The US government continues to scrutinize a favorite tactic of the private equity industry — so-called roll-ups, or serial acquisitions — to determine if such M&A binges harmfully eliminate competition and violate antitrust laws.
On Thursday the US Department of Justice and the Federal Trade Commission launched a joint inquiry seeking information consumers, workers, businesses, trade groups, academics and elected officials, about mergers in which a company snags several smaller entities in the same or related industries.
Such strings of mergers have have long been a preferred technique of private equity firms that have quietly reshaped the American economy in recent decades.
Best known for its titans like Apollo Group, KKR & Co. and Carlyle Group, private equity emerged in the 1980s amid a boom in “leveraged buyouts,” which used large amounts of debt to purchase companies and take them private. Perhaps the best example of a roll-up strategy in action was the emergence in the 1970s and 1980s of Waste Management, a trash hauling giant created by the purchase of scores of small trash collection firms. The head of Waste Management, Wayne Huizenga, later applied a similar approach to create Blockbuster Video in the 1990s.
Today private equity is a massive player in the US economy. According to the American Investment Council, the industry’s trade group, the sector employed some 12 million people in 2022, and accounted for $1.7 trillion in economic activity, about 7% of GDP.
“The freedom to build businesses has been an essential component of a strong American economy for centuries. The ongoing attacks against buy and build will make it harder for entrepreneurs across our country to achieve the American dream, create jobs, and provide opportunities in their communities for workers and families," Drew Maloney, president and chief executive of American Investment Council, the private equity trade group, told Sherwood News.
One of the ways private equity firms got so big was by using roll-ups to create consolidated firms in previously fragmented markets. They simply purchased several smaller companies in the same industry, creating a market leader in the process. Because the individual companies that were purchased were often relatively small, for years many of these deals did not receive the same level of pre-merger scrutiny from regulators that multibillion-dollar blockbuster acquisitions did.
But under the Biden administration, that’s changed. Antitrust regulators at both the Department of Justice and the Federal Trade Commission have spotlighted the potential that private equity has created giants that dominate key industries, giving them too much power to raise prices and keep workers’ wages down, among other things.
Late last year, the DoJ and the FTC released new guidelines for mergers that stipulated that “a firm that engages in an anticompetitive pattern or strategy of multiple acquisitions in the same or related business lines may violate” the Clayton Antitrust Act.
Late last year, the FTC sued a Texas private equity company alleging a years-long scheme to quietly build an anticompetitive giant by gobbling up anesthesia practices in Texas markets. (A judge recently dismissed charges against the private equity company itself, which had created the Texas-sized anesthetic giant, but only owns a minority interest in the firm today. But the company itself that the private equity company created, US Anesthesia Partners, still faces the antitrust case.)
While private equity’s interest in health care has attracted particular attention from regulators, the new request for information on roll-ups suggests they are going to be looking more broadly at this practice, something key officials such as Lina Khan, head of the FTC, have said publicly for a while.
“We can look at businesses across the US economy and how they're structured and what their particular business model is can vary,” Khan said on Bloomberg’s Odd Lots podcast last November, after filing the Texas anesthesia case. “We've been particularly focused on healthcare markets, but especially after we filed this lawsuit, we've been hearing from market participants across sectors about additional areas where they believe that we should be scrutinizing, be it in healthcare or elsewhere.”
