This episode of the “Fierce Competition” podcast features Skadden antitrust/competition partners Ken Schwartz (New York), Tara Reinhart (Washington, D.C.) and Aurora Luoma (London), who dig into the complexities behind increased antitrust scrutiny for private equity transactions. They shed light on the regulatory focus on market roll-ups, delve into recent litigation and unpack potential political motivations behind the new merger guidelines. 

The Skadden team provides a guide for private equity firms in this unpredictable regulatory landscape and highlights the importance of being litigation-ready and effectively communicating the benefits of their deals. The bottom line? In the midst of regulatory obstacles and intense scrutiny, diligent preparation paired with a solid economic analysis is a private equity firm's best ally.

💡 Meet Your Host 💡

Name: Kenneth Schwartz

Title: Partner, Antitrust/Competition at Skadden

Specialty: Ken Schwartz represents clients in antitrust transactional and advisory matters. He has worked in a diverse range of industries, including agriculture, airlines, chemicals, consumer products, defense and government contracting, energy, entertainment, financial services, health care, insurance, media, medical devices, natural resources, private equity, pharmaceuticals, retail and telecommunications.

Connect: LinkedIn 

💡 Featured Guests 💡

Name: Tara Reinhart

What she does: Tara Reinhart is head of the Antitrust/Competition Group in Skadden’s Washington, D.C. office. She focuses on civil litigation and government investigations, with an emphasis on complex antitrust litigation and international cartel probes.

Organization: Skadden

Words of wisdom: “When you're looking at the industries that the agencies have been concerned about with roll-ups, there seem to be so many pro-competitive benefits to talk about, and maybe at private equity firms, you're not used to speaking so much about that, but you should.”

Connect: LinkedIn 

Name: Aurora Luoma

What she does: Aurora Luoma is a partner in Skadden’s Antitrust and Competition Group. She has a broad practice covering key areas of competition law, including international merger control, antitrust investigations, state aid and sectoral regulation. She particularly focuses on complex global mergers in the EU and U.K.

Organization: Skadden

Words of wisdom: “Engagement with regulators is increasingly important from an early stage.”

Connect: LinkedIn

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Fierce Competition is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP, and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.

Welcome to Fierce Competition, a podcast from Skadden's Global Antitrust and Competition Group that explores antitrust policy and enforcement around the world. Join our colleagues from across the continents as we discuss the latest developments and what they mean to you in an increasingly complex legal and regulatory landscape.

Good afternoon and welcome to the second episode of Fierce Competition, Skadden, Arps' podcast about all things antitrust. My name is Ken Schwartz. I'm based in New York. Today I am joined by my colleagues and friends, Tara Reinhart, based in Washington D.C., and Aurora Luoma based in London. We're here to talk about private equity. As an antitrust lawyer, I feel like every week there's a new headline with private equity and antitrust, a new case, a new speech. We want to help unpack the rhetoric and talk about what's really going on.

Let's start simple. What is private equity and why is there this focus? When I think of private equity, I think of an investment firm looking for opportunities with an investment thesis. Could be in distressed opportunities, it could be in thriving opportunities. Private equity certainly spans the gambit of investment and acquisition methods. When I think of benefits of private equity, first and foremost, management expertise, industry expertise, operational expertise, which can translate into sales growth, higher productivity, increased efficiencies, lower costs, that is a typical investment thesis for private equity. At the same time, you see private equity injecting capital into needed companies, rescuing neglected assets, tremendous benefits associated with this asset class.

Tara, let me turn it over to you. As the former chief litigator at the FTC during the Obama administration, where is this rhetoric coming from? Where is this focus on private equity and what should private equity clients understand is going on at the agencies?

Sure. Thanks, Ken, and I am a litigator. I know Ken does primarily mergers and you're dealing with private equity clients and also partners all the time. When I was at the FTC as Chief Trial Counsel for the Bureau of Economics in 2014 to 2016, so really the end of the Obama administration, the Obama administration had really wanted to be more aggressive in antitrust, and they did that. But I was thinking back to my time and there really wasn't a focus on private equity like we're seeing now. My clear recollection was in the instance where the FTC staff were trying to wrap up a deal investigation and the parties were offering a divestiture to satisfy any concerns.

