PE firms are facing a more challenging merger enforcement climate in the US, EU and UK, particularly in the technology, life sciences and defence/security sectors where antitrust authorities may sense that certain past mergers have slipped through the cracks. Rollups are also increasingly hitting roadblocks, particularly in sectors such as veterinary, dental and medical services.
Jonathan Kanter, the top antitrust enforcer at the US Department of Justice, said PE is an “extremely important part of our enforcement programme” and closer scrutiny was coming. Sarah Cardell, the Chief Executive of the UK’s Competition and Markets Authority (“CMA”), has also raised concerns about “quiet dealmaking” by PE firms. The CMA’s mergers intelligence unit is actively seeking out this type of deal and is more likely to call them in for review. This follows the authority’s effective prohibition of a series of acquisitions by a PE backed company in the veterinary care sector.
In practical terms, this means there is increased deal risk, with the possibility of PE transactions being blocked, or cleared only subject to significant divestments. It also increases compliance risk, with large fines being imposed for rule breaches.
There are actions all PE firms can take to minimise these risks:
- Think about antitrust early: what companies do you have in your portfolio that overlap with a target? Remember an authority will look at management not fund structure. Plan ahead and leave enough time to have deals cleared. Critically, your transaction documentation needs to be aligned with your risk appetite – e.g., on the risk of prohibition or divestments.
- Structure and operate JV/consortia arrangements carefully: first, they may necessitate additional merger control filings, based on the turnover of the parents alone, irrespective of the size of the target. Second, keep a record of the reasons for forming such arrangements in case it is ever alleged that you should instead be competing with one another.
- Mitigate general antitrust risk pre-completion: you do not want to be found to have ‘jumped the gun’ by implementing a transaction before receiving mandatory clearances. Neither do you want to be found to have shared competitively sensitive information (i.e., anticompetitive conduct) during due diligence and/or integration planning – instead use NDAs and, where appropriate, Clean Teams.
- Prepare for a clean exit: in Europe PE managers can be, and have been, held liable for anticompetitive behaviour of their portfolio companies, even many years after disposing of the business. Post-acquisition, undertake a risk assessment and make sure there is an operational and effective competition compliance framework in place.
David Harrison, Mark Hills, Tom Panoff, Rachel Lamorte and Jean-Maxime Blutel of Mayer Brown’s Antitrust & Competition team recently wrote about this in greater detail in an article published in The Drawdown of 28 March 2023.