How AI Dealmakers Are Sidestepping Regulators
Attention: AI startups. What’s the best way to sell your company without the prying eyes of antitrust regulators? Make yourself so small you won’t attract attention!
We’re serious, kind of. We’re hearing that a lesser-known loophole to the rules determining when companies have to notify antitrust regulators about an acquisition is based on the size of a company’s net assets or sales. To sum it up, if it’s below $23.9 million, you might be OK.
Specifically, I’m referring to the rules based on the Hart-Scott-Rodino Act, which governs antitrust reporting.
Right now, antitrust authorities don’t need to be notified if the value of an acquisition is below $119.5 million. If the deal’s value is higher—between $119.5 million and $478 million—the parties involved only have to notify authorities if one company (likely the acquirer) has at least $239 million in annual net sales or total assets and the other company (likely the target) has at least $23.9 million in annual net sales or total assets. (Very specific figures, we know!)
So to avoid notifying regulators ahead of time and putting their deal at risk, startups being acquired can use a number of tricks to get their total assets below that $23.9 million figure, a banker who’s been involved in several of these deals told me.
Some tactics this banker has seen include paying outstanding cloud computing bills that a startup might otherwise contest or paying the bankers early, before the deal closes, they said. Startups might also pay employees early or spend cash to buy cloud computing credits, they added.
In doing so, these startups can fly under the radar of antitrust regulators, and don’t have to go through the complicated licensing-and-hiring agreements that startups like Inflection, Adept and Character.AI have had to strike with Microsoft, Amazon and Google, respectively, to avoid antitrust scrutiny.
These strategies have been used to avoid the HSR thresholds in the past, but they’re becoming more popular now with AI companies looking to sell themselves, since the main acquirers that can afford high AI startup prices are big tech companies like Microsoft, Google and Amazon that regulators already have their eye on, the banker said.
There have been 54 AI M&A deals this year so far, worth a combined $2.8 billion, according to PitchBook. (This excludes Inflection-esque deals.) However, this year’s AI quasi-acquisitions likely didn’t have to worry about pre-notifying regulators, since they were technically licensing and hiring agreements rather than traditional mergers, a banker told me. (It seems like that hasn’t stopped the Federal Trade Commission from investigating some of these deals, though.)
Therefore, these tactics would have been more relevant for smaller deals this year, like the acquisitions of Rockset, Deci AI, OctoAI and Robust Intelligence, that could have fallen around these thresholds. (None of the companies had anything to add when we reached out to them about this.)
Don’t expect to see too many acquisitions for the next few weeks, though. Bankers, companies and VCs alike are looking to the results of next month’s presidential elections to see how the antitrust environment and M&A loopholes might change. But I’m sure there will be plenty more dealmaking to come in the months ahead. (Check out our generative AI takeover list for a sneak peek at who might be putting “for sale” signs up.)