This Wilson Sonsini memo highlights recent statements by senior DOJ & FTC officials that suggest that antitrust regulators are increasing their scrutiny of the private equity industry. In particular, director interlocks, roll-ups and issues surrounding private equity funds as divestiture buyers are getting a lot of attention. Here’s an excerpt on what’s caught the regulators attention about divestitures to PE buyers:
Private equity firms are often ideal buyers of assets in the context of agency-mandated merger divestitures. However, AAG Kanter recently stated that the DOJ would pay closer attention to private equity firms as divesture buyers, reasoning that “[v]ery often settlement divestitures [involve] private equity firms [often] motivated by either reducing costs at a company, which will make it less competitive, or squeezing out value by concentrating [the] industry in a roll-up.”
He added that “[i]n many instances, divestitures that were supposed to address a competitive problem have ended up fueling additional competitive problems.” Further the agencies have already made private equity purchases of divestiture assets more difficult; in November 2021, the FTC announced a rule change that requires divestiture buyers to obtain prior agency approval for at least 10 years before reselling the acquired assets, making these acquisitions less practical for private equity firms.
The memo provides some key takeaways for private equity sponsors & their lawyers when confronting these issues. It recommends that private equity firms & portfolio companies develop a compliance program to assess antitrust risk associated with potential interlocks. The added scrutiny being applied to roll-ups is a reason to involve antitrust counsel early on when assessing whether a transaction or series of transactions would be problematic. Finally, PE divestiture buyers face an uphill battle, and must be able to demonstrate the ability to operate a competitive standalone business.
– John Jenkins