Scope of the FTC’s study on non-HSR reported acquisitions by selected technology companies
In February 2020 the FTC voted 5-0 to issue Special Orders to five large technology companies (the Companies)1 requiring them to “provide information and documents on the terms, scope, structure, and purpose” of prior acquisitions consummated between 1 January 2010 and 31 December 2019 that were not reported to the antitrust agencies under the [HSR Act].” The Special Orders demanded information similar to that required by the HSR notification and report form itself. The Special Orders were issued pursuant to the Commission’s authority under Section 6(b) of the FTC Act, which allows the FTC to conduct “wide-ranging studies” that are not directly related to a law enforcement purpose. In response to the Special Orders, the Companies reported a total of 819 non-HSR reportable transactions over the relevant time period (2010-2019). The 616 transactions valued at or above US$1 million were the focus of the Report.
The Report “quantifies and categorizes the pace, the size distribution of transactions in dollar terms, the types of transactions, and the number of non-HSR reportable transactions collectively by the five respondents,” and presents its findings on an anonymized basis to protect the confidentiality of the Companies. The Report highlights the following findings from the FTC’s review of the 616 non-HSR reported transactions valued at or above US$1 million:
- The number of such transactions per calendar year was highest in 2014 and relatively higher from 2015-2019 than in 2010-2013.
- The highest number of transactions fell within the following technology categories: mobility devices and device-based software and content; front-end application software2 ; and internet destination and internet-enabled services.
- The dollar value of the transactions generally trended up during the 2010 to 2019 time period.
- Fifteen percent of the transactions exceeded the Hart-Scott Rodino (HSR) Act dollar threshold.3
- Asset and Control transactions (including Voting Security control and Non-Corporate Interest Control transactions) were the most common type of transaction, with higher-value transactions more likely to be Control acquisitions.
- Less than two-thirds of the transactions involved the acquisition of domestic assets and firms.
- With respect to founders and key employees, a majority of the transactions utilized deferred or contingent compensation and/or included non-compete clauses.
Commissioners provide commentary on Report’s findings at open meeting
At the FTC’s open meeting on 15 September, the Commissioners and Chair Lina Khan provided their thoughts on what they consider to be the most significant takeaways from the findings outlined in the Report.
International deals: Chair Khan pointed out that the data shows that less than two-thirds of the non-reported transactions reviewed by the agency involved the acquisition of domestic assets or firms, which she said underscores “the importance of close collaboration and cooperation with [the FTC’s] international counterparts.” She noted the “significant expertise” that a number of international antitrust enforcement agencies have with respect to digital markets, and urged the FTC to “learn from partners who have excelled at institutionalizing a broader range of tools and skillsets . . .”
HSR “loopholes”: Chair Khan said that the agency’s findings demonstrate how “digital platforms can buy their way out of competing” by acquiring competitors through unreported transactions that are shielded from the scrutiny of the antitrust agencies.4 She stated that various “loopholes” allow deals that should fall within the FTC’s statutory purview to “fly under the radar.” In particular, she noted that the antitrust agencies must “guard against unduly permissive interpretations [of the HSR Act] that handicap” the agency’s ability to adequately review transactions and pointed specifically to the FTC’s recent determination that “the full or partial retirement of debt should be included in calculating a target’s acquisition price in any instance where selling shareholder(s) benefit from the retirement of that debt.”5 Chair Khan also suggested that “broader reforms to HSR may be overdue,” stating that the agency must continue to work to close “loopholes” in the HSR statute itself. Commissioner Chopra agreed that there is a “growing case to be made that the [HSR Act] should be amended to ensure that the very largest firms in the economy report more of their M&A activity to the antitrust agencies.” But more immediately, Commissioner Chopra highlighted the need for the FTC to combat “avoidance devices” used by parties to “disguise a transaction so that [it] doesn’t trigger the HSR thresholds.” For Commissioner Chopra, a dominant firm structuring a merger agreement so that the target firm pays off investors with a special dividend, “leaving the buyer free to take over the target at a price below the HSR reporting thresholds,” is a “clear” example of such an avoidance device.
Non-competes: Commissioner Chopra and Chair Khan highlighted the Report’s findings that many of the non-reportable transactions the FTC reviewed included employment provisions. Chair Khan noted that non-compete agreements played a role in 76 percent of the acquisitions analyzed by the FTC in its study and stressed the need for the Commission to “consider the use and misuse of non-compete clauses across the economy,” specifically with respect to merger agreements and how “firms in digital markets may be using acquisitions to lock-up key assets along with talent . . .” Commissioner Chopra pointed to 12 transactions that he said would have exceeded the HSR Act dollar threshold but for the firms structuring the transactions to include deferred or contingent compensation and the acquisition of debt or liabilities by the acquirer. He referred to this as a merger strategy known as “acquihiring”—providing a payout to a startup and its employees in exchange for the target’s assets and key employees staying on to work at the acquiring firm. He views such “acquihiring” as an avoidance strategy designed to allow firms to evade reporting requirements by making the takeover appear like an employment agreement rather than an acquisition.
Additional studies: Republican Commissioners Christine Wilson and Noah Phillips praised the Report for shedding light on the competitive impact of the unreported transactions that were reviewed. Commissioner Phillips cautioned, however, that the Report does not take a view on the competitive effects of particular transactions. He also noted that the study does not shed light on whether the trends reported are representative of the tech industry as a whole or other industries more broadly. Commissioner Wilson called for the FTC to conduct similar 6(b) studies in other industries and reiterated her call for the agency to analyze non-reportable deals in the healthcare industry.
The FTC’s bipartisan support for conducting the study of non-HSR reported acquisitions by Big Tech firms and publishing its findings demonstrates the FTC’s continued commitment to scrutiny of the tech sector. While it remains to be seen how the agency’s merger review process may evolve in response to the findings outlined in the Report, there appears to be broad consensus among the Commissioners that employing the FTC’s 6(b) authority is a productive use of the agency’s time and resources. Accordingly, we are likely to see the Commission green-light new 6(b) investigations in other industries.
Authored by Chuck Loughlin and Logan Breed.