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The last week has brought calls from three lawmakers — Rep. Cicilline, Sen. Warren, and Rep. Ocasio-Cortez — to ban most mergers during the pandemic. Rep. Cicilline, who heads the House’s antitrust subcommittee, proposes a ban on all mergers except those of companies that are bankrupt or about to fail. Sen. Warren and Rep. Ocasio-Cortez would ban mergers by companies with more than $100 million in revenues, by banks with market caps over $100 million, by private equity firms and their ilk, and those involving patents that impact the crisis. Such a proposal would ban the vast majority of mergers, as 83 percent of mergers reported to the antitrust agencies last year were by acquirers with more than $100 million in revenue.
What is prompting these efforts? In the tweeted words of Rep. Ocasio-Cortez: “The LEAST we should do is halt big mergers during COVID to slow the consolidation of sectors.” The second part of her tweet is exactly right; we should stop the increasing consolidation of market power across the American economy. Concentration can thwart competition, resulting in higher prices, lower quality, and reduced innovation. But a “halt [to] big mergers” is not the right path to the noble goal of restoring competition throughout our economy. Indeed, it would do little good, and it could impose significant harm to a very fragile COVID-19 economy.
Outright bans on mergers, without regard to their potential effects on competition, is overbroad. Our antitrust merger laws are about protecting potential threats to competition. The relevant legal standard asks whether the effect of a merger “may be substantially to lessen competition.” We require companies to report all mergers over a certain size to the antitrust agencies, and then the antitrust agencies decide whether to investigate them or not. In FY 2018, the last year for which data is available, the government decided there was no competitive threat, and thus no need to even initiate an investigation for a whopping 78 percent of the reported deals. In other words, in the overwhelming majority of reported deals, the government had so little concern about competition that it decided not to even investigate. (For those who may worry that politics have overtaken such determinations of threats to competition: the percentage of deals for which the government deemed no investigation necessary has stayed consistent over time; for FY 2012, it was 82 percent.)
If the antitrust agencies were overwhelmed by the current crisis and unable to investigate transactions properly, that could hurt competition. But economic crises tend to drastically reduce corporate America’s merger activity. Indeed, merger filings are down 60% since the U.S. COVID-19 crisis began. DOJ and FTC lawyers, paralegals, and economists are working from home, like so many of us. There is little reason to believe that our antitrust agencies are currently unable to keep up with the business of analyzing proposed mergers.
Moreover, merger law already covers the sorts of scenarios that motivate the proposed merger bans. We would not want large companies to use the epidemic as cover to buy out potential competitors and kill that potential competition — and that is already illegal under existing merger law. Similarly, we would not want companies to further consolidate if COVID-19 leaves competitors vulnerable, allowing them to lessen competition or facilitate industry-wide collusion — both of which are already illegal under existing merger law. The agencies have, for decades, blocked such anticompetitive mergers in the courts, and we have not seen evidence that they are unable to do so now.
Despite the noble intentions of those proposing merger bans, their effects could actually be quite harmful. For example, Rep. Cicilline’s proposal would ban mergers unless the target is bankrupt or about to fail. That could mean that a business owner has to cut its workforce to the bone and forgo possible deals, until the last moment of business viability. It could mean more job losses and bankruptcies, especially given that large, potential acquirers may have better access to capital than small businesses during the COVID-19 recession.
In addition, it might block procompetitive mergers. COVID-19 has changed the core business competencies that make companies successful. Delivery abilities, remote payment functions, sanitation know-how, and domestic supply chains are all more important during these pandemic days than they were a few months ago. Companies with strong delivery capabilities could, for example, merge with companies that are struggling to get their products to customers, and that could be beneficial to consumers. It might even enable competition to dominant digital platforms with a headstart on delivery logistics. These sorts of transactions could be consumer-friendly and might accelerate our economic recovery. Banning them would be unfortunate.
In conclusion, absent evidence that the antitrust agencies are unable to keep up with their work of identifying and blocking potentially anticompetitive deals, a merger ban is unwise. If such evidence were to arise, or if court closures leave them unable to sue to block anticompetitive deals, then Congress should intervene to address those problems. And if judges consistently refuse to block deals that the government believes are anticompetitive, like the recent court decision in the government’s attempt to block the Sabre/Farelogix transaction*, then Congress should reexamine the legal standard and consider revising the law. But based on where things stand today, a preemptive pandemic merger ban would go too far.
*A federal judge ruled against DOJ in that merger case, which was about potential competition from a tech startup, earlier this year. However, the parties decided to abandon their merger on May 1, 2020, given the DOJ’s plans to appeal, the UK merger authority’s decision to block the deal, and the massive business uncertainty in the airline industry.