any experts in anti-trust law?

[blion72]

we are wrapping up the sale and restructuring of our company. it has a very good ending with 15 of the 20 owners being able to exit with enough cash along with their 401k, savings and soc sec (assuming that doesn't blow up) to allow them to live at their current life style for several decades. things will work will for the other owners and employees. I am going to work the transition for a couple years, assuming I am in good health.

our deal involves a couple mid-tier private equity firms and two other corporate investors (not customers). We are finalizing all the legal docs now, and during the discussions one of the partners from the PE firms said that they help with building "war chests" to compete and "stay the course". He had noticed that typically we would walk from sales situations where we could not make a profit. He said you can now go in and drop your prices as far as needed to grow share, and the war chest will back you. He also said you can bring a new product to market and take price leadership, even though you will be losing $$$ for even years. When we asked him why this strategy will work, he said that this clears the market of competitors, and then you can move price back up. he said you grow share and get price control. he indicated they had done it in other markets.

One of our owners asked if this was legal, and he just said this is "modern business" in the digital economy. our lawyers are commercial organization and contract and really didn't have much to say - plus they are done when the deal is done.

i am not sure what the digital economy has to do with this, but is there anyone who knows if this practice would be an anti-trust problem?

 

[Pardlion]

we are wrapping up the sale and restructuring of our company. it has a very good ending with 15 of the 20 owners being able to exit with enough cash along with their 401k, savings and soc sec (assuming that doesn't blow up) to allow them to live at their current life style for several decades. things will work will for the other owners and employees. I am going to work the transition for a couple years, assuming I am in good health.

our deal involves a couple mid-tier private equity firms and two other corporate investors (not customers). We are finalizing all the legal docs now, and during the discussions one of the partners from the PE firms said that they help with building "war chests" to compete and "stay the course". He had noticed that typically we would walk from sales situations where we could not make a profit. He said you can now go in and drop your prices as far as needed to grow share, and the war chest will back you. He also said you can bring a new product to market and take price leadership, even though you will be losing $$$ for even years. When we asked him why this strategy will work, he said that this clears the market of competitors, and then you can move price back up. he said you grow share and get price control. he indicated they had done it in other markets.

One of our owners asked if this was legal, and he just said this is "modern business" in the digital economy. our lawyers are commercial organization and contract and really didn't have much to say - plus they are done when the deal is done.

i am not sure what the digital economy has to do with this, but is there anyone who knows if this practice would be an anti-trust problem?

Lowering price to win business in a competitive field is the opposite of an antitrust violation. https://www.ftc.gov/tips-advice/com...s/single-firm-conduct/predatory-or-below-cost

Your new owner sounds like a dumbass, though. Get your $ and get out of there.

I’m am not your lawyer. I am not a specialist in antitrust law. However, my large bill is in the mail

 

[Art]

Lowering price to win business in a competitive field is the opposite of an antitrust violation. https://www.ftc.gov/tips-advice/com...s/single-firm-conduct/predatory-or-below-cost

Your new owner sounds like a dumbass, though. Get your $ and get out of there.

It's called predatory pricing and it can be an anti-trust violation in certain circumstances.

In this regard, though, I wouldn't trust the word of PE management as far as i could throw Mt Everest.

 

[Pardlion]

It's called predatory pricing and it can be an anti-trust violation in certain circumstances.

In this regard, though, I wouldn't trust the word of PE management as far as i could throw Mt Everest.

Yeah, that’s what the link says.

More likely to be an issue for you is this concept of a “war chest”. Why would you need the PE firm to inject that kind of liquidity into the company, and what would they ask in return? This guy is probably looking to jack his multiple by taking competitors market share and getting a preferred payout on exit by offering the “war chest” with strings attached. Sounds like your horizon might be short, though, so this would be some other guys problem.

 

[Lion84]

That would be predatory pricing and a classic example is when government sponsored foreign steel was dumped on the US market to drive the domestic steel companies out of business. The PE’s usually want to grow the company in size and sell - almost like flipping a house. This type of marketing strategy can get you into both legal and financial trouble.

 

[whart]

we are wrapping up the sale and restructuring of our company. it has a very good ending with 15 of the 20 owners being able to exit with enough cash along with their 401k, savings and soc sec (assuming that doesn't blow up) to allow them to live at their current life style for several decades. things will work will for the other owners and employees. I am going to work the transition for a couple years, assuming I am in good health.

our deal involves a couple mid-tier private equity firms and two other corporate investors (not customers). We are finalizing all the legal docs now, and during the discussions one of the partners from the PE firms said that they help with building "war chests" to compete and "stay the course". He had noticed that typically we would walk from sales situations where we could not make a profit. He said you can now go in and drop your prices as far as needed to grow share, and the war chest will back you. He also said you can bring a new product to market and take price leadership, even though you will be losing $$$ for even years. When we asked him why this strategy will work, he said that this clears the market of competitors, and then you can move price back up. he said you grow share and get price control. he indicated they had done it in other markets.

