New Inquiry into Tech Deals That Went Under the Radar

FTC's attention. Until now, the FTC appears to be reconsidering and wondering whether it missed troubling signs in the wave of smaller acquisitions by the tech giants. Joining me is Jennifer Ree, Bloomberg Intelligence Senior litigation analyst. Jen would you say the FTC has taken a permissive approach to the

tech industry at this point, June? While I believe that there are probably antitrust thinkers out there that actually do believe the ft C has been two lacks for many years on the tech industry, I don't really know that we can say that. I mean, in fact, they have investigated tech company deals. You know, they have looked closely at these deals and considered whether or not these deals should close and in fact challenged a tech deal in the past that was an already consummated deal in one

in that case. So you know, we're not paying as much attention to what they have done in the past. Instead, what we're thinking about is what we view as too much dominance at this point for tech companies. But we're not really looking at what the FTC has done in the past that has in some cases curved tech dominance. So now the FTC is asking for new information from Google, Apple, Amazon, Facebook, and Microsoft. What kind of information? What are they looking for?

This investigation is under the FTC X Section six B, and what it is. It allows the FTC to go in and seek a broad range of documents, data and information from these companies even if they don't really have an ultimate enforcement goal. So in other words, even if they don't necessarily suspect that there has been anti competitive activity,

they can go in and kind of conduct this fishing expedition. Now, what they're looking for here is information on past deals that these companies have done that fell underneath the filing thresholds of the Heart's got Redino Act. So, in other words, they weren't filed with the government because the companies didn't have to file with the government and they were free to just go ahead and close right away without giving the government, FTC or d o J time to review

the deal. So the FTC wants to know about ten years worth of these sorts of deals by the companies that you named, and they're trying to understand whether or not they need to change the HSR rules or do something that might capture small deals that might have been

anti competitive. And in fact, if they believe they find evidence of wrongdoing, which they could because this will be a very broad, sweeping investigation, they can then go back and start an enforcement action targeting specific deals that could be two, three, four or five years old. Explain some of the different reasons why tech companies might buy startups what they're looking for. There are any number of reasons, and obviously what the FTC is wondering as are those

reasons anti competitive? In other words, is there really no reason to buy this startup company other than to eliminate threatening competition in a certain segment. So you know this is something the FTC will be looking for. Now. The other thing they may be thinking about is whether or not some of these acquisitions were done just in order to gain the data that the startup company is able

to collect. I think sometimes when you think about the Google Ways acquisition that the News has targeted as something the FTC may be looking at the question, maybe was this because of the user data that Ways was able to collect from this platform, which was a user generated platform. The other reason sometimes startups are acquired, especially by tech is to gain intellectual property that that startup might have, or even the talent the employees that the company may have.

Senator Elizabeth Warren, of course, a Democrat running for president, has described a kill zone. What is she talking about now? I believe what she's talking about is also what's called killer acquisitions that the idea is sort of just to catch, buy, and kill off the company. This is one of those acquisitions that would be for no other reason but to

eliminate competition. It is not what the Facebook, Instagram or the Facebook What's App acquisitions were, because of course Facebook put assets and capital into those acquisitions and continue those businesses, so those were not sort of a catch and kill type acquisition. But it doesn't necessarily mean that they automatically become pro competitive and not anti competitive. But what Elizabeth Warren is talking about are these startups that could potentially

rise up. Their nascent competitors could rise up and threaten businesses that Google, Amazon, Facebook, etcetera. Are already in and the purpose for the deal is just to buy them kill off the competition. The FDC chairman described the new review of these smaller mergers as a policy project, not

a law enforcement action. What's the difference, you know. The difference really is that when an enforcement type investigation is opened, it usually is because of complaints that have come in or something that the FTC has seen that suggests it's possible wrongdoing has occurred or is occurring. This doesn't have any necessary suspicion of wrongdoing. This is just a fact finding mission, so it sits on the policy side rather

than on the enforcement side. It could lead to enforcement actions because of course they're going to be gathering documents, and if those documents that they review suggest that wrongdoing has occurred, this could then lead to an investigation, which is under the enforcement arm. I've been talking with Jennifer Ree Bloomberg Intelligence senior litigation analysts about the FTC going back to review acquisitions by tech companies that they once

