In recent years, U.S. federal antitrust enforcement agencies have intensified their scrutiny of transactions, particularly in the technology and healthcare industries. However, researchers at Stanford University and the University of Chicago say that hundreds of mergers and acquisitions still pass without review each year due to the way asset values are measured.

The threshold standards these agencies use to determine whether a transaction requires review are based on asset valuations measured under Generally Accepted Accounting Principles (GAAP). But the researchers, in a paper titled "Competition Enforcement and Accounting for Intangible Capital," point out that the bulk of today's corporate value—especially in the most dynamic parts of the economy—consists of intangible assets that GAAP largely fails to capture.

"Asset-size thresholds cause thousands of transactions—especially in technology and pharmaceuticals—to go unreported to the FTC and DOJ, even though their deal values are nearly identical to those that are reported," said John Kepler of Stanford University and Charles McClure and Christopher Stewart of the University of Chicago.

Intangible assets include patents and other intellectual property, software, customer information and other data sets, agreements, and brands. GAAP accounting, in contrast, focuses on hard assets involved in producing goods and services, such as real estate, office equipment, and machinery.

The researchers argue that companies complete hundreds of transactions each year without reporting them.

"If regulators required firms to take intangible capital into account... we estimate that the number of reported transactions would increase by about 263 per year," the researchers said, based on data from 2001 to 2019.

In 2019, for example, if those additional 263 transactions had been included, nearly 1,100 deals would have entered the so-called Hart-Scott-Rodino review process, compared with about 800 that actually did.

Under the agencies' current standards, transactions valued at $90 million or less do not require reporting, while those valued at $360 million or more are automatically subject to review. For the study, these thresholds were based on 2019 data. Today, these dollar thresholds are higher because the amounts are adjusted for changes in U.S. gross national income.

For transactions between these two levels, the agencies examine the valuations of each company separately, and if one reaches a specific level, a review is required.

Profitable deals

Companies and their investors are benefiting from completing deals without government review, the researchers say, because they can exploit anticompetitive combinations without encountering the resistance that would otherwise arise from scrutiny.

In doing so, they are able to stifle emerging technologies that would otherwise pose a competitive threat. As a result, such deals tend to command higher acquisition premiums and generate greater returns for equity holders.

The study shows that unreported deals "command premiums that are 12% higher than those of reported deals" and generate "a 5.6% increase in acquirer equity value." These deals also tend to be concentrated in "markets where anticompetitive behavior is most likely."

In short, the researchers say, accounting rules are helping companies hide potentially anticompetitive mergers from the DOJ and FTC.