SEC’s Heightened Regulatory Environment Could Have A ‘Chilling’ Effect On Dealmaking

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SEC’s Heightened Regulatory Environment Could Have A ‘Chilling’ Effect On Dealmaking





Big M&A deals always grab headlines, but these days it seems like the news is less about the transaction’s details and more about potential antitrust battles with the Federal Trade Commission.

“It does seem antitrust is more in the headlines in the last 18 to 24 months than at any time in the last two decades,” said Thomas Ensign, a partner in law firm Fenwick & West’s antitrust and competition group.

From the FTC’s lawsuit concerning Meta’s—then-Facebook—purchases years ago of Instagram and WhatsApp, to extended investigation of the proposed Amazon/MGM transaction, to the recently failed merger of Nvidia and Arm, an increasingly tough regulatory environment surrounds dealmaking.

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“It’s at the forefront of concerns of deals,” said Jamilla Ferris, a partner in the antitrust and competition group at law firm Wilson Sonsini. “There are plenty of deals still happening …. but it will have a chilling effect on some deals.”

While the deals mentioned above were—or potentially were—huge transactions involving some of the biggest names in tech, increasing regulatory review could have an unsettling effect further down the startup ecosystem.

Venture capitalists and large growth equity firms, which are now throwing more money than ever at ever-increasing valuations, want to know the exit opportunity of a company when investing. For all the focus on the public markets, the vast majority if exits still happen via M&A, meaning if dealmaking gets disturbed, so does an investor’s path to liquidity.

Changes to the system

While enforcement actions by agencies have not increased—merger enforcement actions fell from 31 in 2020 to 12 last year, and consumer protection actions fell from 79 to 31—the FTC has implemented several changes in the past year or so that have been noticed by those in the industry.

“It’s kind of like the opening moves in chess,” Ensign said. “It might not look like anything is happening, but it really is.”

One of those changes was suspending the early termination of the 30-day waiting period—during which a deal cannot be consummated pending a preliminary review. The FTC announced the suspension of the early termination action last February due to what it called an “unprecedented volume of filings.”

However, Ensign questions that reasoning. He points out there were 4,765 HSR filings—or premerger notification filings—on average between 1998 and 2000. Last year, there were 4,130 such filings.

“When senior FTC officials repeat (the unprecedented volume of filings) mantra, they ignore the history of the FTC and DOJ during similar periods,” Ensign said.

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The FTC also announced last August that it will send pre-consummation warning letters in connection with deals it cannot fully investigate within the set timelines to let the parties know their transactions remain under investigation, and they proceed at their own peril. Later in the year, the agency changed its “prior approval” provisions requiring companies that agreed to remedies in previously challenged transactions to get prior approval from the FTC before “closing any future transaction affecting each relevant market for which a violation was alleged.”

“All of these changes are designed to burden and chill the M&A process,” Ensign said. “I have not observed a chilling effect in M&A yet, but I think that’s the intent.”

Looking at deals through a new lens

Those who specialize in antitrust and competition say while the FTC is not actively investigating deals more than in the past, the agency is showing a willingness to look more closely at deals that previously would not have raised eyebrows.

One example are so-called “acqui-hire” deals, Ferris said. Such deals bring talent to the acquirer, but do not add new technology or markets, and have been a staple in tech M&A for years. However, the agency has signaled concerns of the uneven access to talent such deals may create.

“They are not looking at those deals now, but have shown they may be willing in the future,” she said.

There also has been a willingness to go back and look at deals that were consummated years ago, such as Facebook’s purchase of Instagram. While not unprecedented, it is somewhat atypical to review deals years after completion.

Those who work in the industry, however, say this is not just an issue related to tech.

“I think big tech is more interesting to the agencies right now, but it’s not just a tech challenge,” Ferris said.

“The agenda is broader than tech,” Ensign said. “Big tech is just first in line, but it’s not greater than other industries.”

Microsoft’s big deal

Of course, one of the next big deals that most will be watching is the proposed Microsoft/Activision marriage, a deal that at $69 billion would be the largest-ever U.S. technology transaction.

Last week Redmond, Washington-based Microsoft released new guidelines for its app store that many saw as an opening salvo to appeal to regulators as the Activision deal starts to come into focus.

Paul Lennick, SVP of M&A and private equity at business sourcing firm ContinuServe, said he believes the deal is a huge play by Microsoft to get in on the metaverse at the ground level.

“Microsoft wants content for the metaverse,” he said. “And gaming is one of the ‘stickiest’ things you can have.”

Lennick said there may be some concern that Microsoft will gain more influence over this new online medium and block out smaller competitors, concerns that could prompt the SEC and FTC to scrutinize the deal. Agencies and governments may try to limit the transaction, or require Microsoft divest something like its digital mobile platform.

One thing is certain, a lot of eyes will be on the deal—especially considering the open FTC commissioner seat likely will be filled in the coming months by a Democratic nominee and provide a possible tie-breaking fifth vote.

And what is decided about that deal could have some impacts well beyond just Microsoft and Activision.

Illustration: Dom Guzman


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