When private equity was part of the mix, one of the options for the divestiture buyer, there was some angst among staff about the fit. Was private equity going to be committed to running a business and step into the shoes of the company being acquired? Because that's really what the agencies care about with divestiture buyers is that there's a robust competitor from day one to take over for the company being acquired. And the angst was surprising to me. I didn't know that much about private equity, but the concern was that private equity is so focused on short-term gains and not focused on building a business, may not have a lot of experience in the industry and so forth.

And so there was a lot of angst in that respect. But there are things you can do to vet buyers that are private equity, and to me, it didn't ever seem like an impediment. What I did not see back then was what we're seeing now, which is this focus on private equity as trying to do serial acquisitions or rolling up industries for nefarious purposes. I just don't recall that back in the day. This seems like a Biden administration issue.

I think that's right. When I go back in my mind, I think it was Commissioner Chopra during the Trump administration, actually, a democratic appointee who started writing about private equity and questioning long-term incentives and beginning this focus on roll-ups. It showed up in some of his statements in the merger review process. And now I think Chair Khan has really taken that to a next level as a focus, including in a recent complaint filed against Welsh Carson that I know we'll get to.

But when I think of short-term gains, I think it's just too simple to sort of hang that label around private equity. Interestingly, we actually did a study of this last year and published an article where we surveyed econometric data that showed private equity investment could lead to higher productivity per employee. Private equity investment could lead to higher equality, and it was actually the fast food industry. Private equity investment led to more skews at supermarkets. So I feel like this label that just gets attached to private equity or more a sound bite is probably what it is of sacrificing short-term gains, it just is not consistent with most contemporary private equity.

Aurora, what are you seeing on your side of the pond?

Thanks, Tara. I think it's interesting, the position that we're seeing in the U.K. I'd say compared to the types of angst that you're describing in the U.S., we don't really see that to the same level. Coming from the U.K. Competition Markets Authority, which is the antitrust regulator here, they take perhaps a slightly more neutral approach, and the message tends to be business as usual. So when we're thinking about private equity-related purchases in a divestment scenario, or if we're thinking about deals involving private equity buyers more generally, the message that's coming out of the CMA seems to be, well, we treat everyone the same. We apply our rules, we apply the sort of analysis that we apply to any merger or any divestiture buyer.

That said, we are seeing some of the points that you've mentioned in the U.S. also echoed in some discussion in the U.K., even if it's not quite at the level of angst. Say, for example, the new CEO of the CMA, Sarah Cardell earlier in spring this year made reference to roll-up acquisitions and noted that they were an area of focus and that they had been receiving complaints about the effect of those types of acquisitions in particular sectors or particular markets. And we have seen some cases where the CMA has been looking at those, although still very much within the normal paradigm. So applying their usual rules to reviewing transactions.

The CMA, interestingly, you mentioned divestiture buyers. Whilst there are some questions sometimes around whether private equity purchases fulfill the criteria to the suitable purchaser depending on their plans for their business, plans for the target in any particular sector, again, the message, and we've heard it explicitly said from individuals and the regulators, tends to be, we're applying our normal rules, we're thinking about private equity in the same way that we think about any other divestiture purchaser, even if in practice demonstrating the suitability sometimes can require a different approach to a strategic buyer and indeed raise different issues or have fewer issues than a strategic buyer.

The other recent thing we've seen in the United States, of course, is the new merger guidelines. They haven't been fully adopted yet. They think they're still out for comment, but there's a proposal that really is directed to private equity, right?

Yeah, absolutely. I had a chance to actually interview a senior FTC official, and we dug into the new roll-up language and he said, what's really driving it is the FTC and the DOJ are laser-focused on roll-ups in that they're trying to look at three and five-year strategies and understand is this a first step, a second step, a third step towards some undue concentration to some tipping point? And it was an interesting discussion because I think the FTC acknowledges it's not an easy case. I'd be surprised, and I think the government would agree with this, that they wouldn't go to court to try to challenge the first of a roll-up strategy, but they did raise the third or the fourth deal, might present different facts, different market structure, different strategies that maybe they would be going to court on that type of issue.

