(Un)Intended Consequences of Regulatory Enforcement in M&A

A growing literature highlights the important effect of economic and political policies on mergers and acquisitions (M&A). M&A often involves major issues of corporate investment and resource allocation, and so inefficient interference in the M&A market can have significant and long-lasting economic impact. In a new paper, we investigate whether antitrust enforcement by the Department of Justice (DOJ) or the Federal Trade Commission (FTC) has the substantive and lasting effect of deterring U.S. mergers and acquisitions.

The DOJ and the FTC follow strict procedures for regulatory interventions, as described in the Horizontal Merger Guidelines[1], updated in 2010. These interventions may have substantial direct and indirect effects on future activity in the M&A market. Specifically, current antitrust regulation in a particular industry may directly discourage other potential acquirers in that industry from announcing deals for fear that they too will be subjected to regulatory scrutiny. Furthermore, merging parties have private information inaccessible to regulators, and seemingly substantial political bias in the regulatory process can contribute to unpredictable outcomes and enforcement uncertainty.

For example, regulators discouraged the Sprint/T-Mobile merger under the Obama administration in 2014 but then allowed it under the Trump administration just four years later. This uncertainty may indirectly discourage future deals as industry participants choose to defer, delay, or even terminate them until this policy uncertainty lifts. We refer to these potential effects of regulatory enforcement on future M&A activity as deterrence effects. Only a few, in some ways contradictory, papers directly test whether these effects exist and are significant (e.g., Eckbo (1992) and Clougherty and Seldeslachts (2013)).

To ascertain whether a deterrence effect exists in the U.S. M&A market, we follow the conditional probability approach used in Clougherty and Seldeslachts (2013) to study the probability that firms will be subject to future acquisition attempts in an “industry” currently subject to an antitrust-related enforcement action. The definition of industry plays a critical role here, and we build on the text-based similarity scores from Hoberg and Phillips (2010) to define industry clusters. Our main tests use the 10 nearest-neighbors cluster based on the target firm to define the “industry” that is potentially affected.

These clusters capture the 10 firms most similar to a proposed target based on the firm’s own description of its product market. Neighbor firms in the product market are likely to be the most relevant competitors for antitrust regulators because, by definition, they produce products similar to those of, and compete for the same customers as, the target firm (which is the subject of a current regulatory enforcement action). Another benefit of this H&P product market-based approach over traditional industry classifications (such as SIC or NAICS codes) is that similarity scores are recomputed each year, tracking the transformation of firms and industries, while SIC and NAICS codes are rarely updated at the firm level.

Our results are based on a sample of 6,285 M&A deals. In this sample, we observe substantially fewer future deals for firms in industry (i.e., 10 nearest-neighbors) clusters that have recently been subject to antitrust-related enforcement around mergers and acquisitions. Furthermore, the relatively few such deals that we do observe following regulatory enforcement in an industry are, on average, significantly smaller (measured using deal value) than future deals that we observe in industries not subject to antitrust enforcement, consistent with a desire to avoid DOJ or FTC investigations.

These results highlight the statistically and economically significant deterrence effect of DOJ or FTC enforcement. Across all enforcement outcomes, the economic magnitude of this deterrence effect is large: The unconditional probability of observing a future acquisition attempt in a cluster that has experienced an enforcement action is reduced by close to 21 percent relative to clusters that have not, and the average future deal value is cut almost in half.

Moreover, focusing on the subset of DOJ or FTC enforcement actions that involved asking a  Federal court to block the offending transaction, the future deterrence effect is even stronger. Notably, this deterrence effect is persistent, remaining significant over the three years following a DOJ or FTC intervention in an industry cluster. These results are highly robust.  However, when we attempt to replicate our differences-in-differences tests using three-digit SIC industry classification codes to identify “industry” clusters, most of our empirical results disappear. One possible reason, for the conflicting results in tests of deterrence effects in the existing literature is therefore the intrinsic limitations of defining industries using (largely static) SIC codes.

Having established a DOJ/FTC deterrence effect, we next turn to examining a channel that potentially exacerbates this effect: the length of the enforcement action that prompts the deterrence effect. There is much evidence in the M&A literature that acquirers and targets in M&A deals favor completion speed when structuring their deals. From this literature it is clear that the time between deal announcement and closing or withdrawal is important, particularly to acquirers, because delays open the door to rival bidders and create an opportunity for targets to release new information that may force the acquirer to revise its initial bid. Lengthy DOJ and FTC deal procedures can create significant enforcement uncertainty, deterring future deals in an industry. We use, therefore, the duration of DOJ or FTC enforcement procedures as a proxy for the amount of regulatory uncertainty created by a given intervention, and we hand-collect the necessary data about the length of an enforcement action from the DOJ and FTC annual reports to the Congress.

