Over the last 12 months, continued geopolitical turbulence and strong macroeconomic headwinds have affected global deal-making activity, yet scrutiny and intervention both in merger control and foreign direct investment (FDI) continue to intensify.
Aggressive global enforcement in merger control and FDI, including in relation to minority shareholding acquisitions and transactions which do not meet traditional revenue thresholds, will continue to delay closing and lead to unpredictable outcomes in 2024. For some of the largest European deals, the emergence of the EU Foreign Subsidies Regime will present yet another hurdle to completion.
In the US, private equity investors may soon face a “front-loaded” antitrust review process for pre-merger filings required under the Hart-Scott-Rodino (HSR) Act, following wholesale changes proposed by the US DOJ and FTC in June 2023. Where currently the HSR review process is structured such that only those transactions which raise prima facie competition concerns receive a so-called “Second Request” (under which the relevant agency carries out an in-depth investigation into the deal), the proposed changes would drastically increase the amount of information to be provided by the parties at the outset and bring it more in line with the European experience. This may include details of a PE firm's organisational structure and its LP investors, as well as potential overlapping activities (or supply agreements) with a PE firm's wider portfolio.
Roll-up strategies will remain in the spotlight both in the US and in Europe, even for seemingly unproblematic transactions, such as successive low-value bolt-on acquisitions in local markets. The UK's Competition and Markets Authority has also signalled roll-up acquisitions by financial sponsors as an enforcement priority, particularly in consumer-facing industries where competition takes place in local markets, such as veterinary and dentistry services. Typically, the PE acquirer has been required to resolve competition concerns through divestitures of the relevant practices.
2023 saw a resurgence of agencies' appetite to pursue non-horizontal mergers, particularly in conglomerate mergers in the technology and life sciences sectors. The European Commission issued its first prohibition decision based solely on “ecosystem” concerns in Booking / eTraveli, departing from its own guidelines in pursuit of a novel theory of harm focused on the entrenchment of dominance.
Meanwhile, for the first time in 40 years, the FTC challenged a transaction between two pharmaceutical companies based on conglomerate effects concerns, alleging the deal would allow one party to offer rebates on its blockbuster drugs to pressure insurance companies and pharmacy benefit managers to favour the other's products, raising rivals' barriers to entry, and insulating the other's products from competition.
These serve as a clear reminder that agencies are willing to engage in innovative theories of harm to pursue all cases, resulting in longer and more complex review processes even for non-horizontal mergers.
With the EU Foreign Subsidies Regime now in force, companies will be required to notify the EC of acquisitions of certain EU businesses and participation in large EU public tenders, and to disclose a broad range of “financial contributions” received from non-EU governments and public entities (including grants, tax breaks, and purchases from and sales to governments or government-linked companies). Sponsors face a significant burden in designing and implementing systems for the collection of group-wide information relating to prior financial contributions received by a third country, and navigating unprecedented information requests which so far have required extensive disclosure of previously undisclosed LP interests and fund information.
We will also continue to see unprecedented levels of scrutiny on foreign investment control in 2024. As more countries introduce FDI screening regimes, there is now a movement towards outbound screening, initially from the US and the EU, as a means to manage national security risks (such as technology security and leakage in respect of semiconductors, AI, quantum technologies, or biotechnologies). Remedies are now commonplace where FDI filings are required, particularly where there is a perceived national security risk around the preservation of information security or around supply arrangements with key government entities (e.g., in the defence sector).
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