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Small tech deals keep swimming amid FTC 'tidal wave' of merger reviews

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Small tech deals keep swimming amid FTC 'tidal wave' of merger reviews

The Federal Trade Commission's record-high level of merger reviews stands to have an uneven impact on the technology sector. While larger tech firms will continue to face heightened scrutiny, smaller technology deals, which drive the bulk of sector M&A, are likely to continue unimpeded.

The FTC is on track to review about 3,000 deals this fiscal year, which ends in September, far exceeding the annual totals of the past decade. This led the agency to warn recently that companies should expect more merger reviews to exceed the standard 30 days amid the "tidal wave" of filings. The FTC declined to comment further on any specific deals under review.

All deals valued at $92 million or more must be reviewed by the agency, though regulators also have the discretion to investigate smaller deals that they believe may be anticompetitive. While Big Tech firms have raised regulatory concerns over so-called "killer acquisitions," where they acquire nascent competitors to maintain market dominance, technology deals have comprised only 8% of the merger filings reported to the FTC for mandatory review under the Hart-Scott-Rodino Act over the past two years. By comparison, consumer goods and services drove the bulk of merger filings at 30%, according to FTC figures.

Analysts cite multiple reasons for the low share of tech deals, including the relatively small size of many tech acquisitions, which keeps them below the agency's threshold for review. But policy experts note that the FTC's warning that reviews may take longer — and its recent actions targeting prior deals by Big Tech — may dampen Big Tech's appetite for further deals.

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Small deals

Despite some notable exceptions, it has always been the case that most technology deals are smaller-dollar transactions that would not trigger automatic FTC review, said Scott Denne, senior research analyst with 451 Research. The smaller deals are being fueled largely by private equity firms and venture-backed startups, Denne said. In 2020, portfolio companies of private equity firms bought 482 U.S.-based tech companies in deals of $92 million or less, while venture capital-backed startups bought 302.

These buyers targeted small software companies as well as e-commerce, digital marketing, video streaming and cloud-computing companies, Denne noted.

U.S. tech acquirers announced 1,758 deals for the year-to-date as of Aug. 27, about 80% of which were valued below $92 million, according to 451 Research's M&A KnowledgeBase.

Should the FTC choose to look into deals that fall below the mandatory review threshold, regulators will be focused on competition issues, such as whether there is evidence of monopoly power in a smaller market, a rise in potential prices for consumers and/or a negative impact on the supply chain, said Bill Baer, the FTC's former director of the Bureau of Competition from 1995 to 1999.

Chilling effect

When companies submit merger filings, the FTC has 30 days to let the waiting period expire, allowing the parties to consummate the transaction or issue a second request for information about the deal.

Relatively few deals filed for routine FTC review result in a request for more information. Of the 2,089 transactions reported to the FTC in fiscal 2019, only 3% received such a request.

But "a decision by the agency not to act at this moment does not mean they will not act later," said William Kovacic, a former FTC chair and current law professor at George Washington University. "Don't think that you're going to walk away if there is a problem."

It is not just new deals attracting scrutiny. The FTC has a pending lawsuit against Facebook Inc. that targets the social media company's 2012 and 2014 acquisitions of Instagram LLC and WhatsApp Inc., alleging the deals were anti-competitive.

"If the FTC is sending signals that we may come after you later, that's definitely a problem," said William DeVinney, a litigator with Briglia Hundley whose practice includes antitrust.

While Big Tech firms are likely to be more cautious about the types of deals they pursue, the FTC's recent actions will not cool growth in overall tech M&A spending, according to 451's Denne.

"Those [Big Tech] buyers aren't really the ones that are driving the recent surge in tech M&A," Denne said. "If you look at Google [LLC] and Facebook, they are still acquiring every now and then, but their most active years are behind them."

Complicated negotiations

Buyers and sellers across industries will be assessing deals with heightened risk in mind given the current environment, said former FTC competition director Baer.

Buyers may decide to delay a potential transaction, while sellers may insist on deal clauses that require a purchaser to make payments to the seller in some circumstances, even if there are difficulties in closing the transaction.

"Negotiations are becoming more intense," Baer said. "Sellers are going to be more careful about protecting themselves, and buyers are going to do a deeper dive on the antitrust analysis than they might otherwise do."

451 Research is part of S&P Global Market Intelligence.