Antitrust laws in the U.S. prohibit firms from engaging in anticompetitive mergers and acquisitions (M&As) that may harm consumer welfare. While the merger control procedure requires firms to notify the Department of Justice (DOJ) and the Federal Trade Commission (FTC) of prospective M&As, many deals are exempt from such a requirement. Consequently, firms voluntarily disclosing these non-reported deals to inform capital markets may pose significant antitrust risks. In my paper, I study how antitrust risk affects firms’ disclosure of M&As.
The Merger Review Process
Antitrust agencies primarily rely on prospective merger reviews to be notified of potential mergers that are likely to be anticompetitive in the form of greater market power and harm consumer welfare. The Hart–Scott–Rodino Antitrust Improvements Act of 1976 (HSR) requires companies to file a premerger notification report to the FTC and DOJ for specific acquisitions. HSR allows agencies to investigate deals before they close by imposing a statutory 30-day waiting period. Complying with HSR can be burdensome, and thus the notification is only required when the deal meets a specific size threshold (“size of transaction” test) that is adjusted annually. The current threshold (2023) is $ 111.4 million.
However, deals that fall below the size threshold (i.e., “non-reported” deals) can considerably impact the competitive landscape because markets are segmented by product type and geography. For instance, mergers involving acquiring a niche rival product or consolidating local markets may interest antitrust agencies due to their potential harm to consumers. Indeed, agencies routinely challenge non-reported deals – between 2009 and 2013, the DOJ initiated 73 preliminary inquiries into non-reported deals, representing around 20% of all merger investigations conducted by the agency.
Theory and Anecdotal Evidence
Without HSR filings, antitrust agencies closely monitor firms’ public disclosures to keep abreast of potentially anticompetitive deals. Thus, when firms “broadcast” non-reported deals to the public, they run the risk of alerting agencies of deals that could have gone undetected.
Consider the FTC’s challenge to the merger between Otto Bock and Freedom Innovations. This deal was not reported under HSR and thus was not subject to the FTC’s scrutiny before the deal closed. However, upon closing the deal, Freedom Innovations issued a press release discussing the merger that “alerted” the FTC. Shortly after the disclosure, the FTC ordered the unwinding of the deal, citing that the merging parties were head-to-head competitors. The court ultimately upheld the complaint, and the merging parties had to undo the deal.
In addition to alerting agencies, the publicly disclosed contents can provide ammunition for agencies to challenge the merger. Antitrust practitioners refer to such disclosure as “hot documents” that provide agencies with the “smoking gun” evidence of the deal’s anticompetitive effects. For instance, when the FTC challenged Omnicare’s acquisition of PharMerica, it directly quoted the CEO’s public statement to investors that stated “Omnicare basically controls 50%” of the market.
Moreover, firms’ disclosure of product markets and competition allows agencies to easily define the relevant markets affected by the merger for antitrust analysis. Defining the relevant market is important when agencies evaluate the competitive effects of a merger, as it directly influences the calculation of market concentration. Agencies routinely rely on firms’ self-reported disclosures to define markets. When the FTC challenged the Whole Foods-Wild Oats merger, it relied on Whole Foods’ statements in earnings calls to define the relevant market narrowly as “premium natural and organic supermarkets” rather than the much broader “conventional supermarkets.” This anecdote highlights how antitrust agencies can weaponize firm’s disclosure in the merger challenge.
Notwithstanding such antitrust risks, firms have an opposing incentive to timely inform capital markets and investors about the existence of the M&A and the related economic benefits (e.g., higher pricing power and lower competition). Voluntary disclosure accelerates the positive impact of the M&A on firm value, which is reflected in stock prices more quickly as opposed to waiting for higher profits to be realized in future periods. Firms, therefore, face a trade-off between the capital market benefits (i.e., more timely pricing of the M&A outcomes) and the elevated antitrust risk when publicly disclosing non-reported deals.
Research Design and Main Findings
In my recent paper, I study how antitrust risk affects acquirers’ M&A disclosure by focusing on two settings that change the level of antitrust risk at the agency level. First, I exploit the agencies’ industry-level enforcement as an external shock heightening the antitrust risk for disclosing horizontal deals in the targeted industry. Second, I exploit the closure of four local DOJ field offices in 2013 as an external shock that lowers antitrust risk for disclosing intrastate deals in the areas proximate to the closed field offices. To strengthen causal inferences, I examine how the same firm alters its disclosure of deals that attract inherently greater antitrust scrutiny (horizontal and intrastate deals) compared to disclosing all other deals during these heightened or reduced antitrust risk periods.
Using a sample of non-reported deals over the period 2001 through 2020, I study whether acquirers strategically manage three dimensions of their M&A disclosure in press releases and earnings calls – i) quantity, ii) tone, and iii) the amount of discussion of product markets and competition. Using the first setting, which heightens the antitrust risk for specific industries, I document that firms lower the amount of M&A disclosure, provide less positive disclosure, and provide less discussion about product markets and competition for horizontal deals when an industry peer is undergoing a merger investigation. In contrast, using the second setting, which lowers antitrust risk for specific geographic areas, I document that firms increase the amount of M&A disclosure, provide more positive disclosure, and provide more discussion about product markets and competition for intrastate deals after the closure. Collectively, my evidence is consistent with acquirers strategically managing their disclosure of horizontal and intrastate deals according to the level of antitrust risk.
Implications of My Study
The findings are important and timely considering the growing antitrust scrutiny towards M&As. Many product markets have become increasingly concentrated over the past few decades. Concurrently, the U.S. government is eyeing major antitrust reform, with the Biden Administration cracking down on corporate consolidation. Against such a regulatory landscape, firms increasingly face a delicate trade-off when disclosing M&As – although firms wish to timely inform the capital markets through public disclosure, they may think twice because disclosure can later backfire in the form of costly antitrust enforcement action. By shedding light on how antitrust risk affects firms’ disclosure of M&As, my findings could help firms make more informed decisions about their M&A disclosure strategies and, more importantly, contribute to the broader debate on antitrust policy and enforcement.
Jun Oh is a Ph.D. candidate at Cornell University’s Samuel Curtis Johnson Graduate School of Management.
This post is adapted from his “Antitrust Risk and Voluntary M&A Disclosure” paper on SSRN.