So it's at least trying to put something in writing and we have, as we'll talk about, seen a complaint filed, but I still think it's a very challenging case for the government to bring and ultimately for a judge to sign off on when you're trying to pick apart independent transactions, closed transactions, non-reportable transactions and paint it as some broad scheme as opposed to looking at the underlying merits of each incremental transaction.

Yeah, it's probably a good time, Ken, for me just to jump in and talk about U.S. Anesthesia Partners, that litigation-

Yeah, please.

... because we can use that as a sounding board for everything you just said. The FTC brought that case in September, and this is one where Welsh Carson private equity back in 2012 analyzed markets for anesthesiology services and found that there were markets that were fragmented. And that's not surprising, right? We know our anesthesiologists work locally, so you're not looking at a worldwide or even U.S. market or even regional market. You're looking at local markets, you're looking at small practices. A lot of anesthesiologists, like doctors, go into practices with 3 or 4, 10, 12 other anesthesiologists.

Welsh Carson identified the industry as one that could benefit from some consolidation, but that's probably not even the right word, could benefit from some heft coming to some of these smaller practices so that they can lower their costs. These are practices that have lots of regulatory issues, administrative licensing and malpractice insurance and so forth. There's a lot of costs, benefits to banding together to handle these administrative issues. Of course, bigger the practice, the more likely it is that you can have contracts with hospitals, for example, as opposed to just working at smaller surgical centers.

So what Welsh Carson did is they created U.S. Anesthesia Partners and then U.S. Anesthesia Partners went out and started acquiring additional businesses in Texas. And so the local markets were Dallas and Houston and some other cities in Texas, and they did that over a period of six, seven or more years. It wasn't until just this fall that the FTC said, "Okay, stop. What we're seeing is that Anesthesia Partners, USAP for short, has market shares in these localities from anywhere from 49% to 68% or more." And so in the FTC's view, that concentration was too much and would give USAP too much power.

So they brought this lawsuit, but I don't know that it's a good test case for the FTC for a couple of reasons. One, again, these acquisitions started more than 10 years ago, so there's this long history now of conduct and effects to look at, and I wouldn't be surprised if in discovery we learned that there are significant benefits to the anesthesiologists which are passed down, good efficiencies. And my understanding from the reporting I've seen is that in terms of the pricing, which is the big concern of the FTC, the pricing for the services has just followed the economy. And so not evidence that there's some sort of scheme to get rich quick. Couple colorful emails in the complaint, including one that says cha-ching, but we all know that words don't matter. What matters is what actually happened and what's happening. So I think this is not a good test case for the FTC. There seemed to be a fair number of defenses here.

I agree. It's a tough test case, especially when you focus on roll-ups and have to take into account scale lowering costs, geographic expansion, all makes sense.

Aurora, you were going to chime in too.

I was. I have to jump in and ask, and slightly in a different space. As a non-U.S. lawyer, you've obviously seen quite a bit of chatter in the press about the recent comments from Senator Warren on the subway acquisition. I'd be very interested in your perspectives on that. Is that another example of the U.S. regulators chasing roll-ups, and how do you view that particular case?

I think we're all getting a good laugh at the attack by the federal government on Big Sandwich. I'd like to say it's surprising, but on the other hand, in the current administration and current environment, there's just intense scrutiny on private equity transactions, even transactions involving sandwiches. And unlike the U.K., we have investigatory bodies that have to make a decision on whether to challenge a case in court or not. So the agencies investigate, they look at issues they've been considering somewhat novel issues, whether in a merger context or in a litigation context, but just investigating doesn't get you there. They'd have to go to court. Using Tara's phrase, test cases, I would be skeptical if Big Sandwich makes its way to the courtroom. But the agencies have a tremendous flexibility to investigate under the Hart-Scott process, but it really takes a lot more evidence, econometrics, fire in your belly to bring that case in court to actually seek to challenge the transaction.

