Dealmaking in an uncertain environment: Navigating the new antitrust landscape
It’s a tougher world for technology, media and telecom (TMT) companies looking to deals to unlock inorganic growth. New antitrust regulators are in office, and the White House has issued an executive order calling for vigorous antitrust enforcement, particularly in the tech sector. This could lead to blocked acquisitions and pressure to divest core businesses as well as unnecessary business distractions and negative publicity. However, it’s possible to overcome these hurdles by proactively planning and engaging regulators.
When combined with effective government relations, the following four measures can help TMT companies succeed in dealmaking while assuaging regulators’ concerns:
Four steps to help TMT companies succeed in dealmaking
- 1. Think like a regulator
- 2. Show them the data
- 3. Revisit existing segment reporting to help proactively address competitive concerns
- 4. Be ready to divest to reinvest
1. Think like a regulator
No matter their political persuasion, most antitrust regulators have one primary goal: to protect consumers from harm and foster competition. Assessing this potential harm depends on how regulators define a marketplace: who your products and services are competing with and what your resulting market power is deemed to be. Existing laws were designed for single-sided markets. They can often fail to address the complexity of today’s digital platforms, making it even more critical that companies craft their own story on market impact.
Consider not just the regulations on the books, but also recent actions and regulators’ statements. Prepare for all the possible ways anti-competitive activity could be defined, keeping in mind that today’s regulators are more likely to look at indirect effects. They may question how an acquisition could change the competitive dynamics in the target company’s primary marketplace as well as secondary ones.
When you understand precisely how a deal might be challenged, you can prepare to offer your own, more accurate version of the competitive landscape.
Further, a complex deal likely can require a period of transition services. Accomplish as much as possible during the period between signing and closing, so that regulators understand that both companies intend to separate quickly—and in the best manner possible for the transaction and business environment.
2. Show them the data
To demonstrate that your potential acquisition (or existing line of business) is not and will not cause economic harm, you’ll need facts to back up your own definition of the competitive landscape. Unfortunately, you almost certainly won’t be able to pull this data—on direct and indirect competitors’ market share and growth trends across multiple, often intersecting lines of business—from your enterprise resource planning system. You’ll need to pull data from disparate internal and external sources, verify it, analyze it and connect it into a demonstrably true story.
Data can also help you make the case for innovation, which can offer new ways for your post-deal company to facilitate competition. Owners of platforms and networks, for example, may wish to open them up to third parties or selectively share data and functionalities. But to convince regulators, you’ll need data that shows them precisely how such innovation would impact marketplaces. Consider, too, quantifying how innovation in emerging technologies (such as cryptocurrencies and the metaverse) will likely transform the competitive landscape in existing markets.
3. Revisit existing segment reporting to help proactively address competitive concerns
Segment reporting doesn’t just help investors understand how your business is run—from performance to future cash-flow prospects to overall strategy. It also can be a critical data point for potential acquisitions. As regulators look at how you define your business, they will also see how you define your competitive landscape. That’s why it can make sense to update segment disclosures in light of potential dealmaking activity. By moving products and services to different business lines to more accurately reflect changing business practices, it can help show regulators that a new acquisition (or existing line of business) will likely not cause economic harm.
When done correctly, adjustments in segment disclosures can help make your growth story clearer, potentially boosting valuations. It also can enable you to better understand your portfolio of businesses—with all their interdependencies and capabilities—to potentially unlock value. The business implications of a change in segments cut across multiple functional areas, including financial reporting, control procedures, data strategy and management reporting. To get segment reporting right, management needs a measured and holistic approach that incorporates input from across the organization.
4. Be ready to divest to reinvest
With the help of the three measures above, you should rarely need to divest part or all of a core business in order to make a new acquisition. However, in certain circumstances, a divestiture could serve to assuage regulators’ concerns. As such, once you have assessed the potential regulatory impacts on your portfolio of businesses, you can take a proactive approach to divestitures—one that helps you position your assets, work through multiple scenarios, begin preparation and set up the remaining company for growth—while also considering how divestitures may provide a further data point to help support your case with regulators.
Proceed with care—but proceed.
Today, TMT companies may face increased regulatory scrutiny. If you don’t take appropriate care, regulators could potentially block deals, provide unnecessary business distraction or publicity, or even interfere with core lines of business and growth plans. Yet, in most cases, you can still make the deals that your long-term strategy requires. You’ll be better placed to make this case if you:
- Understand how regulators think.
- Gather the right data to prove your case (including the impact of innovation).
- Reassess segmentation, particularly if your lines of business have evolved.
- Take a proactive approach to prepare for potential divestitures.
Keep in mind, regulatory reviews can lead to uncertainty in timing deal closings. Target a realistic close date, given the environment, and factor the timing into overall Day One planning to help integration teams to stay focused.
In addition to the steps outlined here, it’s important to make your voice heard: Take action to shape the future of tech industry regulation by developing effective government relations. With the help of these measures, you can reduce the risk of regulatory pressures affecting potential dealmaking activity and increase your odds of achieving your goals for growth.
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