Federal Trade Commission Review of Facebook-Instagram Gives Pause

The Federal Trade Commission is probing Facebook’s $1 billion purchase of Instagram, according to a May 10 Financial Times report. That the government is looking into the deal is no surprise -- the Hart-Scott-Rodino Act compels companies striking large deals to notify the FTC and Justice Department. While this first look is procedural, a deeper review may signal regulatory concerns about the deal.

Facebook’s purchase dwarfs the threshold for a “large” transaction under antitrust law, which uses an inflation-adjusted figure that was set at $68.2 million for 2012. So the Instagram purchase is literally a “big deal” to regulators, which means there is a 30-day waiting period before the deal can be consummated, or potentially much longer if the FTC decides to apply further scrutiny.

The two regulatory authorities -- the FTC and DOJ -- review transactions to ensure that companies do not possess “market power” that would harm competition. What does this mean? A post-merger company isn’t permitted to raise prices, reduce innovation or output, or otherwise harm consumers. It is important to note that it is harm to consumers, not competitors, that regulators primarily monitor. A transaction’s impact on competitors raises regulatory concern where it hits consumers, such as when a company controls supply of a good, which opens up the opportunity to unilaterally raise its price. An unnamed source suggested to the New York Times Bits Blog that the deal presents a threat to mobile advertising competition, potentially affecting prices.

A May 15 Securities and Exchange Commission filing by Facebook has ignited some speculation that the federal government is initiating a further review of the purchase. Facebook amended its S-1 ahead of the company’s initial public offering to extend the estimated closure of the deal. The filing originally anticipated the deal would close by the end of the second quarter, but the amended filing states that the deal is “expected to close in 2012.” (see page 66) Facebook also agreed to pay a $200 million termination fee to Instagram if the deal falls through.

In-depth antitrust review would likely play out over several months. Reuters reported May 10 that the FTC made inquiries to Google and Twitter about the transaction. Twitter also was rumored to have considered purchasing developer Tap Tap Tap’s Camera+ app after Facebook struck the Instagram deal. Neither the companies nor the agency are commenting on the process, so it is impossible to tell whether moves by other companies may have influenced the agency’s questions.

While a lot of noise has been generated about the regulatory probe, is it really likely that the government will pursue an antitrust injury created by the purchase of Instagram? The Obama administration has increased antitrust enforcement, particularly on horizontal mergers -- deals where companies acquire their direct competitors (think AT&T buying T-Mobile). Vertical mergers -- where one company purchases another in a different line of business -- have tended to see less competitive scrutiny (think Ticketmaster merging with Live Nation).

Moving to block the purchase of Instagram may pose a variety of new questions to antitrust experts, but should startups be concerned about the reports of an FTC probe? At this point, the likely answer is no. Most purchases won’t face the regulatory scrutiny that a buyer like Facebook generates. Between the company’s multi-billion dollar IPO, privacy investigation by the FTC, and acquisition activity, Facebook has repeatedly drawn attention from the government in 2012.

Government scrutiny of large companies’ acquisitions may be of growing importance to startups going forward, especially where industry-leading firms such as AT&T and Verizon aim to make acquisitions and face FTC or Justice Department review. Delaying the close of a deal can impede the development of small businesses and harm startups making the next step in the evolution of their businesses. Engine will update as the review progresses.