Our results are unambiguous: Longer DOJ or FTC investigations are associated with significantly stronger deterrence. Enforcement uncertainty appears, therefore, to be a significant factor driving deterrence, as longer enforcement actions likely create significantly more uncertainty about the future course of regulatory actions. Finally, we investigate whether regulatory enforcement in the target’s 10 nearest-neighbor industry cluster affects pending transactions (i.e., transactions announced but not yet completed). More specifically, we study whether the time to resolution (the time to completion or withdrawal) of these pending transactions is affected by DOJ or FTC enforcement actions (in other deals in the same industry cluster). We find that this is the case: The time to resolution for pending transactions is significantly longer following regulatory inventions in the cluster. This result is further consistent with enforcement uncertainty affecting the behavior of the merging parties.

The existing literature examines the relation between various forms of uncertainty and M&A activity. Confirming that regulatory enforcement uncertainty imposes a significant deterrence effect on the M&A market in recent periods extends the results reported in Clougherty and Seldeslachts (2013), the paper most similar to ours (which is based on data mostly from the 1990s). It is certainly possible that changes in the U.S. economy, especially increases in industry concentration (Grullon et al., 2019), along with two substantial revisions to the DOJ and FTC Horizontal Merger Guidelines (1997 and 2010), may have altered the M&A regulatory-supervision landscape and exacerbated deterrence effects. Analyzing whether the deterrence effect is still observable in the last two decades in the M&A market was, in our opinion, necessary.

In addition, for the last 40 years, the literature has struggled to provide economic justification for DOJ or FTC interference in the M&A market. Repetitive direct tests of the market power hypothesis have failed to uncover conclusive empirical evidence (Eckbo, 1983; Stillman, 1983; Eckbo, 1985; Eckbo and Wier, 1985; Shahrur, 2003; Fee and Thomas, 2004). Establishing a robust deterrence effect (as we do in this paper) amounts to testing whether the DOJ or FTC are credible actors in the eyes of M&A market participants, and our results clearly confirm that this is the case.


[1] Available at https://www.ftc.gov/enforcement/merger-review


Clougherty, J., Seldeslachts, J., 2013, The Deterrence Effects of US Merger Policy Instruments, Journal of Law, Economics & Organization, 29(5), 1114-1144

Eckbo, Espen B., 1983, Horizontal mergers, collusion and stockholder wealth, Journal of Financial Economics, 11(1-4), 241-273

Eckbo, Espen B., 1985, Mergers and the market concentration doctrine: Evidence from the capital market, Journal of Business, 58(3), 325-349

Eckbo, Espen B., 1992, Mergers and the value of antitrust deterrence, Journal of Finance, 47(3), 1005-1029

Eckbo, Espen B., Wier, Peggy, 1985, Antimerger under the Hart-Scott-Rodino: a reexamination of the market power hypothesis, Journal of Law and Economics, 28(1), 119-149

Fee, Edward C., Thomas, Shawn, 2004, Sources of gains in horizontal mergers: evidence from customers, supplier, and rival firms, Journal of Financial Economics, 74(3), 423-460

Grullon, Gustavo, Larkin, Yelena, Michaely, Roni, 2019, Are U.S. industries becoming more concentrated?, Review of Finance 23(4), 697-743

Hoberg, Gérard, Phillips, Gordon, 2010, Product market synergies and competition in mergers and acquisitions: A text-based analysis. Review of Financial Studies 23, 3773–3811

Shahrur, Husayn, 2005, Industry structure and horizontal takeovers: analysis on wealth effects on rivals, suppliers, and corporate customers, Journal of Financial Economics, 76(1), 61-98

Stillman, Robert, 1983, Examining antitrust policy towards horizontal mergers, Journal of Financial Economics, 11(1-4), 225-240

This post comes to us from professors Eric de Bodt at the NHH Norwegian School of Economics, Jean-Gabriel Cousin at the Université de Lille, Micah S. Officer at Loyola Marymount University, and Richard Roll at the California Institute of Technology. It is based on their recent paper, “The (Un)intended Consequences of M&A Regulatory Enforcements,” available here.