DealLawyers.com Blog

This recent Fenwick alert looks at public statements and a myriad of actions by the FTC and DOJ targeting killer acquisitions, nascent competitors and potential competition. The alert starts with this background:

A nascent competitor is a firm that has the potential to become a serious threat to an established incumbent. A killer acquisition occurs when the incumbent, often viewed as having a dominant position in the relevant market (and thus a unique incentive to protect its position), acquires the nascent competitor. Similar concerns may exist, for example, if the acquirer is an established and well-resourced company poised to enter or expand into the relevant market who instead opts to buy what is usually a smaller incumbent. To the extent such transactions are viewed as eliminating significant likely future competition between the two companies, they may be characterized as “reverse killer acquisitions.”

Antitrust authorities may identify two principal harms that can result from acquisitions involving nascent competition: (i) loss of innovation, and (ii) loss of actual or perceived potential competition between the acquirer and the target. The harm posed by loss of innovation often applies where market evolution is unpredictable, but where innovation is found to play a key role in that evolution, and the contemplated transaction is determined to have a likelihood of eliminating incentives to compete via innovation.

Under the “potential competition” doctrine regulators must analyze the potential for meaningful future competition between the parties. This type of harm is most often identified in instances where there is “actual” potential competition, which entails a significant probability of future competition because that competition is imminent or is reasonably expected to occur (typically determined by examining the company’s development pipeline, business plans, incentives, resources, roles in adjacent markets, etc.). Potential competition also includes instances of “perceived” potential competition, where the incumbent takes the threat of entry by the buyer seriously enough that it influences the incumbent’s current competitive behavior (e.g., keeping prices low in order to deter entry).

The agencies have been working to expand antitrust enforcement and the application of this doctrine of potential competition through prolonged investigations and threatened or actual litigation and included an analytical framework on potential competition in the 2023 Merger Guidelines. For buyers eyeing a target that could be a nascent competitor — especially those in tech and pharma — the alert has some key takeaways, excerpted below. The alert itself has further detailed suggestions.

First, the antitrust agencies are by and large only “winning” via abandonments and deal deterrence. Existing antitrust law remains intact, so parties with lawful deals and an appetite to hold their ground can still get deals done.

Second, agency leadership has a clear agenda, which includes inhibiting Big Tech and Big Pharma companies from undertaking almost any merger. Companies should work with antitrust counsel early in the deal process to prepare to engage with the agencies in the context of this agenda and defend the deal with the support of established judicial precedent and economic evidence.

Finally, although the agencies acted to challenge these three deals with little documentary support, the existence of documents suggesting any kind of “killer acquisition” motive behind a deal, no matter who creates them, would all but guarantee at least an extended investigation by the antitrust agencies. As such, implementation of thoughtful document creation protocols is vital to the deal process.

– Meredith Ervine