One of our owners asked if this was legal, and he just said this is "modern business" in the digital economy. our lawyers are commercial organization and contract and really didn't have much to say - plus they are done when the deal is done.

i am not sure what the digital economy has to do with this, but is there anyone who knows if this practice would be an anti-trust problem?

First...congrats on the transaction and hopefully a smooth transition. Next.....I have participated in several similar transactions over the years including being both buyer and seller with PE involvement. Although it seems a bit concerning this is a classic strategy that.... certain... PE groups employ. Essentially, they are more than happy to build up sales making little or no margin over a quick 36 month race to a flip or re-sale. Never forget that the PE crew has one strategy....build up gross revenue and market share quickly to make your entity look attractive to a future buyer. Most PE folks are not investing for 10 years or longer....most will want a return in 5 years or less. Finally, do not be surprised if the PE begins to cut internal cost after a period of time. Aggressive internal cost containment/ reduction would allow them to go to market at a lower cost basis and grow market share Etc. Ensure that you and yours get a significant portion of your value up front and do not allow too large a % over time especially if you are concerned with the PE’s strategy etc. Trust what you see and can prove....ignore the hype as much as possible.

 

[Nitwit]

That would be predatory pricing and a classic example is when government sponsored foreign steel was dumped on the US market to drive the domestic steel companies out of business. The PE’s usually want to grow the company in size and sell - almost like flipping a house. This type of marketing strategy can get you into both legal and financial trouble.

It’s kind of like what Wawa does with their gasoline.

 

[Art]

It’s kind of like what Wawa does with their gasoline.

True, but it would be difficult to obtain anti-trust relief in the retail gasoline business, particularly against an actor the size of Wawa. Maybe at the state level.

 

[DingerzForDaze]

we are wrapping up the sale and restructuring of our company. it has a very good ending with 15 of the 20 owners being able to exit with enough cash along with their 401k, savings and soc sec (assuming that doesn't blow up) to allow them to live at their current life style for several decades. things will work will for the other owners and employees. I am going to work the transition for a couple years, assuming I am in good health.

our deal involves a couple mid-tier private equity firms and two other corporate investors (not customers). We are finalizing all the legal docs now, and during the discussions one of the partners from the PE firms said that they help with building "war chests" to compete and "stay the course". He had noticed that typically we would walk from sales situations where we could not make a profit. He said you can now go in and drop your prices as far as needed to grow share, and the war chest will back you. He also said you can bring a new product to market and take price leadership, even though you will be losing $$$ for even years. When we asked him why this strategy will work, he said that this clears the market of competitors, and then you can move price back up. he said you grow share and get price control. he indicated they had done it in other markets.

One of our owners asked if this was legal, and he just said this is "modern business" in the digital economy. our lawyers are commercial organization and contract and really didn't have much to say - plus they are done when the deal is done.

i am not sure what the digital economy has to do with this, but is there anyone who knows if this practice would be an anti-trust problem?

No, it's not legal. Yes, it's usually very hard to prove/prosecute, so some folks engage in such practices. Yes, this guy telling you outright what his illegal plan is pretty much screws you and the company if the government does investigate and you plan to be honest and adhere to the law. Yes, you're a criminal if you now proceed with this, whether you become a convicted criminal, or not.

 

[Nitt1300]

PE firms are modern pirates.

 

[Aardvark86]

It's called predatory pricing and it can be an anti-trust violation in certain circumstances.

In this regard, though, I wouldn't trust the word of PE management as far as i could throw Mt Everest.

While I'm not a full time antitrust expert, I do know a fair bit about it due to other aspects of my pricing-related practice. While what is described is consistent with predatory pricing theory, note that most modern (at least federal) thinking around predatory pricing is that it is generally a loser of a theory. I can't recall whether it flipped from per se to "rule of reason" analysis specifically, but the skepticism arises from economic thinking that the predatory pricer typically won't "really" be able to raise prices and recoup its losses given the potential for new entrants, etc.

 

[Obliviax]

we are wrapping up the sale and restructuring of our company. it has a very good ending with 15 of the 20 owners being able to exit with enough cash along with their 401k, savings and soc sec (assuming that doesn't blow up) to allow them to live at their current life style for several decades. things will work will for the other owners and employees. I am going to work the transition for a couple years, assuming I am in good health.

our deal involves a couple mid-tier private equity firms and two other corporate investors (not customers). We are finalizing all the legal docs now, and during the discussions one of the partners from the PE firms said that they help with building "war chests" to compete and "stay the course". He had noticed that typically we would walk from sales situations where we could not make a profit. He said you can now go in and drop your prices as far as needed to grow share, and the war chest will back you. He also said you can bring a new product to market and take price leadership, even though you will be losing $$$ for even years. When we asked him why this strategy will work, he said that this clears the market of competitors, and then you can move price back up. he said you grow share and get price control. he indicated they had done it in other markets.

