Mergers and Enforcement in 2021: Hart-Scott-Rodino

The first step in US antitrust enforcement is the requirement, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, that all mergers above a certain size–now $92 million–must be reported to the federal government before they occur. This gives the authorities at the Federal Trade Commission and the Antitrust Division at the US Department of Justice a chance to challenge mergers before they occur. How is that working out? The Hart-Scott-Rodino law also requires an annual report on the state of antitrust in the previous year, and the report for fiscal 2021 has just been published.

Here’s the headline graph showing the number of mergers reported to the federal government for each year in the last decade.

There was an enormous merger boom in 2021. But by the middle of 2022, when the stock market was flattening an dipping and interest rates were rising, merger started slowing down.

In a market-oriented economy, it makes some sense that a lot of mergers should be allowed to proceed. Of course, private firms will sometimes make mistakes in merger decisions, just as they sometimes do in investment decisions, new product decisions, hiring and firing, and so on. But the firms and their managers are the ones closest to the ground with detailed information. There’s no reason to think that the government will be in a better position to figure out if a certain deal will improve a company’s efficiency or productivity. But if the merger threatens to injure consumers by limiting competition, antitrust authorities may have have a role to play.

So out of the 3,520 mergers reported in 2021, how many would you guess were challenged by the antitrust authorities? The Federal Trade Commission challenged 18: five settled by consent orders (that is, the companies proceeded after adjusting the deal); seven in which the transaction was abandoned or restructured; and six that led to litigation. The Antitrust Division at the US Department of Justice challenged another 14 mergers: two led to lawsuits; nine to consent degrees; and three in which the transaction was restructured without a formal consent decree.

Overall, less than 1% of the mergers were challenged, during a giant boom year for mergers Even for someone like me, who believes that companies should often be allowed to proceed and to make mistakes, it’s not a big number.

Some of the mergers that were blocked seem like relatively straightforward cases. For example, Aon plc was blocked from acquiring Willis Towers Watson plc., which would have combined two of the three largest insurance brokers in the world. CoStar was blocked from acquiring RentPath, which are two of the major websites that match renters with apartments. Some hospitals in Memphis were blocked from merging.

But some of the more interesting cases in 2021 were situations in which, rather than two well-established firms merging, the case involved the antitrust authorities seeking to improve possibilities for future competition. For example Visa had proposed buying a company called Plaid. The antitrust authorities argued that Visa is effectively a monopolist in online debit card services, and while Plaid is currently a small firm, it has some possibility for becoming a future competitor. In another case:

Illumina’s $7.1 billion proposed acquisition of Grail, a maker of non-invasive, early detection liquid biopsy that screens for multiple types of cancer using DNA sequencing. Illumina was the only provider of DNA sequencing that is a viable option for these multi-cancer early detection (MCED) tests. The complaint alleged that the proposed merger would likely harm innovation in the market for MCED tests.

These antitrust efforts which turn on possibilities of future competition, or possibilities of harms to future innovative efforts (after all, perhaps the combined company would have resources to make a stronger innovative effort?) are a gray area in the law, but an area that the current antitrust authorities seem eager to pursue.

In the last week, the Federal Trade Commission lost a case to block Facebook from buying a company called Within, which is a virtual reality fitness startup. The argument from the FTC was that this merger could inhibit future competition in the market for virtual reality fitness apps. I have have no strong opinion on the legalities of the ruling. I’ve read that this case was viewed as a borderline call, even within the FTC. But I will note that if, out of thousands of mergers per year, the antitrust authorities choose to focus their limited efforts and resources on on competition within the market for virtual reality fitness apps, then they seem to be implicitly saying that anti-competitive concerns for the US economy as a whole are not especially severe.