Is Biden Accidentally Giving the Green Light to Mega-Mergers?
The Federal Trade Commission let a $39B pharmaceutical merger through without any scrutiny, and the Antitrust Division let Michael Milken roll up the salt market. Where's the change?
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Today I’m going to write about the Biden administration’s first major antitrust move, a clearance of a giant pharmaceutical merger which signaled to Wall Street that Biden hasn’t made antitrust a priority. It’s not the worst news, but it’s not good news.
Before that, a little house-keeping. First, Brian Barrett at Wired wrote a good piece on how Logitech’s Harmony monopoly killed the universal remote control industry, going into more detail than I did a few weeks ago on the same subject. Second, last year I wrote up a board game monopoly roll-up by a firm called Asmodee, which owns Settlers of Catan. Paul Tullis at Bloomberg did a more thorough job last week on how they’ve done through the pandemic.
A number of sources have told me that the merger space is the busiest they’ve ever seen, which is probably a result of being able to borrow a lot of money cheaply (courtesy of the Federal Reserve). Wall Street knows it. “It’s the busiest I’ve ever known it,” Farah O’Brien, a private equity and M&A partner at Latham & Watkins told the Financial Times. “There’s a ton of capital that is desperately trying to find a home. I wouldn’t say there’s caution in the market at all.”
It’s happening in every sector, from lithium mining to electric utilities to semiconductors to pharmaceuticals. Mergers tend to lead to layoffs, higher prices, less innovation and research, and a more brittle supply chain, and they amplify the control monopolies have over our society. There are even weird new ways of self-dealing via mergers, like the trend of private equity funds selling their own portfolio companies to themselves, and the new cheating special of 2021, the special-purpose acquisition companies, or SPAC. The details of how are not particularly important, suffice to say that what is happening is a massive transfer of wealth and power to a small group, far beyond the inequality we’ve known.
Last year, before the GOP got interested in the problem of monopoly power, Elizabeth Warren, AOC, and David Cicilline proposed a merger ban to stop the consolidation fueled by the CARES Act and the actions of the Federal Reserve. It went nowhere, and Trump’s antitrust division wasn’t interested in doing much to stop the merger boom.
Then Joe Biden won the Presidency, and Biden, it seemed, had an interest in the one tool that could arrest this merger boom: antitrust. It started off quite well; Biden has picked Tim Wu to be in the White House to oversee competition policy. There are two antitrust enforcement agencies, the Antitrust Division and the Federal Trade Commission. And Biden nominated antitrust expert Lina Khan to be a commissioner at the FTC, who fired a warning shot at big tech. There’s still a lot of momentum. Today, the House Antitrust Subcommittee held a hearing with lots of testimony on problems with big mergers in the pharmaceutical space.
But then we get to the temporary leadership of the antitrust agencies, who have been in charge for a few months, which is enough time to judge some actual results. The person Biden appointed to be acting chair of the FTC is Rebecca Kelly Slaughter. There were reasons to think she might be an aggressive enforcer. While in the minority, Slaughter had a mixed, if reasonable, record. While she cleared an unnecessary giant industrial gas merger, she also wrote several dissents opposing giant pharmaceutical mergers, asserting the way the FTC looked at these mergers was too permissive. These dissents were a big deal, because the FTC has pretty much allowed big pharma to get away with whatever it wants, which is one reason medical prices keep skyrocketing.
Upon being appointed acting Chair, Slaughter made the right noises. She stopped giving early termination to mergers. She announced a workshop on ‘dark patterns,’ which are deceptive user interface practices used by tech platforms and video game firms. Last week, the commission issued a statement on ethics in big data sets, saying it would deploy its tools to address algorithms that violate anti-discrimination laws. Most importantly, last month, she made an announcement that she would be forming an international working group to ‘rethink pharma,’ collaborating with enforcers from all over the world to research new ways of bringing cases against pharmaceutical mergers. The signaling was aggressive, with the headline in WSJ being “FTC Prepares to Take Tougher Stance on Pharmaceutical Mergers.”
Still, all of these choices were just procedural, they did not actually address the main problem with the FTC. And that is, the commission lacks credibility because no one on Wall Street or in the corporate world takes the FTC seriously as a law enforcement body. The FTC whiffed badly on Facebook and Google, but years before that, it did nothing during the run-up to the financial crisis, despite its authority over consumer protection in the financial space. The situation is so bad that Slaughter’s fellow commissioner Rohit Chopra told the Senate Commerce committee today that “it's become a right of passage for Silicon Valley companies to get an FTC consent decree," and then violate it.
I wanted Chopra to be the Chair of the commission, but Biden moved him to the Consumer Financial Protection Bureau, where he will address Wall Street problems. So then the open question became, what happens when acting Chair Slaughter actually confronts a questionable but difficult merger? And unfortunately, now we know.
Last week, the FTC allowed the $39B merger of Astrazeneca-Alexion without any significant probing, much earlier than investors expected. Now, I haven’t looked into this merger in-depth. The problem is that the FTC didn’t seem to look at it in-depth either. The FTC cleared it without asking for information on the tie-up, which means that the two firms effectively got special permission to merge faster. I get why it’s risky to challenge mega-mergers, but the Biden FTC went out of its way to move this one along faster. And that’s not the only pharma merger Slaughter has waived through; as the Capitol Forum reported, Jazz Pharmaceutical’s $7 billion purchase of GW Pharmaceutical, and Horizon’s $3 billion buy-out of Viela were also cleared extra fast, meaning the commission didn’t bother to ask much about how these mergers might affect the market.
