Final M&A Guidelines: Dark Days Ahead for America’s Startup Ecosystem and Economy

By at 18 December, 2023, 5:13 pm

Regulatory Activists in Government Finalize Pretext for Stopping Mergers and Acquisitions Through New Guidelines

by Raymond J. Keating –

With Christmas nearly here, the Federal Trade Commission (FTC) and the Department of Justice have served up a big old lump of coal for entrepreneurship and our economy.

On December 18, the FTC/DOJ issued their final guidelines with which they will review mergers and acquisitions. It was stated in the accompanying release: “The 2023 Merger Guidelines are the culmination of a nearly two-year process of public engagement and reflect modern market realities, advances in economics and law, and the lived experiences of a diverse array of market participants.”

But the unfortunate reality is that the FTC and DOJ fail to understand the very basics of market realities; have missed fundamental lessons of economics and law, as well as history; and clearly are completely disconnected from the actual experiences of market participants.

Twisting Terminology to Reach a Desired Political End

Since antitrust legislation is written in such a vague way, political appointees like FTC Chair Lina M. Khan twist the terminology to fit their desires for government to control, to hyper-regulate, the economy.

So, it is stated in these merger guidelines that the “Clayton Act (‘Section 7’) prohibits mergers and acquisitions where ‘in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.’” The FTC/DOJ then baselessly asserted, “Mergers can lessen competition when they diminish competitive constraints, reduce the number or attractiveness of alternatives available to trading partners, or reduce the intensity with which market participants compete.”

For good measure, the guidelines acknowledge the inability of agencies to “predict the future or calculate precise effects of a merger with certainty.”

The guidelines go on to essentially become a very long and expansive laundry list of excuses for the FTC/DOJ to stop a wide array of mergers and acquisitions. It amounts to a license for government regulators to freely interfere with and override decisions made by entrepreneurs, businesses, investors and consumers, even though these regulators have no real clue as to how M&A activity, or for that matter, how future firm, industry and economic developments, will turn out.

Consider what the guidelines say, in part, about the relevant market when it comes to some kind of tendency to create a monopoly. This is worth quoting at length due to its absurd, contortionist effort to justify nearly any government interference regarding M&A activity:

“A relevant antitrust market is an area of effective competition, comprising both product (or service) and geographic elements. The outer boundaries of a relevant product market are determined by the ‘reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.’ Within a broad relevant market, however, effective competition often occurs in numerous narrower relevant markets. Market definition ensures that relevant antitrust markets are sufficiently broad, but it does not always lead to a single relevant market. Section 7 of the Clayton Act prohibits any merger that may substantially lessen competition ‘in any line of commerce’ and in ‘any section of the country,’ and the Agencies protect competition by challenging a merger that may lessen competition in any one or more relevant markets.

 “Market participants often encounter a range of possible substitutes for the products of the merging firms. However, a relevant market cannot meaningfully encompass that infinite range of substitutes. There may be effective competition among a narrow group of products, and the loss of that competition may be harmful, making the narrow group a relevant market, even if competitive constraints from significant substitutes are outside the group. The loss of both the competition between the narrow group of products and the significant substitutes outside that group may be even more harmful, but that does not prevent the narrow group from being a market in its own right.

 “Relevant markets need not have precise metes and bounds. Some substitutes may be closer, and others more distant, and defining a market necessarily requires including some substitutes and excluding others. Defining a relevant market sometimes requires a line-drawing exercise around product features, such as size, quality, distances, customer segment, or prices. There can be many places to draw that line and properly define a relevant market.”

There is nothing precise, or anything having a limiting effect on government action, in this description of arriving at a “relevant market.”

Indeed, this is simply an effort to make all markets relevant for government interference and dictates. In fact, this is acknowledged in these guidelines: “The Agencies recognize that such scenarios are common, and indeed ‘fuzziness would seem inherent in any attempt to delineate the relevant . . . market.’”

“Monopoly” Gets a Makeover

These antitrust regulatory activists don’t simply ignore the definition of what a monopoly actually is, they overtly contradict it and toss it aside. As a reminder to Khan and Company, for whatever good it might do, a monopoly means that a market is served by only one seller, and there also must be no close substitutes for the product, and high barriers to enter the market must exist. For good measure, the realities of the marketplace also make clear that firms not only are competing with current businesses, but also with emerging and future competitors.

And by the way, it is stated in these guidelines that agency actions will not be limited by, well, these guidelines, as it is asserted: “…the factors contemplated in these Merger Guidelines neither dictate nor exhaust the range of theories or evidence that the Agencies may introduce in merger litigation. Instead, they set forth various methods of analysis that may be applicable depending on the availability and/or reliability of information related to a given market or transaction. Given the variety of industries, market participants, and acquisitions that the Agencies encounter, merger analysis does not consist of uniform application of a single methodology. The Agencies assess any relevant and meaningful evidence to evaluate whether the effect of a merger may be substantially to lessen competition or to tend to create a monopoly. Merger review is ultimately a fact-specific exercise.”

What exactly does this mean? The answer seems to be: Whatever else regulators can dream up can be considered as well.

Indeed, these FTC/DOJ guidelines certainly are comprehensive in terms of weaponizing politics, politicians and their appointees to put a halt to M&A activity.

However, M&A is vital to American entrepreneurship, and for the competitive edge that entrepreneurship gives the U.S. in the global marketplace. As SBE Council has noted before:

Access to capital and credit always has been and remains a challenge for small businesses at various stages of growth. And when politicians or their appointees take actions that limit or undermine potential returns for investors and businesses on investments, the negatives for smaller businesses and for entrepreneurship in general are real and significant.

