- Two shifts in merger control enforcement in the U.S. have emerged that are impacting the technology space: an increase in challenges of vertical transactions and increased scrutiny and enforcement with respect to deals between parties in adjacent markets.
- Increased vertical enforcement resulted in parties abandoning a large transaction in the technology space in February.
- Scrutiny of mergers between parties in adjacent markets did not bring about any enforcement actions in the first quarter, but recent speeches by the DOJ and FTC indicate we may see such enforcement in the near future.
- Three major tech transactions, two announced and another that closed in the first quarter, are deals to keep an eye on given these shifts.
Increased Vertical Enforcement
Antitrust enforcers’ general skepticism of and shift to more aggressive enforcement with respect to vertical transactions is clear. The last administration brought the first lawsuit seeking to block a vertical challenge in decades in the AT&T/Time Warner case.Then in 2020, the House Antitrust Subcommittee slammed digital platforms’ accumulation of vertically related business lines and recommended “that Congress examine proposals to strengthen the law relating to vertical mergers” in its Report on Competition in Digital Markets authored in large part by current FTC Chair Lina Kahn.And in September of last year, the FTC rescinded vertical merger guidelines that were jointly issued by the FTC and DOJ just a year earlier. The Democratic majority’s statement — which was joined by FTC Chair Kahn — rejected the long held and near consensus presumption that vertical transactions create efficiencies and suggested that efficiencies are almost never relevant to the merger assessment in the first place.
Nvidia/Arm Transaction Abandoned
This heighted scrutiny of vertical deals resulted in the challenge of a large tech transaction, Nvidia’s planned acquisition of Arm, which the parties abandoned in the first quarter of 2022.The buyer, Nividia, manufactures semiconductor chips, while the target develops and licenses chip designs and architectures to other chip manufacturers. Despite recent signs of internal division across party lines, the Commission voted 4-0 in favor of the challenge.This challenge follows two other recent 4-0 votes to challenge vertical transactions — Illumina’s proposed acquisition of Grail in March 2021 and Lockheed Martin’s proposed acquisition of Aerojet Rocketdyne in January 2022. These three bipartisan votes to challenge vertical transactions indicate that stronger vertical merger enforcement is supported by both Republicans and Democrats and is not likely to be a temporay trend.
FTC and DOJ Signal Scrutiny of Deals Between Parties in Adjacent Markets
In addition to heighted scrutiny of vertical mergers, recent speeches by the leaders of the FTC and DOJ indicate that both are seeking to expand the scope of mergers that get scrutinized and challenged in the tech space. In March, Assistant Attorney General Jonathan Kanter criticized “monopoly power over digital markets” saying “citizens have too little choice in many digital markets.”According to Kantar, competition enforcement needs to adapt to address novel business strategies digital platforms are pursuing. One such strategy that Kanter identified is “moat building,” which in the merger context he described as “buy[ing] up any firm that shows even a modest potential to develop into a competitive threat.” To address this, Kanter said that enforcement should “acknowledge that nascent competitor acquisitions do not have to be purely horizontal or vertical” and suggested that authorities need to scrutinize acquisitions in “adjacent market[s]” and of “firms anywhere in the ecosystem.”
FTC Chairwoman Lina Kahn similarly called for scrutiny of mergers between parties in adjacent markets. In a recent speech, she expressed concern over digital platforms’ positions across different sectors beyond their “core markets,” arguing that presence across several business lines and the “multi-dimensional ways in which different lines of business may be interlinked can render outdated frameworks that still try to analyze relationships as ‘horizontal’ or ‘vertical.’”
While we have yet to see a clear example of an enforcement action against a merger between parties in adjacent markets, the message is being sent loud and clear that the agencies are lookingfor opportunities to take action against acquisitions of companies that have tenuous or even no horizontal or vertical relationship to the buyer. Whereas in the past, tech companies and their counsel might rule out antitrust risk in the absence of such relationships, the FTC’s and DOJ’s warnings suggest that acquisitions “anywhere in the ecosystem” have some risk of investigation and even enforcement.
Q1 Transactions to Watch
The enforcement agencies’ focus on vertical transactions and “moat building” result in three transactions to keep an eye on.
In January 2022, Microsoft announced that it agreed to acquire Activision Blizzard.The deal has a clear vertical component as Microsoft manufactures Xbox, one of the three most sold videogame consoles, and Activision Blizzard makes one of the most popular video game franchises, Call of Duty. Activision Blizzard also makes popular PC and mobile video games, like World of Warcraft and Candy Crush. The acquisition of a strong and innovative video game developer could be seen as a move into business lines that are distant from, though in the same ecosystem as, Microsoft’s “core” business lines like PC software (Microsoft Office) and video game hardware (the Xbox).
Microsoft has attempted to address potential vertical concerns by publicly addressing regulators’ potential concerns and announcing behavioral commitments. In a February blog post, Microsoft stated that it would continue to make all Activision Blizzard titles available on another major console, Sony PlayStation, and that it was “interested in taking similar steps to support” the third major console, Nintendo Switch.
Microsoft and Activision Blizzard received a second request from the FTC on March 3.While the Xbox console likely has a significant share of downstream consoles and Call of Duty is one of the more popular console video game titles, one would expect the supply of video games to be relatively fragmented. The FTC’s approach with respect to this transaction could be another step in the shift towards aggressive vertical enforcement and challenges to tech transactions more generally.
