As part of the Administration’s expanding activity in anti-trust, which includes new proposed Guidance and changes in pre-merger filings under Hart-Scott-Rodino for larger transactions, the FTC for the first time is going to court to make anti-trust violation claims against companies set up by  Private Equity funds as vehicles for effecting roll-ups of competitors.

A step back–generally anti-trust claims arise by reason of a transaction involving two large-enough entities to trigger required disclosure to the Feds.  Since roll-ups typically involve a party to be acquired the size of which entity is small, below the threshold of required filings, the transaction is invisible to the regulators.  So the government now is claiming that, regardless of size of any given acquisition, the overall roll-up plan violates that anti-trust statute that protects against unfair methods of competition.  This approach is said to be directed today primarily against life science and health care market roll-ups.

In a recent unique lawsuit, the FTC attacked an effort to roll up anesthesiologists in parts of one State, Texas.  Why did the FTC attack this particular set of roll-up transactions to establish principles it can use in future cases?  The lawyer take-away is because the company’s own records revealed that the sole purpose was to keep prices high, not to create better patient service or create savings or economic benefits that could be passed on to patients or doctors.  One of my partners commented: “your statements and documents matter.”

In this case, company documents made clear that the goal was to increase prices. And the company doing the roll-up also made agreements with non-rolled-up providers in key areas that those providers would not under-price services below what the roll-up would charge.  The lawyer take-aways thus are: PE’s in their literature they use to raise capital or to attract would-be acquisition targets, must show benefits to be derived other than increased financial profit driven by de facto monopoly.

My view is that while in this particular case the PE’s company left a variety of sexy smoking guns lying around which no doubt tempted the FTC to claim unfair competition, the strict legal analysis is really very tight against the typical roll-up transactions.  The de facto result of roll-up operations is efficiency that will in fact drive profit, and every one of such deals will have financial projections that show profit from such efficiency; investors will see these projections and will be induced to fund the roll-up by reason of profit; if roll-up documentation show profits, even if there is also stated that this deal is intended to reduce costs for patients or fees for underpaid staff, the reality of profit through efficiency will be evident.

Thus I assume that the fundamental lesson here is that for the first time the government is moving against the model.  Deals not large enough singly to trigger anti-trust mandatory reporting now can be aggregated and thus attacked as unfair competition. Attention to the tone and content of all related disclosures and documents may be a practical escape hatch in some instances;  but, what is important here that the Fed is taking action that attacks one of today’s fundamental business practices.