Contents

Introduction. 1

Balancing Potential Competition and Dynamic Efficiency. 1

The NPRM’s Prior Acquisitions Section. 2

Proposed Changes Are Unnecessary. 3

Recommendations 4

Conclusion. 4

Endnotes. 4

Introduction

On June 27, 2023, the Department of Justice’s Antitrust Division (DOJ) and the Federal Trade Commission (FTC) issued for public comment proposed amendments to the premerger notification rules (“NPRM”) that implement the Hart-Scott-Rodino Antitrust Improvements Act (“HSR”) and to the Premerger Notification and Report Form (the “Form”) and Instructions (“Instructions”).^[1] The Schumpeter Project on Competition Policy of the Information Technology and Innovation Foundation (“ITIF”) appreciates the opportunity to comment on the NPRM, and specifically with respect to expanding the scope of what is currently required under Item 8 of the Form to include certain proposed changes concerning the reporting of prior acquisitions.

Balancing Potential Competition and Dynamic Efficiency

Protecting potential competition is an important feature of sound antitrust enforcement.[2] Specifically, the antitrust laws do not give firms “free reign to squash nascent, albeit unproven, competitors at will, particularly in industries marked by rapid technological advance and frequent business model shifts.”[3] In the context of mergers and acquisitions, it is understood that this potential competition can be lessened in at least three ways.[4] As distinct from the case of a dominant or rapid entrant, a deal can reduce perceived potential competition, whereby a firm acquires a rival that it perceives to be a potential entrant.[5] Alternatively, some courts have found that a merger or acquisition may diminish actual potential competition by eliminating a rival that was a likely entrant, even if it was not perceived as such by the acquiring firm.[6]

Of course, mergers and acquisitions are also crucial toward promoting innovation. Indeed, as the economist Joseph Schumpeter recognized long ago, consolidation can incentivize dynamic competition, [7] such as by facilitating the ability for a firm to recoup the costs of innovation through increased concentration.[8] Moreover, not only can mergers and acquisitions enable economies of scope and scale that in turn bring to market innovative products that might have otherwise been unachievable through organic growth, but they can also stimulate innovation by providing entrepreneurs with an exit pathway that is generally less costly and more amendable to retaining control relative to an initial public offering.[9]

Over the past several years, concerns have been raised that the Agencies have overlooked harms to competition from patterns of mergers and acquisitions, especially in technology markets, and have sought data on non-reportable transactions from large technology firms like Alphabet, Amazon, Apple, Meta, and Microsoft.[10] Moreover, some studies have suggested that the Agencies’ record may be riddled with false negatives in the form of deals that harm potential competition in ways that outweigh procompetitive dynamic efficiency benefits.[11] Known colloquially as “killer acquisitions,” these transactions have emerged as an enforcement focus and involve large established companies purchasing nascent rivals in small and sometimes non-HSR reportable transactions as a way to remove a competitive threat in its infancy.[12]

The NPRM’s Prior Acquisitions Section

The NPRM contemplates a number of changes aimed at “creating a Prior Acquisitions section within the proposed Instructions that would include the information currently required by Item 8 of the Form, as well as additional information.”[13] As justification for these proposed changes, the NPRM notes not only both that many transactions fall below HSR thresholds and how a pattern of serial acquisitions can violate Clayton §7 and cause “widespread harm,” but that “[a] pattern of serial acquisitions may also affect competition among innovative firms by consolidating innovation efforts into the hands of market leaders or other firms attempting to control the pace or direction of innovation.”[14]

One of the changes proposed by the Agencies involves “extending the time frame to report on prior acquisitions from five to ten years” on the grounds that “the current five-year requirement for prior acquisitions is often insufficient to meaningfully identify patterns of serial acquisitions or a trend toward concentration or vertical integration.”[15] As they explain, “based on decades of experience, along with changes to the economy and the varied acquisition strategies of filing parties, the Commission believes 10 years would once again provide for a better framework for the Agencies to engage in a more detailed consideration of how numerous past acquisitions, including those in related sectors, affect the competitive landscape of the current transaction under review.”[16]

A second important change in the NPRM entails “eliminating the threshold for listing prior acquisitions, which currently limits reporting to only acquisitions of entities with annual net sales or total assets greater than $10 million in the year prior to the acquisition.”[17] For the Agencies, “[l]imiting the reporting requirement to acquisitions of entities with annual net sales or total assets over $10 million may not capture acquisitions of new entrants or other nascent competitors that, despite not yet having widespread commercial success, nonetheless are poised to affect competition among existing firms or disrupt market dynamics.”[18] In support, the NPRM cites the FTC’s technology acquisition study that “between 39.3% and 47.9% of transactions were for target entities that were less than five years old at the time of the acquisition.”[19]

