocasio-Cortez, and Rep. Cicilline to ban all mergers would do active harm to the economic recovery, by forcing small and mid-sized companies to fail rather than survive through a merger or acquisition, and by denying companies the opportunities for innovation and efficiency that come with most mergers. As FTC Commissioner Phillips notes, “[a]s a general matter, decades of research and experience tell us that the vast majority of mergers are either pro-competitive or competitively-neutral. … American consumers stand to gain from pro-competitive mergers, during and after the current crisis” The Council of Economic Advisors (CEA), for its part, warned in February that “[u]sing antitrust law to regulate markets in the absence of competition problems will exact costs on the economy by preventing efficient market organization.”
While the proposal has not gained much traction since it was introduced, the clout Sen. Warren and Rep. Ocasio-Cortez have in the Democratic Party means that even outlandish proposals like these cannot be ignored. We hope Congressional leadership and the Administration will reject any and all merger ban proposals, through the pandemic and beyond.