By: Jim David, jdavid@hamiltonps.com  Lloyd Miller, lmiller@hamiltonps.com

The Origin Of The Merger Ban Proposal

During an April 23 webinar hosted by Open Markets Institute (OMI), Rep. David Cicilline (D-RI) proposed a temporary ban on all mergers and acquisitions in the U.S. during the coronavirus pandemic, unless one of the companies “is in bankruptcy or otherwise failing.” Five days later, Sen. Elizabeth Warren (D-MA) and Rep. Alexandria Ocasio-Cortez (D-NY) revealed their framework for a more detailed proposal. Cicilline and Warren then joined together, along with Senate Antitrust Subcommittee Ranking Member Amy Klobuchar (D-MN), to co-sign a letter asking Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin to use their authority in distributing CARES Act funds to restrict the M&A activity of firms receiving government support. While it’s unlikely Mnuchin or Powell would follow such guidance, the letter demonstrates growing support for the proposal.

The Warren/AOC proposal does offer some specifics, but only leads to more questions and concerns. Although sold as a temporary restriction, the proposal requires the Federal Trade Commission (FTC) “unanimously” decide that small businesses, workers, and consumers are “no longer under severe financial distress” – a threshold that some may argue will long outlast any health crisis. The proposed ban would not halt all M&A activity, but would bar mergers and acquisitions involving private equity firms, hedge funds, companies with over $100 million in annual revenue or market cap, or those holding “an exclusive patent that impacts the crisis,” covering literally tens of thousands of companies in the U.S. and around the world.

Despite Momentum On The Left, Proposal Faces Dim Prospects

The notion of a merger moratorium has started to get louder in recent weeks. Cicilline made his initial announcement at an OMI event specifically because the organization supports restricting mergers and acquisitions. Earlier this month, a group of 27 liberal activist groups, including Greenpeace US, MoveOn, Public Citizen, and Justice Democrats endorsed the Warren/Ocasio-Cortez proposal. And the liberal polling outfit Data For Progress recently published a poll showing 72% of likely voters support restricting M&A activity for companies receiving government support during the pandemic. In the House, supporters include consumer protection subcommittee chair Jan Schakowsky (D-IL), Democratic senior whip Jamie Raskin (D-MD), Congressional Progressive Caucus co-chairs Pramila Jayapal (D-WA) and Mark Pocan (D-WI).

Opposition to the proposal among congressional Republicans is likely to prevent the proposal from ever finding its way into law. However, there are still potential legislative vehicles for a version of this proposal to find its way into law:

  • Stimulus IV: Cicilline has said he wants to include this ban in the next stimulus bill, but it’s unlikely Democrats will want controversial provisions that prolong negotiations, though it could be used as a bargaining chip. There may be an attempt to tie government support to an M&A ban in this bill, but that, too, is almost certainly too controversial to pass the Senate.
  • Pandemic Anti-Monopoly Act: Warren’s proposed standalone ban is much more fleshed out than Cicilline’s proposal but lacks any support from the Senate GOP caucus.
  • Digital Markets Investigation Legislation: Cicilline has also stated he wants to include new restrictions on M&A in his forthcoming bill tied to his year-long digital markets investigation. However, this bill could be months away from being introduced, when the focus shifts from pandemic to economic recovery, making a moratorium tied to the pandemic moot.

The concept of a merger moratorium almost immediately attracted criticism, most notably from regulators who would be in charge of enforcing it. FTC commissioner Noah Phillips and Assistant Attorney General for the Antitrust Division Makan Delrahim have each publicly expressed their opposition to the idea. Phillips wrote in an op-ed that benefits from pro-competitive mergers “would be wiped out with a draconian ‘no mergers’ policy during the COVID-19 emergency.” On CNBC, Delrahim said that we should not “be using the crisis to just block all sorts of fully competitive and probably some transactions that would be very necessary during this time to make sure that companies have the liquidity to continue on and keep workers employed.” House Judiciary Republicans also recently sent a letter detailing their opposition to such a proposal, echoing many of these same concerns.

A Solution In Search Of A Problem

Mergers and acquisitions play a critical role in our economy by helping to allocate assets efficiently. Given how steeply M&A activity declines in economic downturns, this is a curious time to curb deal making. During an economic downturn, buyers tend to become risk averse, eschewing major investments in uncertain industries, while non-distressed sellers will reallocate cash reserves to fund operations while they wait for better conditions for value. For these and other reasons, M&A activity tends to decrease during recessions, as it did from 2007 to 2009 when Hart–Scott–Rodino filings declined 67%. This dynamic is playing out on an even greater scale in the present crisis; April had the lowest volume in global deal values since 2004, and some speculate that decline can get “much worse.” Some deals already in progress are going through messy coronavirus-induced break ups.

In a crisis, however, M&A can provide a lifeline for struggling companies. Taking it off the table at a time like this could worsen the current economic downturn by forcing companies to more aggressively cut costs through layoffs and furloughs and potentially take on higher levels of debt than they otherwise would. The exception for “truly failing firms” is particularly counterproductive, as a pre-bankruptcy acquisition can be preferable to a chapter 11 filing for all stakeholders, including workers.

As we know, some lawmakers never let a good crisis go to waste, but now is not the time to pursue ideological antitrust agenda. Capital is indeed fluid globally and U.S. regulators need to be careful that policies do not disadvantage U.S. companies in an era of increasing global competition. Forcing American companies to go bankrupt or take on large amounts of debt is a dangerous alternative that will only reduce the resiliency of our economy and lead to greater unemployment for a longer period of time.

A COVID-19 moratorium on M&A is a solution in search of a problem–and a potentially destructive one at that.