Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez have announced plans to introduce a bill that would ban company mergers during the pandemic crisis. The chairman of the House Judiciary Antitrust subcommittee, David Cicilline, is also seeking to add similar provisions to any future support or stimulus bill Congress considers in the future. On the surface, the idea may have merit — stopping companies “taking advantage” of the weakness in the economy to “prey” on smaller and more vulnerable enterprises. But beneath the surface, there is almost nothing that could be proposed that would be more counter-productive to weak companies in this challenging period than this proposed intervention.
What is fascinating is the sleight of hand the two lawmakers are using — calling their bill the “Pandemic Anti-Monopoly Act,” but then defending it on the basis of an anti-predatory rationale. Antitrust laws were not repealed when the coronavirus pandemic struck, so if there is a proposed merger that could violate them, regulatory agencies such as the Federal Trade Commission and the Justice Department already have the jurisdiction to step in. This would, of course, cover the formation of an unlawful monopoly, but Warren and AOC’s broader concerns about “predatory” behavior are worth a closer look in their own right.
The bill would bar acquisitions by certain categories of purchaser (private equity firms, hedge funds, or any company with $100 million of revenues or else $100 million in market capitalization) until the FTC determined that “small businesses, workers, and consumers are no longer under severe financial distress.”
It is worth remembering that acquisitions cannot be closed without two signatures — that of the buyer, and that of the seller. To the extent that a would-be seller does not believe it is in his or her best interests to sell, a “predatory” buyer will not be able to close the deal. The principle of free exchange is still at play, as it was before COVID and will be after COVID. Now, of course, Warren and AOC may very well argue that some beleaguered companies are so bruised from the economic turndown that they lack the ability to act on what is in their best interests, particularly over the longer term. Nevertheless, the arrogance implicit in the assumption that a representative and a senator are more qualified to assess risk and reward than the principals of a business whose net worth and income are actually at stake is staggering. In fact, the cut-off from opportunistic capital for companies experiencing cash flow or strategic challenges may very well be their death warrant. The law that is supposedly designed to protect them may ensure their destruction — a destruction that trickles down to their employees, vendors, counter-parties, creditors, and shareholders.
What happens if an opportunistic buyer is legally banned from taking an equity position in a distressed company? They will move up the capital structure to an infusion of debt. Is that the result Warren and AOC are seeking — the piling on of more (and presumably expensive) debt on companies that are already struggling? Why would that be a better result for the “little guy” than a voluntary strategic equity transaction?
The unintended consequences of this bill would either be (a) more business failures, meaning more debt defaults, unemployment, and contagion effects throughout that company’s vendor network, or (b) the additional leveraging of companies that are already in distress with an almost inevitably negative effect on their future growth, and with that their ability to increase wages and hire more workers.
An infusion of equity would be the preferred option for many companies in distress. But what about companies not in distress? What about a micro-cap biotech company who has a promising treatment for viral respiratory infections, but needs more capital, infrastructure, R&D, and distribution capacity to see it all through? The vast majority of-pre phase 3 pharma companies use M&A as their exit and monetization strategy. Could it be that this ban would actually prevent a marriage from happening which would have enabled a treatment for COVID from coming to market? That might be an extreme case, but it is highly likely that there are many small, under-resourced businesses that have developed products or identified opportunities but lack the resources to develop them for themselves. The best option for them is often acquisition by a better capitalized strategic partner.
At the core of all this is the age-old “knowledge problem.” Warren and AOC’s fatal conceit is to believe that they know more about what a given small business needs or does not need than the owners and management of that business. A time of crisis only makes the stakes higher. Disconnected politicians who have no knowledge of specific company issues, sector challenges, and the countless nuances that exist within an industry can do irreparable harm by insisting that the government should get in the way.
To sum up, this particular initiative is completely unnecessary on its face — antitrust regulations are still in effect. Voluntary exchange needs to be respected. This is no time to cut off companies from the oxygen of capital markets. This bill is a statist nightmare hiding behind the mask of good intentions.