Has Private Equity Finally Gone Too Far?
After an attempted looting of supermarket giant Albertsons, two private equity giants induced a backlash from antitrust enforcers. Have the billionaires finally overreached?
Welcome to BIG, a newsletter on the politics of monopoly power. If you’re already signed up, great! If you’d like to sign up and receive issues over email, you can do so here.
Today I have short pieces touching on a number of areas.
Antitrust enforcers threaten private equity giants in their secret attempt to loot supermarket giant Albertsons.
What would a GOP takeover of Congress mean for antitrust?
Over the counter hearing aids go on sale.
FTC goes after the monopolists on the farm.
Antitrust enforcers dust off an old law against corporate collusion and force the resignation of multiple private equity partners sitting on corporate boards.
Two other announcements. One, my organization launched a campaign to break up TicketMaster. If you want to help, go here to pester the Antitrust Division. Two, I’m doing an event today (Thursday) at 8pm with the Financial Times’s Rana Foroohar on her new book, Homecoming. You can sign up to watch and ask questions here.
Enforcers to Billionaires: Stop Looting
Last week, I wrote about the Kroger-Albertsons supermarket merger, which briefly rocked the antitrust world. Multiple politicians, including Mike Lee, Elizabeth Warren, and Bernie Sanders, have come out against the deal or eyed it skeptically, because it would form a 700,000 employee giant in the $1 trillion grocery business with the power to reshuffle our food system.
A lot of people analyzed the overall deal, but I focused on how two large investors in Albertsons - private equity giants Cerberus and Apollo - sought to short-circuit antitrust law itself. They did this by planning to take all the cash and working capital from Albertsons through what is known as a ‘special dividend.’ They would do this long before any sort of investigation could even begin. Other analysts of private equity, such as Eileen Appelbaum and Andrew Park, noticed this problem as well.
My hope was that antitrust enforcers would step in and try to stop not only the merger, but the special dividend. Doing so would be a huge deal, an attempt to use antitrust law in a creative way to push back on financial engineering. I thought enforcers would try to block the merger, but I did not really expect action on the dividend. I am happy to note that yesterday, seven state attorneys general sent a note to the Kroger and Albertsons CEOs asking them to cancel the special dividend.
D.C. Attorney General Karl Racine, who is generally the most aggressive state official, said that if Albertsons refused, his office may seek an injunction to delay the payout. Here’s Racine on Squawk Box, talking to anchor Andrew Ross Sorkin (who can’t quite believe Racine would do that.)
The rest of the interview is about the merger itself, and Racine goes on to discuss the squeeze on suppliers and workers from the transaction. But the most surprising thing is the potential action on the special dividend. I am very pleased that enforcers took our analysis to heart.
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Last week, I published an analysis of what a Republican takeover of one or both Houses of Congress would mean for the anti-monopoly project. The basic story is that we can expect a weird two-track dynamic. On a superficial level, House Republicans, led by Jim Jordan, will be deeply hostile to the Federal Trade Commission and Antitrust Division, limited mostly by their attention on other non-antitrust related matters. But on a deeper level, we will see a war within the Republican Party, glimpses of which were visible last month when a large chunk of Republicans broke off from their party leadership and voted for stronger antitrust laws.
This situation is paralleled by a broader ideological transformation in the conservative world, away from business-friendly U.S. Chamber of Commerce politics to a more populist approach. In 2019, for instance, Fox News host Tucker Carlson spoke at the National Conservative Conference with a speech titled “Big Business Hates Your Family.” Carlson mocked the fecklessness and corruption of current antitrust thinkers. And this wasn’t fake - he was asked what he thought of Elizabeth Warren, and responded with, “Elizabeth Warren wrote one of the best books I’ve ever read on economics. She wrote a book called The Two Income Trap with her daughter. It’s an amazing book, you should read it.” He proceeded to attack Warren on social questions, but the economic populism is an important theme.
This ideological shift is why Jordan lost that vote over antitrust. Jordan largely focused on attacking the personal reputations of antitrust enforcers, especially Lina Khan, who he alleged was recruiting Marxists to the FTC. Congressman Ken Buck, a conservative from Colorado, was the leading figure on the other side of Jordan. Over the last year, Buck sat down with 70-80 Republican members to explain antitrust legislation and how it works. Buck made an argument on the substantive elements of antitrust, not the personalities. He noted that it didn’t matter if the Democrats had MSNBC, because conservatives have Fox News. Same with the New York Times oped page versus the Wall Street Journal oped page. But, he said, if Google discriminates, there is no alternative, because Google is a monopoly. What conservatives dislike about Big Tech, he argued, is downstream from market power. And once Buck got people away from the personality issue, he was persuasive. Several Republican establishment members decided on the floor after listening to the debate, because they thought Buck had the better argument.
So that’s why Buck won. The most important impact of the legislative fight is less the victory than the fact that antitrust is now a hot issue on the right. For the last year, most Republican members refused to pay attention to the debate. They simply did not think the Democrats were serious about bringing legislation to the floor. But once Pelosi announced that there would be a vote, Republicans realized they had to learn about antitrust. Now, because of this vote, the incoming class of members will be more interested in the problem, and will try to understand the substantive merits.
