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FTC chair Lina Khan has argued that antitrust increases competition.
(Saul Loeb-Pool/Getty Images)
A perfect storm has obstructed exit paths for many VC-backed companies.

IPO markets are shut tight, strategic acquirers are cautious amid the possibility of a recession, and otherwise eager PE buyers are hindered by a lack of inexpensive financing from syndicated bank loans. Adding to the list of obstacles, Biden administration regulators at the Federal Trade Commission and the Department of Justice are pursuing the most stringent antitrust policy in decades.

While elevated antitrust risk has deflated M&A activity, potential acquirers are increasingly willing to fight the government in court after watching some buyers prevail by litigating deal blocks.

Over the last two years, watchdogs at the FTC and DOJ, tasked with reducing consumer harm and protecting innovation, have scrutinized M&A transactions much more closely and appear to have tried to block more deals than in the past. The dramatic increase in antitrust inquiries has deterred corporate acquirers, especially big tech companies such as Amazon, Apple, Alphabet and Meta, from scooping up startups and other tech businesses, M&A attorneys and dealmakers say.

"When prices dropped last year, over a dozen clients called me and said, 'I have a list of targets that I'd like to go after. [Can you] do the antitrust analysis?" said Ethan Klingsberg, co-head of US Corporate and M&A at law firm Freshfields Bruckhaus Deringer. But in many cases, the potential acquirers were not prepared "to go to war" with the regulators and never initiated deal discussions with the target, he said.

Acquisitions of VC-backed companies hit a decade low in Q1. While the drop in M&A activity can be attributed to the deteriorating economic environment and a renewed emphasis on profitability at tech companies, antitrust concerns further cooled down acquirers' interest.

Michael Diz, co-chair of Debevoise & Plimpton's M&A group, said that antitrust could be the straw that breaks the transaction's metaphorical back. Potential acquirers are already dealing with high cost of financing, inflation and geopolitical concerns.

"If you add one more [hurdle], maybe that's the one that makes the deal too hard to get done," Diz said.

While regulators' antitrust efforts have been focused on larger deals, the agencies can technically review any transaction valued at upward of $111.4 million. That means some acquirers must be prepared to fight for the right to buy relatively small companies.  
Last summer, the FTC filed a lawsuit to block Meta's $400 million acquisition of Andreessen Horowitz-backed VR company Within. The regulator argued that by buying the company, Meta would stifle competition and innovation in the VR industry. But Meta decided to challenge the FTC's block in court, and the California judge presiding over the case ultimately sided with Meta. And the FTC has lost other merger challenges in the past year.

In fact, the FTC and DOJ's track record of persuading judges that deals are being lawfully blocked has been rather poor, attorneys say.

In recent months, potential acquirers have become more open to the idea that they may have to litigate antitrust cases to get deals done. A year ago, boards were not ready to fight the government in court, Klingsberg said. "But there now seems to be an increasing receptivity to that as a legitimate [acquisition] strategy."

Motivated acquirers have to be ready for a long process and steep costs. Buyers are not only paying up for legal fees and divesting divisions that present antitrust concerns, but they are often paying breakup fees of 3% or more of the deal price in the case the transaction fails to receive regulatory clearance, Klingsberg said.  Acquirers must also be able to offer financing to the target company during the regulatory review. That incentive increases the purchase price if the deal takes longer than anticipated to close.

Despite failing to prevail in a number of court cases, regulators are expected to continue aggressive M&A scrutiny.

"I think we've seen time and time again how [antitrust regulation] actually promotes competition," FTC chair Lina Khan said last week at the 2023 Berkeley Forum on M&A and the Boardroom. "There's a preference in the case law for growth through internal expansion over growth through acquisition."