U.S. antitrust regulators in July proposed guidelines geared toward making their legal challenges to mergers and acquisitions succeed — a move that appears to be aimed at the technology sector but affects every industry, including homebuilding.
The Department of Justice (DOJ) and Federal Trade Commission (FTC) lost in their attempts to kill Microsoft Corp.’s $69 billion deal to acquire game maker Activision Blizzard Inc. and to stop Meta Platforms Inc. from buying a virtual reality content maker. It also failed to stop a merger in the sugar industry and lost a merger in the insurance sector.
“Unchecked consolidation threatens the free and fair markets upon which our economy is based,” Attorney General Merrick Garland stated in a press release. “These updated Merger Guidelines respond to modern market realities and will enable the Justice Department to transparently and effectively protect the American people from the damage that anticompetitive mergers cause.”
While the proposed rules seem to target tech companies, they’ll also impact the homebuilding industry.
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The proposed guidelines include a new 30% rule that will increase scrutiny on deals where a business would end up controlling 30% or more of a geographic market. In the homebuilding business, the 30% threshold has been crossed in 13 of the top 82 markets, according to John Burns Research and Consulting. One builder is close to the threshold in another 12 markets where it has a 25% to 30% market share.
“For the last several years, builders are focusing on tertiary markets that are less concentrated, where they can take more market share without attracting the attention of regulators,” Margaret Whelan, CEO of Whelan Advisory Capital Markets, told John Burns Research.
Three to five homebuilders dominate most markets, where they have an aggregate market share of more than 50%, according to John Burns Research. An additional 10-plus buildings are carving out a 1% to 5% market share in each of those markets.
“The top four homebuilders nationally have significant market share, but they do not always compete directly,” said Whelan, whose business is a boutique investment bank focused on advising homebuilding and construction companies on M&A and capital raising.
“Rather, they are focused on their own product type and price points, even when they’re in the same geographic market.”
The FTC and DOJ review all M&As that exceed $101 million, which is low considering that D.R. Horton acquired Arkansas-based Riggins Custom Homes, which builds 170 homes per year, for $107 million in 2022.
The proposed rules are expected to be adopted after a public comment period that ends in September.
“Open, competitive, resilient markets have been a bedrock of America’s economic success and dynamism throughout our nation’s history. Faithful and vigorous enforcement of the antitrust laws is key to maintaining that success,” FTC Chair Lina Khan said in a press release. “With these draft Merger Guidelines, we are updating our enforcement manual to reflect the realities of how firms do business in the modern economy.”
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