May 18, 2016

Will antitrust rulings continue in the coming years?

Federal regulators are becoming increasingly more concerned with antitrust standards.

While last year brought multimillion and billion dollar mergers to the tech industry, the first five months of this year have been relatively calm. Merger activity is down in the U.S. by 22 percent, according to Thomson Reuters data. Meanwhile, across the globe mergers are down 12 percent. Though there are numerous contributing factors for this decline, one of them may be the increasing scrutiny levied by federal antitrust regulators who are blocking many major domestic and international mergers.

What are recent high-profile blocked mergers?
In a recent surprising decision, a federal judge issued a ruling in favor of Federal Trade Commission officials that would essentially block the potential Staples-Office Depot merger, according to Bloomberg. The FTC challenged this merger, citing antitrust concerns, stating that creating one large supplier would negatively affect consumers. While this potential merger would have left the general population largely unaffected, federal regulators claimed that the newly combined company would raise its prices for large businesses buying office supplies in bulk.

"Today's court ruling is great news for business customers in the office supply market," Debbie Feinstein, the head of the FTC's bureau of competition, wrote in an email statement. "This deal would eliminate head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses."

As a result of the judge's decision, Staples and Office Depot called off their multibillion dollar deal. Furthermore, Staples will pay Office Depot a $250 million break-up fee. Many involved in the case were surprised at judge's ruling, as he frequently criticized the FTC's handling of the case, despite ultimately siding with the federal regulator at the outcome of the case.

"We are extremely disappointed that the FTC's request for preliminary injunction was granted despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case," Ron Sargent, Staples' chairman and chief executive officer, said. 

Why is their increasing antitrust scrutiny for mergers?
The Obama Administration has been active in speaking out against mergers that violate antitrust laws, especially the President's top economic advisor, Jason Furman, and a former administration official, Peter Orszag. The two published a paper last year explaining that monopoly powers in certain industries hire fewer workers and pay them more, essentially driving workers away from companies that are not part of a monopoly so that they can earn a better wage. They also severely lower these excluded companies' sales margins.

These monopolies are also frequently negative for the average American consumer, as with less competition, prices rise without significant regulation or federal oversight. Higher prices means less money in these customers' pockets, which hurts the overall economy.

What is helpful antitrust advice for small tech startups and companies?
While most would think that antitrust scrutiny only befits larger-scale industry leaders, it is important for small to medium-sized technology startups and companies to be aware of antitrust laws as well. Most attorneys state that it is never too early to begin educating workers on antitrust laws and enlisting the help of skilled M&A consultants to handle challenging or high-profile deals. This way, companies can avoid wasting ample time and resources in court proceedings, as well as fallout surrounding a failed merger.

As the tech industry changes dramatically from day to day, tech startups must keep a close eye on the market. Mark Ostrau, chair of the antitrust group at Silicon Valley law firm Fenwick & West LLP, told Law 360 that industry competitors can change in an instant, whether due to emerging technologies or discoveries, making it a very narrow market nearly overnight. Thus, even though small tech companies may not see themselves as an industry giant, if they become one of very few enterprises in their industry, future deals may be fall under antitrust scrutiny.