In a recent study, we examine whether firms structure their mergers and acquisitions (M&A) to avoid scrutiny from antitrust regulators as well as whether such deals reduce product market competition.
While M&A deals are often triggered to create value, they are scrutinized for antitrust violations in all of the world’s major economies. We find robust evidence of bunching in M&A transaction values just below the threshold required for submitting premerger notification filings for assessment of antitrust concerns by U.S. agencies. These “stealth acquisitions” entail contractual terms with lower deal premiums that facilitate avoidance of antitrust review, payoff functions that allow for more discretion in assigning deal values, and additional compensation for managers of target firms (e.g., via post-acquisition employment). We also find that these acquisitions are more likely to include mergers between direct competitors operating in the same industry, particularly those that operate in the same state and in highly concentrated industries. Finally, we find several patterns of evidence consistent with stealth acquisitions’ reducing product market competition, as the equity values of acquiring firms’ competitors increase following stealth acquisitions, and detailed micro-level product-pricing data reveal increased product prices following a stealth acquisition by rivals. Our results suggest that firms can successfully manipulate M&A deals to avoid antitrust scrutiny, thereby leading to anticompetitive behavior.
A core regulatory objective of the Department of Justice (DOJ) and Federal Trade Commission (FTC) is to conduct extensive reviews to evaluate the potential impact of mergers on firms’ competitive practices. Concerns about the increasing incidence of anticompetitive deals motivated the adoption of the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976, which established a premerger notification program that requires parties to notify the DOJ and FTC of their intent to merge. However, since these regulatory agencies operate with limited resources, the FTC specifies a dollar-based threshold above which merging firms are required to notify authorities. Every year the FTC announces an updated — and increasingly large — deal-size threshold, resulting in a significant increase in the threshold over time. Consequently, in recent years, the vast majority of M&A deals do not undergo antitrust review (e.g., Wollmann, 2019).
Reflecting concerns that acquisitions that avoid regulatory review can be used to facilitate anticompetitive behavior, recent developments highlight regulatory concerns on the anticompetitive issues that can result from non-reportable M&A transactions. In early 2020, the FTC launched antitrust investigations into all non-reportable acquisitions made since 2010 by Amazon, Apple, Facebook, Google, and Microsoft due to concerns that many of these firms’ non-reportable acquisitions had anticompetitive consequences. Subsequent statements released by FTC commissioners Rohit Chopra and Christine Wilson questioned the efficacy of the HSR Act’s premerger notification process and called for similar inspections across more industries to better understand the competitive effects of non-reportable mergers. Against this institutional backdrop, we study the extent to which firms engage in stealth acquisitions and examine the effects of stealth acquisitions on outcomes that are symptomatic of anticompetitive behavior.
We use data on all M&A transactions for U.S. firms between 2001 and 2019 to show that an abnormal number of deals are structured so that the deal value falls just below the FTC’s premerger notification threshold. We also find that this abnormality shifts each year in line with the annual change in the threshold. Moreover, we do not find any evidence of stealth acquisitions when we focus on announced deals in the hotel and real estate industries, which are always exempt from the FTC’s premerger notification program, or when we evaluate acquisitions relative to the following year’s notification threshold. Collectively, these findings suggest that many firms manage the size of their deals to avoid antitrust review.
To better understand the characteristics of these stealth acquisitions, we examine the types of firms, contractual provisions, and economic incentives associated with these acquisitions. Our analyses show that stealth acquisitions are more likely to involve takeovers of private firms by public firms, aligning with recent concerns of the FTC on non-reportable deals undertaken by large public firms. In-depth evaluations indicate that the contracts that govern these stealth acquisitions are more likely to incorporate earnouts, which can allow managers of acquiring firms to use greater discretion in assigning deal values that fall just below the premerger notification threshold. We also find that acquirers in stealth acquisitions are more likely to extend the directors and officers insurance coverage of private target firms and agree to higher levels of deductible thresholds before demanding post-acquisition breach-of-terms damages from the target, which can allow acquirers to negotiate lower deal values below the notification threshold to offset the additional costs stemming from these contracting features. Consistent with this viewpoint, we find that public acquirers pay lower deal premiums for private targets in stealth acquisitions. We offer some insights into why managers of target firms are willing to accept lower deal values in stealth acquisitions by showing that such deals are more likely to involve less-risky payoffs that involve all cash rather than equity payments and employ target CEOs following the acquisition, resulting in an increased likelihood of earnouts paying off.
The next phase of our study considers industry and market conditions that can give firms incentives to participate in stealth acquisitions. Consistent with the heightened concerns expressed by regulators on the anticompetitive effects (e.g., price gouging and poor product quality) of intra-industry mergers in confined locations and segments, we find that deals between acquirers and targets in the same industry are more likely to be structured as stealth acquisitions, particularly when they involve firms in the same state and in concentrated industries.
Finally, we assess stock price and product-price changes in the acquiring firms’ product markets that can be symptomatic of reduced competition. Our first analysis evaluates the stock market returns of industry rivals around stealth acquisitions, because mergers that reduce overall competition and allow for market-wide increase in the price of similar products should also benefit industry rivals. Consistent with the anticompetitive nature of stealth acquisitions, we find that their public announcements are associated with larger abnormal stock returns for rival firms when such acquisitions involve mergers between direct competitors operating in the same industry. Our second analysis seeks to undertake a more direct test by looking for changes in the product prices of the common products of rivals following the completion of a stealth acquisition in the retail industry. Commensurate with the collusive nature of stealth acquisitions, we find a pronounced spike in average monthly prices for those products relative to other products following our stealth acquisition of interest.
Overall, our findings provide initial insights into how acquirers and targets can manipulate the size of their deals to avoid premerger review and into the specific contractual provisions that can be used to derive and negotiate deal values just below the threshold for premerger review. Further, our findings illustrate how firms that organize their economic activity to avoid antitrust scrutiny exploit regulators’ resource constraints at the expense of consumers. Given regulators’ practice of evidence-based policymaking, our results support any future regulatory efforts to supplement the current objective approach of reviewing deals for antitrust violations with a more subjective and contextual approach to allocate scarce resources to monitor the antitrust implications of corporate deals below the notification threshold. Our findings should be of interest to antitrust authorities such as the FTC that have recently expressed strong concerns on the efficacy of premerger review guidelines. We believe that our findings can extend to M&A activity around the other premerger filing thresholds and regulations implemented by antitrust authorities, and thus our findings likely underestimate the frequency and impact of M&A antitrust avoidance.
This post comes to use from professors John D. Kepler at Stanford Graduate School of Business, Vic Naiker at the University of Melbourne, and Christopher R. Stewart at the University of Chicago’s Booth School of Business. It is based on their recent paper, “Stealth Acquisitions and Product Market Competition,” available here.