New merger review rules impose additional scrutiny on US private equity

In recent years, the private equity industry has experienced significant growth and has become a major player in the global economy. Private equity firms, which pool together funds from institutional investors to acquire and manage companies, have been involved in numerous high-profile mergers and acquisitions (M&A) transactions. However, the landscape for these deals is changing as new merger review rules impose additional scrutiny on US private equity.

The United States has long had a robust system for reviewing mergers and acquisitions to ensure they do not harm competition or consumers. The Federal Trade Commission (FTC) and the Department of Justice (DOJ) are the two primary agencies responsible for enforcing antitrust laws and reviewing M&A transactions. These agencies carefully examine deals to determine if they would result in a substantial lessening of competition in any relevant market.

Historically, private equity firms have faced less scrutiny compared to traditional corporations when it comes to merger reviews. This is because private equity deals often involve the acquisition of a controlling interest in a company rather than a full acquisition. As a result, these transactions were often considered as investments rather than mergers subject to antitrust review.

However, recent changes in the regulatory landscape have brought private equity deals under increased scrutiny. The FTC and DOJ have recognized that private equity firms can have a significant impact on competition and consumers, especially when they acquire multiple companies in the same industry. As a result, they have implemented new rules to ensure that private equity deals receive the same level of scrutiny as other mergers.

One key change is the lowering of the threshold for reporting transactions under the Hart-Scott-Rodino (HSR) Act. The HSR Act requires parties to certain mergers and acquisitions to notify the FTC and DOJ and provide information about the transaction before it can be completed. Previously, private equity deals were often exempt from this reporting requirement due to their structure. However, the new rules have eliminated this exemption, meaning that more private equity deals will now be subject to HSR reporting.

Additionally, the FTC and DOJ have increased their focus on potential anticompetitive effects resulting from common ownership. Common ownership occurs when a single investor, such as a private equity firm, holds significant stakes in multiple competing companies. This can lead to reduced competition as the investor may have an incentive to coordinate the behavior of these companies to their advantage. The agencies are now closely scrutinizing common ownership in industries where private equity firms are active, and they may require divestitures or other remedies to address potential antitrust concerns.

The new merger review rules also emphasize the importance of assessing the potential impact of a transaction on innovation. Private equity firms often acquire companies with the intention of improving their operations and profitability. However, these acquisitions can also result in reduced incentives for innovation if the focus shifts towards short-term financial gains. The FTC and DOJ are now paying closer attention to the potential effects on innovation when reviewing private equity deals.

Overall, the new merger review rules impose additional scrutiny on US private equity, bringing them in line with traditional corporations. Private equity firms must now navigate a more rigorous regulatory landscape, including increased reporting requirements and a focus on potential anticompetitive effects and innovation. While these changes may pose challenges for private equity firms, they ultimately aim to protect competition and consumers in an evolving marketplace.

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• Source: Plato Data Intelligence.