thought were too small to bother with. So this review could lead to enforcement actions. But aren't these small companies by now already integrated into the tech giants. Could the FTC unwind them at this point? This would be fact based, It would be deal by deal. In some cases, yes, assets are gone, they're completely merged. Really you can't unscramble the eggs in certain cases. But in other cases, the

acquired entity maybe operating as a separate subsidiary. It might be a situation where it's easier to carve off those assets. And in addition, one of the things the FTC has done in the past and d o J is required the company to go into the company and create a separate division where they've actually integrated assets, to go in and separate out out those assets, create a separate division, incentivize the employees to go with the division, and then

sell off that division. I can't imagine what the industry's reaction has been to this, because it sounds like it's going to require a lot from them initially and perhaps lead to more problems down the road. That is absolutely right. You know, the legal departments of these big tech companies, the five you mentioned earlier. Have to be so busy right now because this is just one of many investigations that is ongoing right now. You know, you have Congress

looking into these companies. We know that the Department of Justice is looking at Google, looking at Apple and possibly other tech companies. We know the FTCs investigating Facebook, We know the European Commission has been looking at these companies. So they are very busy, and you know, there is a lot of sort of add on here in terms of polling documents and probably some repetitive documents, the same documents that respond to both investigations. So they are very busy.

And certainly every time a company turns over a lot of their ordinary course business documents, including texts and emails, you know, notes of telephone conversations, they add risk because you could have the greatest compliance program internally in the world, but you still don't necessarily have control over the things that your vast number of employees are saying and doing in the everyday running of the business, and you're turning

all of that over to the government. Does the FTC have the resources and the people to go through all the information that's going to be coming from these huge companies. You know, the FTC has always been, in my experience, very good at doing a lot with limited resources. The FTC themselves have said to Congress they need more resources in order to do what they're doing and to sort of tackle the new technological economy that we're in right now.

They are up against the big legal teams that these companies hire and can afford to hire, so it is very difficult for them. They would probably benefit from more resources, but I also wouldn't doubt that the FTC can do the job that they need to do with the resources they have. The FTC said it might use this review to change rules about when deals need to be submitted

for review. What are the rules now? So the HSR Act hearts guard Redino Acts sets out the thresholds for when a deal needs to be notified, and it's actually really quite complicated now. Most big law firms that have an M and A practice have an HSR specialist. That the only thing this lawyer does is every time a deal comes in, they assess it to determine whether it

needs to be filed. Generally, deals that are worth less than ninety three million right now don't need to be filed, and deals that are worth more than three seventy six million must be filed. And in between deals some yes and some know. It depends, and that threshold changes every year, And there are a lot of exemptions, there are a

lot of safe harpers. So what the FTC might want to look at when they collect these documents is an understanding of the kinds of deals that are happening that aren't falling within those thresholds, or that are fitting one of those exemptions. And maybe what they want to do is say, Hey, a lot of tech deals seem to fall under exemption X, so let's get rid of exemption X.

That's the kind of thing they might be thinking. The idea if they change the rules would be to ensnare more deals require the filing, which then requires an automatic waiting period before the companies can close. This move is part of a broader reconsideration of US antitrust law that focuses on in customer prices and consumer harm. So explain where we are now with the way these things are judged,

and I wear looking at it again. Generally, when deals are reviewed by the antitrust regulators, what they're looking for is a deal that has the likelihood of substantially lessening competition and could cause consumer harm. Consumer harm is usually increased prices. This is the most obvious way consumers are harmed harmed, but it has never been limited to justin increase in prices. This could also be a decrease in output, it could be reduction in quality, and it could be

in fact reduced innovation. The FTC recently has actually challenged deals because not just an increase in prices, but a reduction and innovation, particularly in the pharmaceutical area. These are generally the bucket of consumer harms that are looked at and and the idea is to be predictive. You know, you can't say what's definitely going to happen when two companies merge, and it's a very difficult determination, you know,

we saw what happened with T Mobile and Sprint. The States, many state ages believed that this was a deal that was likely to have substantial anti compare out of effects, but the Department of Justice, with a remedy didn't agree um and a district court judge did not agree, deciding that the deal could go forward and that the States are hadn't shown that this would likely to be anti competitive, and most judges will say, when they're looking at these deals that are challenged by FTC or d o J,

