Small deals let big tech evade antitrust scrutiny, FTC says

Loopholes in merger laws may have allowed hundreds of deals by tech giants to evade scrutiny by federal antitrust enforcers, inciting the mass consolidation of the digital economy by a handful of businesses.

A Federal Trade Commission study issued this month on transactions by Alphabet, Amazon, Apple, Facebook and Microsoft revealed that lax oversight of small deals obscured large-scale acquisition plans by dominant tech firms to create and maintain monopolies, according to the agency.

“When we singly review serial acquisitions, we may miss the bigger picture patterns of anticompetitive roll-up strategy,” Commissioner Rebecca K. Slaughter said.

“I think of serial acquisitions as a Pac-Man strategy. Each individual merger viewed independently may not have significant impact, but the collective impact of hundreds of smaller acquisitions can lead to a monopolistic behemoth.”

The findings support arguments that the companies have essentially bought their way out of competing by using their vast resources to acquire startups, patent portfolios and industry experts that might someday threaten their dominance. They have done so, FTC Chair Lina M. Khan said, largely outside of the agency’s purview.

“These companies may buy five or 10 small companies in the same industry, and each one of those viewed independently may not be anticompetitive,” said Jennifer Oliver, a partner at antitrust firm MoginRubin. “Those acquisitions viewed together might tell a different story.”

The five tech giants that were examined as part of the study identified 616 unspecified transactions that were not required to be reported to antitrust authorities.

Under the law for reviewing mergers known as the Hart-Scott-Rodino Act (HSR), companies must notify the FTC and Department of Justice of deals worth at least $92 million. The reasoning for the cutoff is that small acquisitions cannot undermine competition and do not raise antitrust concerns.

But the deals, which were not identified by name, point to evidence that the tech firms are purchasing emerging rivals before they get to truly compete, according to the FTC. At least 240 of the 616 transactions, for example, involved companies that were less than 5 years old.

“This study underscores the need for us to closely examine reporting requirements under the HSR Act and identify areas where the FTC may have created loopholes that are unjustifiably enabling deals that fly under the radar,” Khan said.

One deal that was able to evade scrutiny was Facebook’s acquisition of GIF website Giphy last year in a deal valued at $400 million. It was able to fly under the radar of antitrust enforcers because Giphy paid dividends to investors to lower its value before it was bought.

Oliver said the move allowing companies to avoid seeking permission from the FTC and DOJ to move forward with takeovers by getting money off their books is legal. She added some firms “structure their transactions with the sole intent of avoiding the [reporting] threshold.”

U.K. competition regulators in August found that the Facebook-Giphy deal removes a potential challenger to the social media giant in the advertising market. It’s examining possible remedies.

Commissioner Rohit Chopra urged for revisions to merger laws to ensure that “the very largest firms in the economy report more of their M&A activity to the antitrust agencies, including those transactions that may fall below today’s existing HSR reporting thresholds.”

While laws forbid what are called “avoidance devices” to evade scrutiny, he argued merger enforcers have historically neglected to enforce them.

“I have been deeply concerned that past commissioners decided to create loopholes,” he said. “These documents provide a roadmap for dominant firms on how they can avoid reporting.”

The FTC in February lowered the reporting threshold for the first time in years from $94 million to $92 million. It also revised merger guidelines to prohibit manipulating the size of deals to avoid review.