Serial Acquisitions and Roll-Up Strategies
TL;DR
Background: As various jurisdictions have sought to impose more stringent controls on mergers and acquisitions, one area of growing concern to policymakers and antitrust scholars has been a perceived increase in “serial acquisitions” or “roll-up strategies,” in which a larger company acquires numerous smaller, related companies and merges them into a single entity. Skepticism of serial acquisitions has been particularly evident in Europe, where several jurisdictions have sought to buttress their merger-review procedures in the wake of the European Commission’s unsuccessful Illumina/GRAIL case.
But… While critics of serial acquisitions argue that existing merger rules fail to apprehend competitively significant mergers that either fall below existing merger-filing thresholds or affect innovation in ways that are allegedly ignored by the current rules, these appeals are premature.
However… There is currently little evidence to suggest that mergers systematically harm consumer welfare. More importantly, proponents of more stringent review of serial acquisitions and roll-up strategies have failed to advance alternative merger-review procedures that would catch additional anticompetitive mergers without disproportionately increasing administrative costs and the number of false positives.
KEY TAKEAWAYS
A Political Cure in Search of a Problem
In most jurisdictions, antitrust merger procedures are triggered only when both merging parties’ revenue exceeds certain thresholds. This means that deals in which at least one party has limited turnover effectively escape antitrust scrutiny. In many jurisdictions, policymakers are revamping their merger rules to plug this perceived gap.
Several European member states either have already introduced or are currently contemplating “call-in powers” that enable competition authorities and, indirectly, the Commission to continue reviewing below-threshold mergers. During the Biden administration, U.S. antitrust agencies similarly launched a request for information on serial acquisitions and roll-up strategies. Unfortunately, these initiatives ignore the crucial question of whether raising the bar set by existing merger rules would actually benefit consumers.
Serial Acquisitions and Competition Concerns
Many of the activities described as “serial acquisitions” are indistinguishable from ordinary patterns of business growth and consolidation in maturing industries. It’s not clear why a growth strategy executed through multiple small acquisitions should be viewed differently than one reliant on so-called “organic” growth. There is also little evidence that such below-threshold acquisitions harm competition in ways that would warrant changing existing rules and procedures.
Recent research on private-equity acquisition strategies suggest the primary motivations for roll-up strategies are to unlock growth potential in capital-constrained firms and to improve the operational performance of underperforming firms.
Acquisitions generally match innovators who lack the resources to scale, such as capital or distribution networks, and larger organizations that possess those resources, but lack the incentives to innovate. Such combinations typically benefit both consumers and competition.
Both theoretical and empirical grounds are absent to support the contention that serial acquisitions are any more anticompetitive than the sum of their parts. Such deals do not generally alter the tradeoffs that have led competition enforcers to largely ignore mergers that fall below existing notification thresholds.
Special Scrutiny Would Be Costly
Clamping down on serial acquisitions would risk chilling legitimate, beneficial transactions; imposing disproportionate costs on smaller firms; and misallocating scarce agency resources away from more significant threats to competition. This is particularly concerning, given that the vast majority of mergers are either procompetitive and enhance consumer welfare, or are competitively benign. The literature here is vast, particularly in the case of vertical mergers.
Even the empirical literature on so-called “killer acquisitions,” such as one frequently cited paper that estimates between 5.3% and 7.4% of pharmaceutical mergers fit that category, does not appear to warrant heightened scrutiny. The literature offers no obvious ways to differentiate, ex ante, anticompetitive deals from the 92.6% to 94.7% that are presumably procompetitive.
Substantial costs could be associated with deterring anticompetitive transactions below existing revenue thresholds. For instance, overly zealous enforcement may reduce incentives for startup formation and innovation, decrease liquidity in capital markets, sacrifice efficiencies from beneficial consolidation, and reduce competitive pressure on incumbent firms.
A Positive Agenda
Competition agencies should adopt a nuanced, evidence-based, and context-specific approach to serial acquisitions and roll-up strategies. Agencies should build on existing research on mergers, rather than pursue broad new rules or presumptions based on limited evidence. The competitive effects of such acquisitions may vary significantly by industry and geographic market.
In pharmaceuticals, for example, serial acquisitions may be a vital mechanism to bring innovations to market, while in other sectors they might raise more significant or more frequent competitive concerns. Only through rigorous, sector-specific research can the agencies develop a nuanced understanding of these strategies’ competitive effects.
Furthermore, competition agencies should seek to develop more focused and productive requests for information on critically important issues in serial acquisitions. They also should recognize that sound policy reform requires a firm foundation in both research and enforcement experience, along with attention to established precedent.
Moreover, it is important that competition agencies be cautious about drawing general conclusions about entire industries, business models, or methods of acquisition, and more cautious still in condemning them.
Finally, policymakers must consider the tradeoffs inherent in any new reporting requirements or regulatory approaches that effectively increase the number of deals scrutinized by enforcers, while carefully weighing any potential benefits against the burdens imposed on businesses and agency resources.
For more on this issue, see the International Center for Law & Economics’ (ICLE) “Comments to the DOJ Request for Information on Corporate Consolidation Through Serial Acquisitions and Roll-Up Strategies, Docket No. FTC-2024-0028” and its “Comments to Autorité de la Concurrence on Introduction of a Merger-Control Framework for Addressing Below-Threshold Mergers.”