Facebook’s purchase of Giphy has caught the attention of competition regulators.
Experts say some firms manipulating deals to avoid notifying regulators
Last year, Facebook Inc. did something U.S. technology giants have done countless times before: It bought a smaller company and closed the deal without notifying competition regulators.
But this transaction — the $400 million (U.S.) acquisition of image library Giphy Inc. — was particularly bold. At the time, Facebook was under investigation by antitrust enforcers for what the government says was an illegal practice of buying companies in order to eliminate them as potential threats to its monopoly power.
Giphy used a common — and legal — manoeuvre that lets companies avoid scrutiny from merger watchdogs: It paid a dividend to investors. The payment, described by two people familiar with the matter, reduced the size of Giphy’s assets enough so that the companies weren’t required to report the deal to antitrust officials. The people asked not to be identified discussing non-public information.
Manoeuvres like Giphy’s make policing deals all the more challenging at a time when authorities are being called on to take more aggressive steps to curb the growth of dominant companies, especially in the technology industry. It also raises questions about whether the system used to screen mergers for anticompetitive threats is in need of an overhaul.
“Firms basically are running wild,” said Thomas Wollmann, an economics professor at the University of Chicago’s Booth School of Business who has studied the issue. “It’s a little bit like what happens if the police station closes at 5 p.m. That’s when all the crime starts.”
Facebook declined to comment about the Giphy deal.
Researchers who study these so-called stealth deals say they’ve found evidence that some companies are manipulating acquisitions to avoid notifying regulators. Others have documented how unreported deals allow companies to consolidate markets and shut down rival products. These acquisitions present yet another challenge for antitrust cops, who are increasingly strapped as a merger boom stretches their resources.
Facebook’s acquisition strategy was targeted Thursday in a new antitrust complaint filed by the U.S. Federal Trade Commission, which said the company has illegally maintained a monopoly in social media by buying companies it sees as competitive threats.
Most mergers in the U.S. are never looked at by regulators. Slightly more than 2,000 deals were filed to government antitrust enforcers between October 2018 and September 2019, the most recent period reported by the FTC and the Justice Department, which share antitrust duties. The government reviews account for about 10 per cent of nearly 22,000 acquisitions or company investments announced in that period involving a U.S. company, according to data compiled by Bloomberg.
The U.S. system for screening mergers was created by the1976 law known as the Hart-ScottRodino Antitrust Improvements Act. The law requires companies to notify antitrust officials about deals that meet annually adjusted thresholds. Transactions worth $92 million or less don’t have to be reported, while those over $368 million do. For deals between $92 million and $368 million, filing requirements are based on assets and sales of the buyer and seller.
The Giphy acquisition shows how deals can fall through the cracks. By paying the dividend, Giphy lowered the value of its assets below the threshold required for filing, which was $18.8 million last year.
Facebook is now in danger of being forced to sell Giphy. The U.K.’s antitrust watchdog has provisionally determined that the acquisition threatens competition in social media and display advertising. The Competition and Markets Authority said the only way to address its concerns is for Facebook to sell Giphy. The CMA plans to issue its final report in October.
Facebook said it disagreed with the regulator’s findings and said the deal was in the interest of people and businesses in the U.K. and around the world.