FTC Releases Report Summarizing Findings of Study into Undeclared Big Tech Acquisitions | Hogan Lovells
Scope of the FTC study on undeclared TGV acquisitions by selected technology companies
In February 2020, the FTC voted 5-0 to issue special orders to five big tech companies (the companies)1 requiring them to “provide information and documents on the conditions, scope, structure and purpose” of previous acquisitions made between January 1, 2010 and December 31, 2019 that were not reported to antitrust agencies under of the law [HSR Act]. “The special orders required information similar to that required by the HSR notification and report form itself. The special orders were issued in accordance with the authority of the Commission under section 6 (b) of the FTC law, which allows the FTC to conduct “large-scale studies” that are not directly related to a law enforcement objective. In response to special orders, the companies reported a total of 819 transactions to be reported unrelated to TGV during the relevant period (2010-2019) The 616 transactions with a value equal to or greater than US $ 1 million were the focus of the report.
The report “quantifies and categorizes the pace, distribution of transaction size in dollar terms, types of transactions and number of non-GVS reportable transactions collectively by the five respondents”, and presents its findings on an anonymous basis to protect the confidentiality of the Companies. The report highlights the following findings from the FTC’s review of 616 transactions reported as non-HSR with a value of US $ 1 million or more:
- The number of such transactions per calendar year was the highest in 2014 and relatively higher in 2015-2019 than in 2010-2013.
- The largest number of transactions were in the following technology categories: mobile devices and device-based software and content; front-end application software2 ; and Internet destination and Internet-enabled services.
- The dollar value of transactions generally tended to increase over the period 2010 to 2019.
- Fifteen percent of transactions exceeded the Hart-Scott Rodino (HSR) dollar threshold.3
- Asset and control transactions (including controlling voting securities and controlling non-corporate interests) were the most common type of transaction, with higher value transactions being more likely to be acquisitions control.
- Less than two-thirds of transactions involved the acquisition of domestic assets and businesses.
- With regard to founders and key employees, the majority of transactions used deferred or conditional compensation and / or included non-compete clauses.
Commissioners comment on report findings at public meeting
At the FTC’s public meeting on September 15, the Commissioners and President Lina Khan shared their thoughts on what they see as the most important lessons to be learned from the findings presented in the report.
International offers: President Khan pointed out that the data shows that less than two-thirds of the unreported transactions examined by the agency involved the acquisition of domestic assets or businesses, which she said underscores “the importance of close collaboration and cooperation with [the FTC’s] international counterparts. She noted “the significant expertise” that a number of international antitrust law enforcement agencies have with respect to digital markets, and urged the FTC to “learn from partners who have excelled in institutionalizing a wider range of tools and skills. . . ”
HSR “loopholes”: President Khan said the agency’s findings demonstrate how “digital platforms can out-compete” by acquiring competitors through undeclared transactions that are shielded from scrutiny by antitrust agencies.4 She said various “loopholes” allow deals that should fall within the legal jurisdiction of the FTC to “slip under the radar.” In particular, she noted that antitrust agencies should “beware of unduly permissive interpretations [of the HSR Act] which handicaps “the agency’s ability to adequately review transactions and in particular highlighted the recent FTC decision that” full or partial debt repayment should be included in the calculation of the target purchase price in all cases where the selling shareholder (s) benefit from the withdrawal of this debt.5 President Khan also suggested that “broader reforms of the HSR may be overdue,” saying the agency must continue to work to fill the “gaps” in the status of the HSR itself. Commissioner Chopra agreed that there is “a growing argument that the [HSR Act] should be changed to ensure that the largest companies in the economy report more of their M&A activity to antitrust agencies. But more immediately, Commissioner Chopra underscored the need for the FTC to combat the “avoidance devices” used by parties to “disguise a transaction so that [it] does not trigger HSR thresholds. For Commissioner Chopra, a dominant company structuring a merger agreement so that the target company remunerates investors with a special dividend, “leaving the buyer free to take over the target at a price below the HSR declaration thresholds” , is a “clear” example of such an avoidance device.
Non-competition: Commissioner Chopra and President Khan highlighted the report’s findings that many of the non-reportable transactions examined by the FTC included employment provisions. President Khan noted that non-compete agreements played a role in 76 percent of acquisitions analyzed by the FTC in its study and stressed the need for the Commission to “consider use and abuse of non-compete clauses in the economy ”, particularly in relation to merger deals and how“ companies in digital markets can use acquisitions to lock in key assets as well as talents. . . Commissioner Chopra highlighted 12 transactions that he said would have exceeded the HSR dollar threshold had it not been for the companies structuring the transactions to include deferred or conditional netting and the acquisition of debts or liabilities by the acquirer. He referred to this as a merger strategy known as an “acquisition,” whereby a payment was made to a startup and its employees in exchange for the assets of the target and any key employees remaining to work in the acquiring company. He views such an “acquisition” as an avoidance strategy designed to allow companies to evade reporting requirements by making the takeover appear as a contract of employment rather than an acquisition.
Complementary studies: Republican Commissioners Christine Wilson and Noah Phillips praised the report for shedding light on the competitive impact of the undeclared transactions that were reviewed. Commissioner Phillips cautioned, however, that the report does not comment on the competitive effects of particular transactions. He also noted that the study does not reveal whether the reported trends are representative of the tech industry as a whole or other industries more broadly. Commissioner Wilson called on the FTC to conduct similar 6 (b) studies in other sectors and reiterated her call for the agency to analyze non-reportable agreements in the healthcare sector.
The FTC’s bipartisan support for completing the study of unreported acquisitions by large tech companies and releasing its findings demonstrates the FTC’s continued commitment to monitor the tech industry. While it remains to be seen how the agency’s merger review process may evolve in response to the findings outlined in the report, there appears to be a broad consensus among Commissioners that the use of authority 6 (b) FTC is a productive use of agency time and resources. As a result, we are likely to see the Commission give the green light to further 6 (b) investigations in other sectors.
1 The companies included in the study were Alphabet Inc. (including Google), Amazon.com, Inc., Apple Inc., Facebook, Inc. and Microsoft Corp.
2 Including CRM, ERP, SCM, BI, commerce and vertical management software.
3 The FTC notes that some of these transactions may have met the criteria for other legal or regulatory exemptions.
4 Federal Trade Commission, Open Commission Meeting (September 15, 2021) video available here.