Amazon’s acquisition of MGM is another deal to continue to watch even though it closed without a challenge in the first quarter of 2022. Amazon, which has long been the target of competition accusations by FTC Chair Kahn, agreed to acquire the movie studio MGM in May 2021. The deal drew criticism from a number of directions: think tanks,a union,and lawmakers on both sides of the aisle,all voiced concerns over the deal. The parties received a second request from the FTC, but the transaction cleared in the EU and a number of other jurisdictions. The FTC did not take action to stop the deal from closing in March.
Like Microsoft/Activision, the deal has a clear vertical component due to Amazon’s streaming movie platform and MGM’s movie catalogue. It also represents a move into an adjacent and innovative market. Some have speculated that the transaction could be the first instance of the FTC taking action consistent with its recent warning letters to merging parties stating that, while the HSR waiting period has expired, the FTC’s investigation may continue and parties consummate transactions at their own risk. Though Amazon did not disclose whether it received one of those letters, the FTC suggested it did. When asked about the deal, the FTC said, “[t]he FTC does not comment on any particular matters. However, we reiterate that the Commission does not approve transactions and may challenge a deal at any time if it determines that it violates the law. Additionally, this summer the FTC announced that it will send pre-consummation warning letters in connection with deals it cannot fully investigate within the timelines established by the HSR Act. These letters alert merging parties that their transactions remain under investigation, and warn that consummation occurs at their own risk.”Given that MGM’s movie catalog, while impressive, likely represents a small share of movies overall, this is another transaction that could test the boundaries of the FTC’s aggressive posture.
In March 2022, Google signed an agreement to acquire Mandiant, a cybersecurity company.Despite the apparent lack of horizontal or vertical relationships, the parties reportedly received a second request in April. Given the apparent lack of overlap, this transaction is one to watch as a bellwether of DOJ’s enforcement of transactions between parties in adjacent markets.
U.S. v. AT&T Inc., DirecTV Group Holdings, LLC, and Time Warner Inc., case files available at https://www.justice.gov/atr/case/us-v-att-inc-directv-group-holdings-llc-and-time-warner-inc.
U.S. House of Representatives, Subcommittee on Antitrust, Commercial and Administrative Law, Report on Competition in Digital Markets, at 394 (2020) available at https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf?utm_campaign=4493-519.
Statement of Chair Lina M. Khan, Commissioner Rohit Chopra, and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Vertical Merger Guidelines (September 15, 2021) (“Like all other forms of efficiency, EDM is simply not relevant to the legality of a merger if it does not result in the preservation of competition in the post-merger market, with the assessment of competition not limited to price.”) available at https://www.ftc.gov/system/files/documents/public_statements/1596396/
In the Matter of Nvidia/Arm, case files available at https://www.ftc.gov/legal-library/browse/cases-proceedings/2110015-nvidiaarm-matter.
FED TR. COMM., “FTC Sues to Block $40 Billion Semiconductor Chip Merger” (December 2, 2021) available at https://www.ftc.gov/news-events/news/press-releases/2021/12/ftc-sues-block-40-billion-semiconductor-chip-merger.
In the Matter of Illumina, Inc., and GRAIL, Inc., case files available at https://www.ftc.gov/legal-library/browse/cases-proceedings/201-0144-illumina-inc-grail-inc-matter; In the Matter of Lockheed/Aerojet, case files available at https://www.ftc.gov/legal-library/browse/cases-proceedings/211-0052-lockheedaerojet-matter.
JONATHAN KANTER, Keynote at CRA Conference (March 31, 2022) available at https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-keynote-cra-conference.WALL STREET JOURNAL, “Microsoft to Buy Activision Blizzard in All-Cash Deal Valued at $75 Billion” (January 18, 2022) available at https://www.wsj.com/articles/microsoft-to-buy-activision-blizzard-games-11642512435.
MICROSOFT, “Adapting ahead of regulation: a principled approach to app stores” (February 9, 2022) available at https://blogs.microsoft.com/on-the-issues/2022/02/09/open-app-store-principles-activision-blizzard/.
OPEN MARKETS, “Biden Administration Must Block Amazon’s Monopolistic Ploy to Take Over MGM” (May 26, 2021) https://www.openmarketsinstitute.org/publications/biden-administration-must-block-amazons-monopolistic-ploy-to-take-over-mgm.
REUTERS, “Union group says U.S. should reject Amazon's plan to buy MGM” (November 21, 2021) https://www.reuters.com/markets/deals/union-group-says-us-should-reject-amazons-plan-buy-mgm-2021-11-22/.
KEN BUCK, Tweet (“I’m deeply concerned about Amazon’s acquisition of MGM studios ...); https://twitter.com/repkenbuck/status/1397550303306731528. ELIZABETH WARREN, Letter to Lina Kahn (June 29, 2021) available at https://www.warren.senate.gov/imo/media/doc/Letter%20to%20FTC%20re%20Amazon-MGM%20Deal.pdf.
THE VERGE, “MGM is now part of Amazon” (March 17, 202) https://www.theverge.com/2022/3/17/22979800/amazon-mgm-merger-completed-prime-studios.
WALL STREET JOURNAL, “Google to Buy Cybersecurity Firm Mandiant in $5.4 Billion Deal” (March 8, 2022) https://www.wsj.com/articles/alphabets-google-to-buy-mandiant-in-5-4-billion-deal-11646740305.