I think it's quite interesting. And one of the points I also wanted to perhaps raise and discuss, as I mentioned earlier, that from the U.K. CMA perspective, we see the CMA applying the same analytical principles to a private equity transaction or a roll-up deal that we would expect in any other merger insofar as they're looking for, whether in their view there's a realistic possibility of a substantial lessening of competition, be it in national, local or other markets. My understanding is that the U.S. can potentially take a slightly broader view and take a different approach to looking at roll-up deals. So even if they don't identify a substantial lessening of competition, they could find routes to block a deal. Is that right? Or is that-

The FTC is definitely taking the position that they don't need to satisfy the usual Clayton Act Section 7 standard, which would require them to show that there is likely to be a substantial lessening of competition. The FTC points to its own FTC Act Section 5, which prohibits unfair competitive practices, unfair methods of competition. And there is some history of case law out there that shows us what that is. But certainly the FTC's position is it doesn't have to rise to the level of a violation of the Clayton Act or the Sherman Act for them to prevent a deal. So I don't know that we've seen them test that yet. I wouldn't be surprised if we do see them test that in this administration, but time is running short in this administration.

And certainly the proposed new merger guidelines basically are grab bag to find any strategic transaction potentially unlawful, or for the agencies to lobby to a judge any strategic transaction is unlawful. And again, I'm skeptical that the courts are going to embrace fairly partisan guidelines, especially given the history that prior iterations of the merger guidelines were grounded in econometrics and bipartisan.

Can you think that these are political steps that are being taken right now?

I do. I do. I think you hit the nail on the head that there are people at the agencies that would like to see Congress act and what we are seeing from the agencies are the types of actions that the anti-monopolists would like to see brought into legislation.

What's your advice for private equity in this environment?

I think you got to expect the unexpected that you need to build into your definitive documents time to see a transaction through, that you need to be prepared to engage with the agencies, that you need to be prepared to, in the United States, litigate, if necessary, with the agencies. And that can be striking to some clients that are used to a different enforcement environment where there was a little bit more predictability, a little bit more speed, but in these days, boy, you got to be ready to explain your deal on the merits and you got to be ready to fight it out if needed.

Aurora?

Yeah, from my perspective, I entirely agree with all of that. And one of the key things to think about early on, and this applies to all deals, but I think particularly in this enforcement environment to private equity-related deals, is think through the positives of the deal. What is your positive case? What are the benefits of the transaction that you can take to the authorities and describe to them to offset perhaps some of the messages that we're hearing coming out about the concerns that these types of deals can raise. And thinking about that early and weaving that into the deal strategy and engagement with regulators is increasingly important from an early stage.

I agree with that, and I think, especially when you're looking at the industries that the agencies have been concerned about with roll-ups, there seem to be so many pro-competitive benefits to talk about, and maybe at private equity firms, you're not used to speaking so much about that, but you should. There's just so much to say, especially in these small professional environments, local environments, private equity may be the only way that these firms can get together to increase their ability to have leverage and to lower their costs. So you should say so, if that's the case, if you think that's true.

I also think, at least in the United States, no deal is too small to escape scrutiny from the agencies at this point. And so you need to be thinking about the regulatory concerns probably even in deals where historically you wouldn't have and make sure you get some good analysis done. I think you could probably support the pro-competitive benefits with some good economic analysis early on, which might not be something you typically have done, but also think about the acquisition targets. Acquisition targets are hearing the same things in the news that you are about the agencies' concerns, and I think they're going to be cautious and potentially a little gun shy depending on the nature of the deal you're proposing. And so you probably have another audience to sell to in a different way from the way that you've done historically.

No, that's right. I had a client years ago who described getting ready for the HSR process as train hard, fight easy, and I think those words are more true today than ever. You need to be prepared.

Well, I'd like to thank Tara and Aurora for taking the time to participate in this podcast, and we thank you for listening and welcome any feedback and are always happy to speak individually about issues and dynamics in antitrust. You can feel free to reach out to any one of us. Have a great day and many thanks.

Thank you for joining us for today's episode of Fierce Competition. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at skadden.com.