Private equity firms now need to consider competition issues for every acquisition

Acquisitions by private equity firms have traditionally sailed below the competition regulator’s radar including because acquisitions have been for a new platform, with no competition issue or have been a considered as a “bolt-on” (i.e. result in only an incremental increase market position).

However, recent scrutiny of PE acquisitions by competition regulators around the world means firms need to understand the competition risks associated with any acquisition and the strategies that will assist in navigating regulatory processes efficiently and quickly. This is also true in Australia where the ACCC appears to be taking a similarly rigorous approach to acquisitions by private equity firms, and has called for greater scrutiny of “bolt-on” acquisitions in particular.

Recent US developments

In line with the Biden administration's tough stance on mergers, and public comments made by the Assistant Attorney General regarding the role of private equity in market concentration, the Federal Trade Commission (FTC) has clearly signalled its intention to take a harder stance on mergers involving private equity investors. The FTC has indicated that it proposes to closely examine:

• mergers that “trend towards concentration” including cumulative acquisitions;
• a series of acquisitions by a firm even where a single acquisition would not harm competition; and
• acquisitions of partial ownership or minority interests.

Consistent with this tougher approach, US regulators are also proposing to require parties to provide comprehensive disclosure of related prior acquisitions and organizational structure (including minority shareholdings and partners).

The proposals may be moot (i.e. already in effect) given recent cases:

• In 2023, the FTC commenced legal action against US Anaesthesia Partners, Inc. (USAP), the dominant anaesthesia service provider in Texas and private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson). The FTC alleges that these parties engaged in a multi-year anti-competitive strategy to consolidate anaesthesiology practices in Texas. Significantly, this included an allegation that by completing a series of “bolt-ons”, Welsh Carson had been, systematically acquiring most large anaesthesia practices in Texas to establish a dominant provider capable of demanding higher prices; 
• In 2022, the FTC required the divestiture of 16 veterinary clinics before approving JAB Consumer Partners veterinary services acquisition on the basis of concerns about creeping consolidation; and
• In 2022, the DOFJ commenced investigating Thoma Bravo’s acquisition of ForgeRock over concerns that ForgeRock was too close of a competitor to Ping, a similar company bought in the same year by Thoma Bravo. This move was seen as a push back on the practice of "private equity bolt-ons". The deal completed in August 2023.

Recent UK and EU developments

The above proposals align the US with the EU and UK, where regulators trace structural ownership and influence from the acquiring entity through to ultimate parent(s) and shareholdings.

In doing so, the UK Competition and Markets Authority (CMA) seeks to determine whether the private equity firm has ‘decisive-influence’ over any of its shareholdings and how this influence may lead to an anti-competitive outcome from multiple shareholdings/cross ownership, including when making multiple bolt-on acquisitions across a single sector over time.

The CMA is also closely examining companies managed by private equity firms, having recently opened an investigation into consolidation and price rises in the UK’s pet care sector.

The CMA is specifically concerned that private equity acquisitions and subsequent consolidation has led to price rises across the UK market.

The CMA has also recently concluded a string of investigations during which it imposed liability on private equity firms for competition abuses committed by former portfolio companies (during the period of PE ownership).

The ACCC

The ACCC appears to be taking a similarly rigorous approach to acquisitions by private equity firms, and has called for greater scrutiny of bolt-on acquisitions and minority acquisitions. In particular, it has raised concerns about:

• cross-directorships or multiple shareholdings in a single industry;
• informal influence being exerted by shareholders on managers across competing businesses; and
• consolidation across industries, even when that consolidation takes the form of minor acquisitions.

These concerns are already being reflected in the ACCC’s review of current mergers. For example:

• in relation to the 2022 review into the (now withdrawn) Spirit Super/Palisade acquisition the ACCC noted that “common fund management and ownership that allow a degree of control or influence by minority interests have the potential to detrimentally effect competition”;
• In 2022, the ACCC Chair warned that “[we] are aware that the minority interests of private equity and managed fund investors in competing firms are attracting close interest around the world. This is an area in which we will continue to engage closely with fellow international regulators”;
• In the last 12 months, there have been a number of deals blocked by the ACCC or in respect of which they have raised serious competition concerns (some involving private equity);
• In 2023, as part of reviewing Woolworths’ acquisition of Petstock, the ACCC decided to open a merger investigation for old acquisitions undertaken by Petstock of smaller rivals that were not cleared by the ACCC.  As a result of the investigation, Petstock and Woolworths ultimately agreed to divest 41 specialty stores and 25 co-located veterinary hospitals; and
• In 2023, the ACCC noted it had competition concerns with Brookfield’s acquisition of Origin despite different funds owning and managing vertically integrated businesses and very comprehensive undertakings offered by the parties.

What does this mean for your next acquisition?

1. Like international regulators, the ACCC is becoming more sceptical of deals and wants parties to provide clear evidence as to why those deals will not raise competition concerns.  The mantra that parties should “compete rather than acquire” is making regulatory approvals more challenging, time consuming and costly.
2. The ACCC may closely and fully examine transactions involving common ownership, even where this ownership may be comprised of a common investor across different funds. This may require more detailed company information to be provided to the ACCC including organisational structure, internal decision-making rights, board composition, voting and shareholder rights and veto rights.
3. The ACCC may closely scrutinise the parties’ transaction history, particularly prior acquisitions in the same or related sectors that did not obtain ACCC clearance. The regulator may require a target to divest assets before a merger can complete, altering the timeline and value proposition for the parties.
4. Investors may need to take a more pro-active approach to regulator engagement, including notifying the regulator (as a courtesy) of minority interest acquisitions, in order to avoid a post-completion investigation.
5. Where the ACCC is concerned about a deal, it is more likely to require divestments as a remedy rather than behavioural undertaking.  For example, over the last 5 years, 9 out of every 10 remedies agreed by the ACCC were structural in whole or part.
6. Where a deal requires foreign investment approval, that approval will not be provided until the ACCC has confirmed that the deal does not raise competition concerns. This means parties will need to consider their foreign investment and ACCC regulatory engagements together.
7. Parties should be cautious of multiple acquisitions in a sector.  The US and ACCC experiences show that regulators may prosecute multiple acquisitions as general anti-competitive conduct or open post-completion merger investigations and seek divestments of old acquisitions (as well as penalties for breach of law).

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).