M&A: Preparing for the Antitrust Risk Factor

As the founder of a startup or expansion stage company, you’ll have a lot on your plate when the time comes to prepare your company for its exit from the market.

In almost every situation, you’ll tidy up your business plan, financial statements, and cash flow projections, among many other things. But what about considering how antitrust regulation might affect your business? Is that something that you need to consider when you’re identifying market exit opportunities?

Here’s the simple answer: Absolutely.

The Obama Administration has already initiated more antitrust investigations during its first two years in office than the George W. Bush Administration did during its eight year tenure in Washington, D.C. The goal of the crackdown, as the head of the Justice Department’s antitrust division told the New York Times in 2009, is to restore the ultimate purpose of antitrust laws: protecting consumer welfare.

And while every startup and expansion stage business would love to hit the IPO jackpot, the reality is that most successful exits involve those companies being acquired by much larger companies. With that comes the inevitability of antitrust concerns.

Here are a few questions that companies must consider while they lay out their exit strategy:

Why should startup and expansion stage companies in the process of being acquired care about antitrust regulation?

The risk of investigation is far higher in this political climate and that must be accounted for when you identify market exit opportunities. The potential costs associated with an antitrust investigation can break the back of most M&A opportunities.

One example of the exponential expense of antitrust investigations is Google’s current attempt to defend itself in several different antitrust cases (including one in which it’s setting aside $500 million for a potential settlement of the Department of Justice’s probe into monopolistic practices).

In fact, Reuters’ Rob Cox points out that antitrust investigations have played a large role in slowing down several of Google’s attempts to acquire smaller startup technology companies recently. The cost of those investigations can cripple deals and start-up companies too often fail to account for those potential costs when trying to identify M&A suitors.

When should a startup company start factoring in antitrust risks during its search for potential suitors?

In general, antitrust risk should be factored into the identification process if the merger or acquisition will make the acquiring or merged company the dominant player in the market (a market share leader with the ability to influence prices).

Things get a little more complicated with innovation industries, as regulators will often consider technology trends and market share trends when determining whether or not to investigate a transaction. That means that potential suitors in those markets will likely factor in additional risk in circumstances where a startup is gaining market share rapidly or is altering the landscape of a market with the introduction of new technologies.

But how can startup companies use that information to establish competitive positioning in the M&A market?

Startup companies can use this information to more precisely estimate their company’s value to a potential M&A suitor, which can be used to rank exit options.

Businesses that are being acquired should also acknowledge that capital is tight in the current economy and they should target a diverse group of potential M&A suitors. The traditional bolt–on acquisition multinationals like IBM are not as active in today’s market. By opening doors to a more diverse suitor base, companies will also ensure a more flexible and effective company exit strategy.

So, do you know how an antitrust investigation might affect your exit strategy?

While startup and expansion stage executives have plenty to think about when they formulate and execute their market exit, it’s crucial to understand and prepare for how antitrust laws might impact it.

If you need to brush up on the history of antitrust laws and how they continue to impact today’s market, check out Investopedia, which does a great job of detailing the purpose and enforcement of antitrust laws. The U.S. Small Business Administration also provides some excellent information, including the Plain English Guide to Antitrust Laws and its Antitrust Compliance Assistance resource center.

You may think your company is fully prepared to execute its exit strategy. But if you haven’t accounted for your antitrust risk, then you’re missing a critical piece of the M&A puzzle.