Investors are already taking these clearances as a signal that it’s business as usual in the merger world. In a recent Wall Street Journal piece, Charley Grant cited the clearance of this specific deal as evidence more mergers are on the way. Any intervention by enforcers in the merger boom, he told Wall Street, “seems unlikely in the near term, as the administration has focused on other priorities.”
Other priorities. Wow.
A few headlines also make the point.
The FTC isn’t the only wayward agency out of step with the new Biden frame on cracking down on concentrations of power. Last week, the Department of Justice Antitrust Division cleared Michael Milken’s takeover of Morton’s Salt, which was a merger I wrote about in March designed to force up prices for deicing salt in the Upper Midwest. The DOJ did force the merged entity to sell off their consumer and pharmaceutical salt business, which is useful, but they allowed the takeover of the deicing salt market. And more importantly, they signaled to dealmakers that merger policy is still permissive. That’s not good.
Now, challenging mergers is resource intensive. And while I don’t think most mergers should be legal, the law is what it is. That said, clearing these mergers sends a signal that all the announcing and workshops and guidance is just fluff. We’re in a merger boom, and a lawless economy, with no cops on the beat.
All is not lost. The main antitrust appointments for the administration aren’t in, and the Biden administration has done a pretty good job across government agencies putting in people focused on competition. As I noted earlier, Khan will join Slaughter at the FTC, and Khan has a more assertive approach. Additionally, the Biden administration hasn’t made a decision on the new antitrust head of the Department of Justice, or the permanent FTC Chair. Jonathan Kanter, for instance, would be a very strong pick for the Department of Justice slot, and a signal to big tech and Wall Street that the party’s over.
Signals can work both ways. It’s just that right now, the Biden administration is signaling, unwittingly, that they are fine with business as usual. And I don’t actually think they are.
One Benefit of Biden's Capital Gains Tax Hike: Fewer Mergers. Last week, Joe Biden proposed a capital gains tax hike, from 23.8% to 43.4% for households making more than $1 million. That is, when a very wealthy person sell a financial asset, any gain will now be taxed at a higher rate, roughly the same as their income tax.
What’s useful about this particular proposal from an anti-monopoly perspective is that the main tax on mergers and acquisitions is, in fact, capital gains. And when you raise taxes on something, you usually get less of it. There is some research on the interaction between mergers and capital gains taxes. In the European Economic Review, a group of European economists found that “a one percentage point increase in the capital gains tax rate reduces acquisition activity by around 1% annually.”
In other words, mergers drop when it’s less profitable to sell companies, especially when the buyer is paying cash, since that triggers capital gains.
Big Supermarkets Kill Your Favorite Products Since the early 1990s, supermarkets have been consolidating rapidly, with the top twenty biggest increasing their share of the market from 35% in 1990 to 65% in 2019. There were 300 mergers in this industry just in 2019 alone, as the Department of Agriculture shows in this chart.
So what? Why is this bad?
Well, CNN reporter Nathaniel Meyersohn had an interesting observation from oat milk producer Oatly’s F-1 investor document for its IPO. Oatly’s goal is to sell sustainable food products to address health problems and climate change, starting with oat milk. In its risk factor section, the corporation noted that consolidation is a major risk because it leads supermarkets to reducing the number of brands they carry.
Supermarkets, grocers and other retailers in North America, the European Union and Asia continue to consolidate. This consolidation has produced larger, more sophisticated organizations with increased negotiating and buying power that are able to resist price increases, as well as operate with lower inventories, decrease the number of brands that they carry and increase their emphasis on private label products, all of which could negatively impact our business.
One of the arguments Amazon makes to justify selling its own private label products ahead of the products sold on its platform by third parties is that supermarkets often do this as well. What Bezos and co. leave out, of course, is that the ability to self-preference your own private label product, for supermarkets as well as Amazon, is probably a result of scale and some level of monopoly power.
The Free Market Is Dead (Time Magazine) Chris Hughes, who is famous for co-founding Facebook and then calling for Facebook to be broken up years later, has an important article in Time Magazine on how the era of free markets is over, and it’s time to start thinking about markets as explicitly managed. What I found most compelling about the article was his description of the “oldest continuously operating farmers market in the United States, the Lancaster Central Market,” which has been in Pennsylvania Dutch Country since 1720.
That market basically operates according to the same principles it did back then. It used to have a market clerk to settle disputes, enforce rules, and manage standard weights and measures. Today it’s a market association, but the rule-setting role for cleanliness and quality is the same. “The market makers,” Hughes writes, “ensure that there’s a good mix of vendors and that the sellers and buyers act ethically and legally—no stealing, cheating, or misrepresenting the quality or provenance of goods.”
Market structure is getting political again. And Hughes is pointing to the kind of politics he thinks the country is moving towards.
The European System of Monopoly (The Counterbalance) This is an excellent interview with one of my favorite antitrust officials, Tommaso Valletti, who was the Chief Competition Economist at the European Commission from 2016 until 2019. In this piece, Valletti just unloads on the corruption in Brussels. Also, the Counterbalance is a new newsletter on global monopoly movements, and it is very good.
Going to the vet: what happens when private equity invests in a cottage industry (Financial Times) A very ugly story about the takeover of European veterinary clinics by private equity firms.
Procter & Gamble Will Raise Prices in September(Wall Street Journal) Price hikes are probably inevitable since input costs are going up, but it would be harder to raise prices if firms didn’t have massive market power.
Thanks for reading. Send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.
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