you know, I need a crystal ball. How can I predict the future of what will happen? So it's a very difficult determination to make. What the d o J and FTC do is use economic tools. They both have groups of economists within the antitrust groups within each agency that have a lot of complicated economic tools they use to try to help make this prediction um And it's difficult to do. And you know, sometimes the FTC is wrong and d o J are wrong, and sometimes they're

absolutely right. Uh, you know, And it's a predictive judgment, and they do the best that they can do. They want to change what they're looking for. Do they want

to expand it away from consumer harm? Because sometimes tech deals tech deals make things cheaper for consumers, that's right, And I think that's been one of the conundrums, and certainly right now, neither agency would want to do something that somehow has this unintended consequence of harming consumers, such as prices on Amazon going up, or a function that we're used to having for free, like searching on Google or using Facebook suddenly become go behind a paywall. They

do not want an unintended consequence like that. I think what what the agencies are thinking about right now is not necessarily looking at some other standard outside of consumer harm, but understanding whether there are ways that consumers are harmed that they haven't really thought about in the past, such

as via the collection of data. Um what does that mean and how does this data driven economy that we live in right now affect consumers and how could that contribute to consumer harms in ways that perhaps they haven't really been thinking about in the past. Does in fact

privacy protection constitute part of that consumer harm? If a company that offers greater privacy protections is acquired by a company that offers lowered privacy protections, could that be a consumer harm because now the consumers that are more concerned about their privacy protection lose the option of the search engine, let's say, or the social media platform that did provide

greater privacy protections. This is something I think some people appointed to with Instagram that when Instagram was independent, it offered perhaps greater privacy protections than Facebook did, and once acquired users lost that option. So I think that this is more about thinking about new ways that consumers may be harmed by tech companies that operate differently than most of the companies did that the agencies were looking at fifty years ago. Now I'm saying that that I think

this is what the agencies are thinking about. There's certainly advocates out there for looking at things like how deals affect employment, how deals affect wages, which would be going

beyond the kinds of consumer harms that the agencies think about. Now, there's been criticism of the FTC on a number of grounds, one being that the number of criminal antitrust cases filed in twenty team where at the lowest levels in almost thirty years, And you had one senator Missouri Senator Josh Holly saying the FTC should just be part of the

Justice Department, rolled into the Justice Department. So what's your take on whether the FTC has not really done the kinds of things that they should have in the past. On the criminal side of it, the FTC doesn't have

jurisdiction to pursue companies under the antitrust laws. Under the criminal side of the anti dust laws, only the Department of Justice does, and I think in some respects um those statistics maybe a little bit misleading, only because there was this raft of criminal prosecutions by the Department of

Justice following the banking crisis of two thousand. You had a lot of rate rigging and bench mark rigging conduct and cartel type conduct by the banks that the Department of Justice went after in two thousand eleven and on with a libor scandal. We all recall the for an exchange rigging scandal you had is to fix um credit default swaps conduct, and and you had this uptick in

the criminal prosecutions. And so now some of those cases are wrapping up, and I do actually think the Department of Justice maybe on the verge of filing more criminal charges in the generic drug price fixing probe. And the News has reported that the Department of Justice maybe also going after some companies no poaching agreements criminally, in other words, agreeing not to recruit each other's employees, which is sort

of a price fixing. It's a wage fixing, and it affects those employees and the ability to get raises and increased salaries. So we may be seeing more coming out of the Department of Justice on criminal matters with respect to the FTC. You know, I think it's really hard to go back and criticize the FTC for not doing enough. We have had a rapidly changing economy over the last ten years, particularly in tech, and tech innovations move very

very quickly. The FTC. I believe we tend to overlook much of what the FTC does in terms of blocking deals. If you look at the statistics, they do not show that there's any decreased level of interest activity coming out of the FTC as compared to ten years ago. They continued to do a lot of work, and I think they continue to do what they can do given the

resources that they have. That's Jennifer Ree, Bloomberg Intelligence Senior Litigation Analyst, and that's it for this edition of Bloomberg Law. I'm June Glass. Thanks so much for listening, and remember to tunit to the Bloomberg Law Show tomorrow night at ten p m. Eastern right here on Bloomberg Radio.