September 28, 2023

More on Antitrust and Private Equity: FTC Takes Issue with “Roll-up” Strategy

Late last week, the FTC filed a lawsuit against a PE firm and one of its portfolio companies challenging a serial acquisition strategy. In the complaint, the FTC alleges that the portfolio company entered into a series of acquisitions that were part of a “scheme to consolidate anesthesia practices in Texas” and entered into price-setting agreements with independent anesthesia providers that shared key hospitals and a market allocation agreement to avoid competing with a potential entrant.  While the PE firm defendant has decreased its ownership in the portfolio company to what is now less than 25%, the FTC alleges that it “actively directed” the portfolio company’s consolidation strategy.

This Freshfields blog highlights that this is the latest development in the FTC and DOJ’s continued push to use various tools to target financial sponsors — calling out the expanded premerger notification requirements, proposed merger guidelines, focus on unfair methods of competition, and enforcement of interlocking directorates, which we’ve blogged about previously, and notes that the complaint “could help chart a path for future challenges to roll-up strategies.” The blog gives the following key takeaways for PE firms:

Expect continued scrutiny: The antitrust agencies’ focus on private equity and financial sponsors will continue. Chair Khan has vowed that “[t]he FTC will continue to scrutinize and challenge serial acquisitions, roll-ups, and other stealth consolidation schemes that unlawfully undermine fair competition and harm the American public.”

Consider that minority interests may garner attention: The FTC is expected to assess even minority investments from PE firms and financial investors and take an expansive view of control—including evaluating how board or advisor position influence strategic and commercial decision making.

Anticipate potential enforcement outside of the merger clearance process: Firms should expect that agencies will take an interest in consummated transactions alongside their review of individual transactions reportable under the HSR Act.

Understand that roll-up strategies will be of particular interest: In particular, firms should be aware that agencies are following through on their agenda with respect to “roll-ups” – taking a critical view toward series of acquisitions concentrated within a single sector or related sectors over a more expansive multi-year timeline.

Be aware of internal documents: Firms are reminded that internal documents are typically a key element in any enforcement challenge and should therefore consider those in evaluating antitrust risk.

– Meredith Ervine