Private equity firms have sought a greater number of buy and build opportunities in recent years, amid high valuations and competition for primary deals. In our view such deals carry higher antitrust risks and warrant careful consideration of antitrust issues by both private equity teams and portfolio company management. We are seeing increased scrutiny by some antitrust authorities around the globe and M&A strategy should be considered from an antitrust perspective at the time of the initial acquisition.
Getting the Approvals — Buy and Build Deals Are More Complex From an Antitrust Perspective
As financial investors, private equity firms may be accustomed to streamlined (and often fast-track) antitrust approval processes, since many private equity acquisitions do not raise significant competitive issues. Add-on acquisitions are necessarily implying that the buyer and target are active in the same or similar sector. Such combinations can raise competition issues and may attract regulatory attention, which must be addressed by buyout firms working closely with portfolio company management to minimise antitrust related delays and complications. The heightened antitrust risk posed by add-on deals is compounded by the recent dramatic expansion of merger control regimes, with new and sometimes unpredictable international regimes coming online, particularly in Asia and Africa. As new regulators get up to speed with merger rules, deal teams should factor in longer review periods and heavier information and formality requirements. Private equity firms should be prepared to provide firm and investment information, even where a separate portfolio company is making the acquisition. Identifying regulatory filing requirements and guiding portfolio companies will smooth merger control clearance process. Latham & Watkins’ app details merger control thresholds and timelines in over 80 jurisdictions and will serve as a useful reference tool for effective transaction planning.
Waiting for the Approvals — “Gun- Jumping” Issues Increasingly Relevant
Where antitrust approval is holding up closing, portfolio company management may be tempted to get a head start on post-closing integration. Integration planning is a necessary step, but most merger regimes prohibit any form of actual integration between the acquirer and target businesses before approval is issued. Such pre-approval integration can bring significant fines and is particularly risky where the buyer and target are active in the same industry (as is the case for add-on deals). Deal teams should note that companies do not need to fully combine to “jump the gun” – sharing confidential and competitively sensitive information (an increased risk where the buyer and target are competitors), engaging in joint selling and allowing the buyer to take ordinary-course of business decisions for the target can also amount to gun-jumping. The French competition authority recently imposed a fine of €80 million on an acquirer for gun-jumping in the pre-merger approval period. Issuing robust pre-integration guidelines to the buyer and target business teams (i.e. at portfolio company level) and mandating “clean teams” during the due diligence process (where some exchange of sensitive information could be required) will help mitigate gun-jumping risks.
Further, deal teams should approach structuring acquisitions in a way which allows for a staged acquisition process with caution, seeking advice based on the facts of each deal. Structuring may not provide a solution to merger control related delays and has been the subject of recent antitrust enforcement action in China, with the Chinese antitrust regulator issuing fines.
In our view, private equity owners and portfolio company management will need to be increasingly alert to antitrust issues and should carefully review buy and build deals for a range of antitrust risks.