If the GOP wins the majority in the House, conservative Jim Jordan, aided by Kevin McCarthy, will become the Chair of the Judiciary Committee. And he will spend time trying to undermine and defund the FTC, and undercut Ken Buck. We can expect oversight hearings, subpoenas, and lots of accusations of wrongdoing. But Jordan has a problem, because at least in this area, he’s cross-wise with his base. Republican voters are angry at Big Tech monopolists. We’re also seeing this play out in miniature with a fight over the next GOP FTC Commissioner, which Mitch McConnell is choosing right now.
So basically, the Republicans aren’t unified on market power, so if they are in a governing position, we can expect a war within the right. The longer version of this analysis, with a lot more detail on the right-wing FTC pick, is here.
Can You Hear Me Now?
It takes awhile for policy changes to impact our lives, but at least in the case of hearing aids, we can move beyond the ‘this is theoretical’ stage. I wrote up the fight over taking on the hearing aid cartel late last year, and this month, over the counter hearing aids went on sale.
Walgreens on Monday started selling over-the-counter hearing aids online and at its stores nationwide for $799 a pair. By comparison, the average cost of prescription hearing aids can range between $2,000 and $8,000, according to the company.
CVS is selling over-the-counter devices on its website with prices ranging from $199 to $999. The drug store chain will also start offering them at select pharmacy locations beginning in November.
Walmart is also offering over-the-counter hearing aids online and in stores in Colorado, Michigan, Missouri, Ohio, Pennsylvania, Tennessee and Texas. The devices will be available at additional locations nationwide, according to the company. Prices range from $199 to $999 depending on the device.
It’s not a perfect situation. For instance, the FDA rules don’t allow software-only solutions to be called hearing aids, so even though Apple earpods can function as hearing aids, Apple can’t say that explicitly it makes hearing aids. Still, it’s a big step forward to create an entire new market segment.
Late last month, the Federal Trade Commission revealed it was working with ten state attorneys general, including Texas uber-conservative Ken Paxton, to sue two dominant firms who sell pesticides at elevated prices. They are specifically going after two corporations - Syngenta, a Chinese-owned seed and chemical firm, and Corteva, the result of a merger of two U.S. firms, Dow and DuPont.
There are a few interesting aspects of this case. First, it has to do with farmers. Lina Khan is not only doing this with state enforcers, but also wrote an oped in the Des Moines Register explicitly signaling to rural America that the goal of the FTC is to stop middlemen from preying on farmers.
The monopoly problem farmers face is really bad. On the input side they must deal with equipment producer John Deere, fertilizer giants CF Industries and Nutrien, and seed/chemical goliaths Bayer/Monsanto, among others. On the other side, they face giant buyers like ADM, Bunge, Cargill and Louis Dreyfuss, who in turn sell to large supermarket chains like Walmart and Kroger, and broadliners Sysco and U.S. Foods who sell to restaurants, institutional facilities, and food service giants. It’s consolidation all the way up and down the chain.
This move by the FTC, to address one small part of the input side, is a meaningful start. If it works, then farmers can bring their own suits without waiting from the government. Here’s a badly drawn graphic showing the basic problem farmers face.
The products at issue are fungicides and herbicides (Azoxystrobin, Metolachlor, Mesotrione, Oxamyl, Acetochlor) used on corn, apples, peanuts, citrus fruits, pears, carrots, peppers, tomatoes, tobacco, sugarcane, etc. pretty much anything you can grow. Corteva and Syngenta have essentially been paying distributors not to carry rival, cheaper products, so they can maintain higher prices. This is done under the veil of “loyalty” programs to dealers, but it’s a way of blocking competition and keeping prices high.
In attacking this arrangement, the FTC is resurrecting dormant legal tools. The commission is filing under Section 3 of the Clayton Act, a law prohibiting certain exclusive dealing arrangements. This provision hasn’t really been used in decades, and its use is a direct attack on the status quo antitrust establishment.
Normally, enforcers use the Sherman Antitrust Act on such arrangements which requires a judge to hear all the evidence and make a decision about whether output has been hindered. Doing so requires lots of economic analysis and is done under a consumer welfare test involving price theory. But the Clayton Act has a different standard, and under key court precedent (Standard Stations in 1949), judges have much less discretion. One must only prove that Syngenta or Corteva control a significant share of the market, and that they are blocking rivals. You don’t have to prove prices are affected, just that the structural behavior is happening. There are other reasons why the FTC’s legal approach is innovative, but that’s the main one.
So basically, there are two lessons to take from this lawsuit. One, Lina Khan led bipartisan antitrust suit, using provisions of the Clayton Act that had been dormant for decades, to stop Wall Street from attacking the American farmer. Two, my handwriting is horrible.
