The Federal Trade Commission (FTC) plays a vitally important role in protecting consumers and the competitive process. However, this role is limited to the enforcement of existing laws as enacted by Congress and focused on cases where there is demonstrable and legitimate harm. Under current leadership, the FTC has brought complaints against companies using untested legal theory and pursued rulemaking authority under an expansive reading of Section 5. In response to the Innovation, Data and Commerce Subcommittee Hearing, the American Consumer Institute has released a series addressing the changes at the FTC and how they undermine consumer interests in the competitive process.
The Federal Trade Commission (FTC) has made its merger review and investigation process longer and more costly in recent years. Changes such as suspending early termination for deal reviews and showing a growing hostility to large firms have drastically increased the time and expenses involved in entering into a merger. These added barriers to entering into mergers, which are a necessary part of any industry, have the unfortunate consequence of decreasing innovation and efficiency.
On February 4, 2021, the FTC announced a temporary suspension of early terminations (ET) on merger reviews. ETs were granted to mergers that presented no threat to competition, allowing these “noncontroversial” mergers to proceed before the FTC’s 30-day review period had expired. Firms could receive multiple extra weeks to finalize mergers and get back to business, saving companies time and money.
These deals were so popular that nearly three fourths of merger notices involved an ET request. Of these, a further three fourths received early termination. All in all, almost half of merger reviews were terminated early, collectively giving months of wait time back to firms so they could continue doing business.
As former Commissioners Noah J. Phillips and Christine S. Wilson wrote in a statement regarding the FTC’s decision, suspending this popular procedure has rarely occurred. The reason for the FTC’s suspension of ETs was to deal with an unusually high number of merger notices during the transition between the Trump administration and the Biden administration. Phillips and Wilson point out that this is the first time such a reason has been given. Prior suspensions were all due to government shutdowns or Covid-19, not executive transitions.
Though this policy was meant to be “brief” in the agency’s own words, it has now been over two years since its enactment, with no sign of a reversal. In a Q&A with FTC Chair Lina Khan, Khan openly acknowledged that she is not interested in efficiency with how the agency allocates its efforts.
At the same time the agency is forgoing a streamlined review, it’s requesting an expanded budget. The FTC’s 2023 approved budget was $430 million, only 12 percent less than it requested. If granted its 2024 request, its budget would balloon by an additional 37 percent, double from four years ago.
Businesses have made drastic changes to accommodate the FTC’s more aggressive approach. The average merger investigation between 2011 and 2016 took 8.1 months. For Q3 2022, it had jumped to 11.3 months, an increase of nearly 30 percent. Long wait times, increased filing fees and a more aggressive review process make mergers far more costly than they used to be. At the same time, between 2021 and 2022, the total value of global mergers and acquisitions (M&A) fell 35.8 percent. Though M&A is expected to increase in 2023, some are concerned that actions by the FTC could stifle this rebound.
Mergers are a healthy part of business and have multiple positive consumer effects. A study by Jan Bena and Kai Li, “Corporate Innovations and Mergers and Acquisitions,” analyzes why firms enter into M&A and how this affects their innovation. Bena and Li find that firms with high patent output and low research and development (R&D) often acquire low patent output and high R&D firms. Post-merger, these complementary attributes result in an overall increase in patent outputs, as the higher R&D firm can actualize its investments. Patent filings are frequently, albeit imperfectly, a proxy for evaluating innovation.
Creating unnecessary delays to M&A, especially for business actions that would have previously received “early termination,” will result in decreased innovation and efficiency. The FTC has made it clear that efficiency is not its priority. Consumers and taxpayers, on the other hand, will bear the costs of the FTC’s actions.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.