Note: This post was updated to reflect the new proposal from Sen. Warren and Rep. Ocasio-Cortez.
Leading Congressional Democrats are proposing an effective halt to all mergers and acquisitions for the length of the COVID-19 (coronavirus) pandemic. This policy is not only misguided, but would do active harm to the nearly unprecedented challenges for economic recovery America faces in the months and years ahead.
Sen. Elizabeth Warren (D-MA) and Rep. Alexandria Ocasio-Cortez (D-NY) are introducing legislation to halt mergers and acquisitions during the pandemic. Rep. David Cicilline (D-RI), who chairs the House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, proposed including a “moratorium on mergers until the pandemic ends” in the next COVID-19 relief package passed by Congress. At an event rolling out his proposal, Cicilline said:
“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.”
No one wants “rampant” consolidation, in good times or bad. That is precisely why the Federal Trade Commission (FTC) and the Department of Justice’s (DOJ) Antitrust Division exist. For example, of all the FTC or DOJ requests for further information on proposed mergers and acquisitions (M&A) in FY 2018, a majority (57.8 percent) were for the very transactions (worth $1 billion or more) that could most contribute to consolidation, in theory. The proposals from Cicilline, Warren, and Ocasio-Cortez, though, would take an industrial-sized wrecking ball to a job that requires a sculptor’s chisel at most. Even though a majority of FTC/DOJ requests for further information in FY 2018 involved large transactions, a majority of the proposed M&A submitted to the agencies, as required by law, were valued at less than $500 million. Cicilline’s proposal, in particular, would treat those small transactions the same as the large ones.
It’s also important to define the problem (or lack thereof) that Cicilline, Warren, and Ocasio-Cortez are seeking to fix. In introducing his proposal at an event last week, Cicilline painted a ghastly picture of the private sector during this economic and public health emergency:
“Private equity firms have been sitting on $2.5 trillion of investor cash, while dominant technology firms have over $570 billion in cash and investments … Mega-mergers and corporate takeovers that were permitted during the last economic crisis led to the firing of millions of workers, the slowing of investment and innovation, and huge increases in executive compensation.”
But a picture reflects the painter’s perspective, which may or may not match reality. 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.
HSR Filings* (% of 2008)
Second Requests** (% of 2008)
FTC/DOJ Merger Challenges (% of 2008)
* The Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 requires companies to alert the FTC and DOJ to proposed mergers and acquisitions before they occur. (source)
** A second request occurs when the FTC or DOJ requests “additional information and documentary material” from the relevant parties, in order to further review a proposed merger or acquisition. (source)
While it is too early to tell if the COVID-19 crisis will lead to a sustained drop in mergers and acquisitions, early reports indicate that is just the case. FTC Commissioner Noah Phillips said earlier in April that “[s]tatistics we're seeing on a day-to-day basis [indicate] that filings are going down. … That's not because of what we’re doing. That's because of what happens, typically, in a market in the context of a financial crisis.”
So, Cicilline, Warren, and Ocasio-Cortez propose tackling a problem - “another period of rampant consolidation” - that may not even exist in the coming months and years. Regardless, the proposed solution of a moratorium on mergers (with some exceptions) would be extremely difficult to implement and would ultimately be counterproductive to a robust economic recovery in America.
While full details of the Cicilline and Warren/Ocasio-Cortez proposals have yet to come out, Cicilline proposes allowing mergers “only if a company is already in bankruptcy or is otherwise about to fail.” The article on the interview the Congressman gave to Politico includes a link to an FTC opinion on the proposed acquisition of FIH Group Holdings, LLC (“Freedom”) by Otto Bock HealthCare North America, Inc., manufacturers of microprocessor-equipped prosthetic knees (MPKs). This opinion discusses the potential standard companies would have to meet for the FTC or DOJ to determine they are “about to fail” and require a merger.
Here are just a few problems the FTC’s opinion in the Otto Bock/Freedom case pose for the current economic crisis:
- The FTC said that Freedom, the company to be acquired by Otto Bock, “cannot simply show that it had an imminent payment that exceeded its existing cash on hand. Rather, the analysis must account for the commercially reasonable options that firms in today’s markets can pursue when facing a liquidity shortfall.” What defines a commercially reasonable option for companies facing liquidity shortfalls in today’s economy, though? National and local economies are changing at a rapid pace in response to the pandemic, and Cicilline has not yet proposed a standard that adapts to this rapidly changing definition of “commercially reasonable options” for struggling businesses seeking capital.
- The FTC said Freedom “failed to meet the first prong of the defense by demonstrating a grave probability of Freedom’s failure.” Again, this demonstration is prone to rapidly changing circumstances in the COVID-19 downturn. Today’s stable position for a company weathering the crisis could be a “grave probability of failure” tomorrow.
- The FTC argued that “the existence of Freedom’s pending debt repayment is not sufficient to show that the firm was insolvent. Respondent does not argue that conditions in credit markets were extraordinary or unusually constrained, so as to preclude refinancing or recapitalizing to help make the payments due at the conclusion of its term loan.” Simply put, credit markets are extraordinarily and unusually constrained at this moment. Companies should have maximum flexibility to survive the downturn, and a merger or acquisition may be the best way to do so.
In short, Cicilline has not defined his standard of allowing a company to merge with another if it is “about to fail.” Warren and Ocasio-Cortez, for their part, have proposed that the FTC halt all mergers and acquisitions until the FTC can determine “small businesses, workers, and consumers are no longer under severe financial distress.” The devil will remain in the details here, and any definitions lawmakers come up with would be subject to change month to month, week to week, or even day to day given current market conditions.
Of course, it’s also important to reject the notion that mergers and acquisitions are inherently harmful for the economy. In fact, they could help companies large and small dig out of one of the deepest economic holes America has ever been in. As NTU Policy and Government Affairs Manager Thomas Aiello argued in a 2017 opinion piece for Morning Consult:
“Economists generally agree that mergers can increase efficiency, a vital economic metric for all businesses, both big and small. Permitting businesses to consolidate has the potential to increase economies of scale, which causes the average cost of production to fall while the output volume rises. Reductions in the cost of inputs and the elimination of redundancies will lower average cost, with those savings being passed onto consumers in the form of lower prices.
Merging also allows businesses to allocate greater capital into innovation instead of dedicating resources toward undercutting competition. Because the new firm will earn more profit, more resources will be used to finance risky (and often expensive) research and development that wouldn’t have otherwise happened. Experts continuously cite that ‘mergers and acquisition activities have a positive and significant effect on innovation and have found no support for the argument that mergers are detrimental to innovate.’
Increasing economies of scale, lowering prices for consumers, allocating greater capital into innovation - these are all objectives American companies will need to achieve if the country is to accomplish its goal of a full economic recovery.
It is certainly possible Rep. Cicilline, Sen. Warren, and Rep. Ocasio-Cortez see mergers as a particularly acute threat during the COVID-19 crisis, even if that view is misplaced. However, this is not the first time lawmakers have proposed a moratorium on mergers. In fact, just a few short months ago, before the world even knew of COVID-19, Cicilline “pressed [DOJ’s] Makan Delrahim and [FTC Chairman] Joe Simons on whether they’d support a ‘merger moratorium for dominant [tech] platforms’ while they investigate industry giants.”
A merger moratorium at any time would be harmful to America’s economic growth. During the COVID-19 emergency, in particular, it would be extremely detrimental to America’s economic recovery. That is a result the country cannot afford as it tries to repair a shocking amount of financial damage done to American businesses and workers in a short amount of time.