Proposed Changes Are Unnecessary

The core rationale underlying the NPRM’s contemplated “Prior Acquisitions section” lacks sufficient justification. Simply put, from the standpoint of innovation, trends to concentration can still be procompetitive and drive dynamic efficiency.[20] Moreover, as ITIF has found, fears about underenforcement in the form of failing to protect potential competition in technology markets from “killer acquisitions” appear to be overstated.[21] In particular, concerns about killer acquisitions may be more well-founded in pharmaceutical markets characterized by drastic innovations, and where innovation milestones are easy to observe,[22] rather than in technology markets.[23] Additionally, the FTC’s recent loss in Meta/Within makes clear that, even for transactions the Agencies are aware of, cases alleging harm to potential competition face substantial burdens of proof to ensure that the antitrust laws are not used to chill procompetitive transactions based on speculative theories.[24]

The NPRM’s proposal to change the time frame to report on prior acquisitions from five to 10 years is also out of step with the better view of both case law and market realities. First, for purposes of analyzing a series of acquisitions, the Supreme Court in Brown Shoe Co. v. United States expressly referenced a five-year period.[25] Similarly, in United States v. Von’s Grocery, the Court looked at acquisitions that had occurred six years prior to the merger.[26] While it is true that on occasion the Court has appeared to countenance a longer time frame,[27] in the fast-moving technology markets in which the Agencies are concerned anticompetitive acquisition activity may be occurring, 10 years is often an eternity—an acquisition made 10 years preceding the instant transaction before the Agencies likely provides little to no relevance toward understanding any current industry trend in technology markets driven by Schumpeterian competition.[28] Moreover, the NPRM provides no explanation for how the Agencies’ “decades of experience”[29] suggest that a pattern of anticompetitive acquisitions would not be discernable in the first instance in a 10- but not 5-year look back period. And of course, for any problematic trend they notice in a five-year period, they can seek additional information going back further in time.

Additionally, there does not seem to be a strong factual basis for the NPRM’s decision to eliminate the de minimis threshold that exempts from reporting transactions where control of entities did not involve net sales or total assets of greater than $10 million in the year prior to acquisition. While the FTC may have found in its technology acquisition study that approximately 39 percent of all non-reportable transactions above $1 million were below $10 million,[30] this is not without more grounds for suggesting that transactions this small are necessary to understand broader market trends—let alone constitute hidden swaths of killer acquisitions. Indeed, not only does the current HSR process already capture a substantial number of smaller transactions that should inform the Agencies about patterns of anticompetitive acquisition activity,[31] but prominent transactions commonly identified as potential killer acquisitions, such as Facebook’s acquisitions of Instagram and WhatsApp (currently the subject of a suit by the FTC),[32] as well as Google’s acquisitions of DoubleClick and AdMob, were all HSR reportable.

Recommendations

For these reasons, ITIF has concerns about the NPRM’s creation of a Prior Acquisitions section as an additional reporting requirement to supplement that which is already required under Item 8 of the HSR Form and offers the following recommendations: 

▪ Reconsider the need for creating a Prior Acquisitions section: As discussed above, there is very little basis for concluding that the Agencies are engaged in systemic underenforcement of so-called “killer acquisitions,” including in technology markets and in particular due to a lack of proper notification requirements.

▪ Keep the time frame to report on prior acquisitions at five years: The 10-year window is not only out of step with the Supreme Court’s decisions in Brown Shoe and Von’s Grocery, but wholly misplaced in the dynamic and fast-moving nature of the very markets where the Agencies appear to be most concerned killer acquisitions may be occurring. 

▪ Preserve the $10 million threshold for listing prior acquisitions: Notwithstanding the number of transactions that may fall below it, there appears to be no firm basis for concluding that these deals are competitively significant to identify either patterns of anticompetitive acquisitions or killer acquisitions.

Conclusion

The Agencies have made clear that they “have a strong interest in receiving HSR filings that contain enough information to conduct a preliminary assessment of whether the proposed transaction presents competition concerns.”[33] Unfortunately, the NPRM’s proposals toward creating a Prior Acquisitions section using a 10-year time frame that does not exempt acquisitions of entities with annual net sales or total assets over $10 million are not only vitiated by an ill-founded concern about underenforcement of killer acquisitions in fast-moving technology markets, but place additional burdens on parties complying with the HSR Act that are not simply justified by their informational value to the Agencies.

Thank you for your consideration.

Endnotes