Naturally, regulators don’t like talking about the full consequences of their actions, including that last point about undermining entrepreneurial activity. But when one understands that investors, such as venture capitalists, consider M&A as a means for getting a return on their investments, then pushing M&A antitrust policymaking further away from sound economic and market considerations, to be more deeply immersed in political ideologies and special interest influences, means very real ills for small, entrepreneurial firms that desperately need investment.

Indeed, a key problem with antitrust interference in the economy in the hands of hyper-active regulators, again such as the FTC’s Lina Khan, is that their very activism creates uncertainty in the market; eliminates or discourages mergers that could benefit consumers and the economy; and hurts entrepreneurial firms as investment is disincentivized due to very real concerns about mergers and acquisitions being disallowed due to the political assumptions of regulators. For example, rather than clarifying the implementation of antitrust laws, the FTC and DOJ draft merger guidelines would further muddy the waters by making policy even more susceptible to the political whims and preferences of regulators, and again, thereby trumping sound economics and what’s actually going on in the marketplace.

Consider analyses that further drive home these points about increased uncertainty and costs. As pointed out in a recent SBE Council brief:

 “…venture capital ranks as an essential form of investment for a variety of businesses at assorted stages of growth. The latest PitchBook-NVCA Venture Monitor unfortunately indicated recent stagnation, at best, on the venture capital front… There are a variety of causes coming into play, but the role of governmental intrusion and overreach on the regulatory front cannot be ignored. In the Venture Monitor report, among other factors, it was pointed out that ‘the threat of dogmatic regulation could stifle development of promising innovation hubs.’ Keep in mind that venture capital investors essentially have two exit strategies – that is, two ways to earn returns on their investments – the firm invested in either is acquired or goes public. It’s either M&A (mergers and acquisitions) or IPOs (initial public offerings). Unfortunately, elected officials and their appointees seem set on limiting, or even eliminating, M&A options, and restricting potential returns on investments in certain industries. And by doing so, they effectively limit the incentives for investing in entrepreneurial ventures thick with risk and uncertainty.”

In addition (and again as noted by SBE Council previously), a study titled “Venture Capital Investments and Merger and Acquisition Activity Around the World,” by Gordon M. Phillips, from Dartmouth College’s Tuck School of Business and NBER, and Alexei Zhdanov, of Penn State University’s Smeal College of Business, looked at venture capital investment and M&A activity in 48 nations, as well as at “country-level pro-takeover legislation” and “U.S. state-level antitakeover business combination laws.” Among the findings were the following:

● “We show that there is a strong positive association between venture capital and lagged M&A activity around the world. We argue that growth in M&A deals in a country is likely to attract more investments by VC firms as venture capitalists anticipate more viable future exit opportunities via a takeover.”

● “…we argue that an enactment of a country pro-takeover law represents a positive shock to M&A activity. On the other hand, the passage of a state antitakeover law in the U.S. can be interpreted a negative shock that is likely to reduce M&A activity in that state. We show that subsequent VC activity responds to both types of shocks. First, the passage of a pro-takeover law in a country is associated with more subsequent VC deals in that country, while the enactment of a business combination antitakeover law in the U.S. has a negative effect on subsequent VC investment in that state.”

● “Overall, our results highlight the importance of M&A markets for the incentives to engage in VC. As many start-ups rely on VC funding and venture capitalists rely on acquisitions for subsequent exits, our results suggest that an active M&A market is important for encouraging venture capital investments, entrepreneurship and growth.”

Finally, consider a key point from an analysis of the Meta-Within case by the Information Technology and Innovation Foundation: “In 2020, nearly 90 percent of all venture-backed startups exited their venture-funding through an acquisition. The looming threat that this exit strategy may no longer be available, or will face costly litigation, will limit the ability of small studios to access venture capital and thereby reduce VR app innovation.”

Yes, M&A opportunities are vital for investment in startups and smaller enterprises, and government increasing costs and uncertainties to M&A is negative for entrepreneurship, investment and growth.

Along these lines, there is the issue of transparency. Transparency regarding government actions is welcome to entrepreneurs, businesses and investors, so that decisions can be made with more complete information. It was noted in the FTC/DOJ release: “Since 1968, the agencies have issued merger guidelines to enhance transparency and promote awareness of how the agencies undertake merger analysis before deciding whether or not to challenge an acquisition.” And later: “Like the prior horizontal and vertical merger guidelines they replace, the 2023 Merger Guidelines are not themselves legally binding, but provide transparency into the Agencies’ decision-making process.”

FTC/DOJ Objectives are Clear: Drastically Reduce or Halt M&A Activity

As arbitrary and detached from economic and historical realities these guidelines are, they are transparently so. Therefore, market participants can plainly see that the objectives of this FTC and this DOJ are to drastically reduce or put a halt to M&A activity by providing antitrust regulators with enormous discretion to act according to the whims of politics over sound economics and legal reasoning. Market participants can, and will, make decisions accordingly, and that means that as long as these guidelines and the current crop of hyper-regulators hold sway and power, as noted previously, investment in entrepreneurial ventures will be restrained or reduced, and our economy will suffer as a result.

American entrepreneurs, businesses, and workers provide great value to consumers at home and around the world. In Christmas parlance, they act in a very nice way, and deserve to be commended and thanked. In contrast, it’s government hyper-regulators, led by the likes of FTC Chair Khan, who are being naughty, and deserve the metaphorical coal in their stockings.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.


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