In Other People’s Money: The Bankers and How They Use It, future Supreme Court Justice Louis Brandeis described how America’s ‘financial oligarchy’ maintained power. He was writing in 1912 and describing the method that J.P. Morgan used to control the corporate sector. A key method was to use interlocking directorates, the “most potent instrument of the Money Trust,” which was when one man held “the inconsistent position of director in two potentially competing corporations.”
Brandeis described how overlapping directors fostered a daisy chain of corporate relationships, where a Morgan railroad firm bought steel from Morgan-dominated U.S. Steel, which borrowed money from a Morgan bank, which lent to Morgan’s General Electric, which sold electrical supplies to U.S. Steel, and so on and so forth. Basically interlocking directors facilitated turning corporate American into one giant collusive arrangement, erecting a silent clubby barrier to entry for new firms who didn’t have a board-level relationship with a potential large client.
The next year, in 1913, Congress passed Section 8 of the Clayton Act, which barred interlocking directorates. And it worked. For a long time, corporate America, though full of big firms, was not part of a large Money Trust-type of arrangement. But the Clayton Act, like much of antitrust doctrine, sat rather unused for forty years. So this ‘most potent instrument of the Money Trust’ returned.
The most prominent example of the return of corporate collusion was in the mid-2000s, when Google’s Eric Schmidt, because he was sitting on the Board of Directors of Apple, cooked up a scheme with Steve Jobs where they would stop hiring each others’ employees, which ultimately led to an embarrassing wage-fixing conspiracy and series of lawsuits throughout Silicon Valley. This was done on a ‘handshake’ basis, which is much easier when you are sitting in the same boardrooms.
The interlocking directorate problem today is most common among private equity firms like Thoma Bravo, Apollo, and Silver Lake, who roll up entire sectors and impose common operating standards on competitive firms. The law was so irrelevant that there was no reason to assume anything might change. That is, until it did change, two weeks ago. On October 19th, the Wall Street Journal reported a story with the headline, “Corporate Directors Resign as U.S. Targets Overlaps at Competing Firms.”
Three directors of SolarWinds resigned in response to the DOJ’s concerns about board overlaps, the Justice Department said. The three former board members all represented the interests of private-equity firm Thoma Bravo LP, the DOJ said. Investment funds managed by Thoma Bravo own 31% of SolarWinds’s shares outstanding, according to SEC filings.
Seth Boro has been a director at SolarWinds and is a managing partner at Thoma Bravo, according to SolarWinds’s most recent annual proxy statement. Mr. Boro is also a director of Dynatrace Inc., according to securities filings. James Lines and Michael Hoffmann also work at Thoma Bravo and have served on SolarWinds’s board, the proxy says.
SolarWinds is a network-management company that says its competitors include Dynatrace.
Solar Winds is the firm responsible for a historic hack of U.S. nuclear facilities because of the corporation’s poor quality standards. But poor quality doesn’t matter if most competitors are equally bad. Thoma Bravo, the PE investor in Solar Winds, also invests in Solar Winds rivals, and has its people on the boards of both companis. So they don’t even need an agreement to collude, it just happens naturally.
And that’s the logic for the Antitrust Division’s revived attack on interlocking directorates. It prevents the informal kind of collusion that allows private equity to dominate an entire sector through the same kinds of clubby social networks used by J.P. Morgan more than 100 years ago.
The Antitrust Division went after a number of firms beyond Solar Winds. They publicly forced the unwinding of five different interlocking directorates, in industries as varied sales intelligence software, space infrastructure, components and technologies for use in transportation applications, online corporate education services, and application performance monitoring. The goal here is to stop conspiracies before they start.
The effect of this action will reverberate across corporate America, as I’m sure plenty of antitrust lawyers are reading up on Section 8 precedent so they can advise clients. It’s not just the government that can enforce the Clayton Act. Private plaintiffs can do so as well. And they are easy to bring, since they mostly require showing an interlocking directorate and not much more than that. No fancy economists or market definition, just show they are competitors or potential competitors in product or labor markets, and boom there you go.
Clayton Act Section 8 cases aren’t profitable, but they can be brought by private parties, even by law student clinics. And wow is the economy full of interlocking directorates. For example, here’s a paper that came out just a few days after the Antitrust Division’s actions were announced showing that over half of all companies above $5M in revenue in the life science industry have “potentially illegal interlocked boards.”
That’s… a lot. So if corporate America seems like it is moving in lockstep, you’re not imaging things. They really are. Fortunately, we have a law to address it, and the Antitrust Division is finally enforcing it.
What I’m Reading
Xbox Boss Phil Spencer Wants to Sever Apple-Google ‘Duopoly’ in Mobile Games, Wall Street Journal
Corporate Card Startup Mercantile Raises $22 Million To Target An Unusual Niche: Professional Associations, Forbes BIG readers are doing some interesting things, including challenging conflicts of interest in the medical industry.
“Competition and the Two SECs” Remarks Before the SIFMA Annual Meeting, Gary Gensler, Securities and Exchange Commission
Why Ticketmaster SHOULD BE BROKEN UP, Breaking Points with Krystal and Saagar
CMA orders Meta to sell Giphy, Competition and Markets Authority
Thanks for reading!
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