US authorities are keeping a close eye on Facebook due to anticompetitive concerns, and new details about its mid-2020 acquisition of gif creator Giphy have emerged.
According to sources, Giphy paid dividends to investors before Facebook bought it, lowering the value of its assets and allowing the deal to go unnoticed by regulators. Axios reported at the time that the deal was worth $400 million.
As of 2020, US law states that if a company’s assets are worth less than $18.8 million, it and the acquirer are not required to notify antitrust regulators about their transaction. Last year, Facebook told Congress that it did not report its Giphy acquisition because it was not required to. Experts said Giphy was perfectly legal to do what it allegedly did because the Federal Trade Commission did not consider dividend payouts to be a strategy to avoid filing ahead of a deal.
According to John Keplar, a Stanford professor who co-authored a research paper on the subject, it appears across industries, not just in technology. Nonetheless, it demonstrates how the tech industry, including Facebook and its contentious acquisitions of would-be competitors, can thrive under the current US regulatory framework.
Giphy’s reported dividend payouts may highlight “antitrust regulators’ resource constraints,” according to Keplar. “It seems plausible that there are just too many deals occurring in practice for them to keep up with,”
According to reports, thousands of acquisitions and mergers go unreported, with only 10% of the approximately 22,000 reviewed before closing between 2018 and 2019.
By capping the notification requirement, regulators are spared the time-consuming task of reviewing each and every acquisition, particularly small ones that are unlikely to pose anti-competitive issues, according to Maureen Ohlhausen, a Republican former FTC commissioner who referred to them as “non-reportable deals” in an interview.
Ohlhausen, who has been critical of government regulation, claims that pre-deal dividend pay-outs aren’t really a loophole because it’s completely legal for companies to do so – or was until September 2020. “It’s not common,” Ohlhausen, who was appointed to the FTC by former Presidents Barack Obama and Donald Trump, said.
Another former FTC employee, who worked for the agency for over a decade and described themselves as enforcement-oriented, told Insider that they wouldn’t call it common and don’t believe Facebook or Giphy did anything to avoid scrutiny. Given the attention that the tech world has received in recent years, they stated that “there is no acquisition that Facebook is going to do today that will evade the radar of the enforcers.”
On the other hand, there are concerns that companies will exploit the rule and structure their transactions to avoid seeking approval from antitrust officials, who may pull the plug if they detect any irregularities.
Kepler co-authored a paper titled “Stealth Acquisitions and Product Market Competition” in July. It discovered a large number of acquisitions with deal values that are just below the required notification threshold.
Their findings “indicate that firms can successfully manipulate M&A transactions to avoid antitrust scrutiny, resulting in anticompetitive behavior.”
Companies have “plenty of reasons” to pay dividends to shareholders, according to Keplar, but “the question of whether it’s legal to do so to avoid filing for antitrust is a bit trickier.”
The FTC established a rule in 2003 that special dividends are never defined as a means to avoid informing regulators of a deal. However, in September 2020, the agency changed those guidelines, and now, managing the size of a deal to avoid filing can be considered an avoidance device.