One of our owners asked if this was legal, and he just said this is "modern business" in the digital economy. our lawyers are commercial organization and contract and really didn't have much to say - plus they are done when the deal is done.

i am not sure what the digital economy has to do with this, but is there anyone who knows if this practice would be an anti-trust problem?

Not a lawyer but I've done this with a half dozen software companies and am doing it now.

You take the venture capital because you are NOT trying to make a profit but to grow an asset. This is the "dot-com" boom personified. While it didn't pan out for everyone in that era, it is a bonified strategy that can lead to millions.

To put it in sports terms: The Jacobs brothers bought the Cleveland Indians in 1987 for something like $40m. They complained that they lost a couple of million per year for their entire tenure of ownership (12 years). They sold the team in 1999 for $320m. So they made $280m in 12 years. Lets say they lost $2m per year for 12 years or $24m. That means they made $254m in 12 years and paid less in taxes on that money than you are paying on your payroll salary. Dolan, the current owner, bought the team for that $320m. The valuation of that asset going into COVID was $1.15B. And yes, the owners complain about losing money every year.

That is what the PE people are trying to do. They are happy to lose operating cash if they can leverage that to gain assets to sell for the "endgame". So if they invest $10m and lose a million per year but sell the company for $100m after five years, that is a huge pay day at less taxes than your payroll income.

That's the trick. Poor people think in terms of income. Rich people think in terms of assets. Its as simple as that.

 

[Ct. Lion]

Under anti-trust doctrine pricing practices/predatory pricing is of most concern when large corporations with a dominant industry position sell at a loss to eliminate competition, and/or, gain market share.
I worked for a company (retired now) that had a dominant market position with regards to certain products. The main product was always drawing law suits under anti-trust for various reasons. I had the responsibility for contracts, terms & conditions and general business practices for that product and was constantly being named as a witness or giving depositions. I was also a corporate 30(B)(6) witness for these kind of law suits.
One of the ways we avoided losing the law suits is by having what we called "the Deep Discount test" . This test rolled up the fully apportioned cost of every aspect of engineering, production, admin, marketing, sales, etc. and this became the bottom line. So simply said, we never sold below full apportioned cost and every transaction at least broke even.
But smaller competitors did not do this or have these same concerns unless it was a dumping issue or there were other atmospherics surrounding the transactions.

 

[DingerzForDaze]

Not a lawyer but I've done this with a half dozen software companies and am doing it now.

You take the venture capital because you are NOT trying to make a profit but to grow an asset. This is the "dot-com" boom personified. While it didn't pan out for everyone in that era, it is a bonified strategy that can lead to millions.

To put it in sports terms: The Jacobs brothers bought the Cleveland Indians in 1987 for something like $40m. They complained that they lost a couple of million per year for their entire tenure of ownership (12 years). They sold the team in 1999 for $320m. So they made $280m in 12 years. Lets say they lost $2m per year for 12 years or $24m. That means they made $254m in 12 years and paid less in taxes on that money than you are paying on your payroll salary. Dolan, the current owner, bought the team for that $320m. The valuation of that asset going into COVID was $1.15B. And yes, the owners complain about losing money every year.

That is what the PE people are trying to do. They are happy to lose operating cash if they can leverage that to gain assets to sell for the "endgame". So if they invest $10m and lose a million per year but sell the company for $100m after five years, that is a huge pay day at less taxes than your payroll income.

That's the trick. Poor people think in terms of income. Rich people think in terms of assets. Its as simple as that.

Once again you utilize a sports business analogy incorrectly. Even accepting the veracity of your factual recitations, operating a sports organization at a loss, while the value of the organization increases, is not predatory pricing.

It has no relevance to what the OP is describing.

If you're actually doing what the OP is describing, as you claimed you were, you are engaging in criminal activity.

Illegal predatory pricing can be thought of as requiring 3 basic elements (dumbing it down): 1. Pricing below your own costs; 2. Intent to eliminate competitors to procure a dominant/more dominant place in the industry; 3. Intent to harm consumers by substantially raising prices to harm consumers after element 2 is effectively implemented.

Obviously your sports analogy has ZERO relevance there. It's not even in the same stratosphere as the actual discussion.

The OP described a situation where they would drop their pricing below costs with the intent of driving out competition and then later raising prices to recoup their losses. A textbook violation of antitrust law.

 

[DingerzForDaze]

Under anti-trust doctrine pricing practices/predatory pricing is of most concern when large corporations with a dominant industry position sell at a loss to eliminate competition, and/or, gain market share.
I worked for a company (retired now) that had a dominant market position with regards to certain products. The main product was always drawing law suits under anti-trust for various reasons. I had the responsibility for contracts, terms & conditions and general business practices for that product and was constantly being named as a witness or giving depositions. I was also a corporate 30(B)(6) witness for these kind of law suits.
One of the ways we avoided losing the law suits is by having what we called "the Deep Discount test" . This test rolled up the fully apportioned cost of every aspect of engineering, production, admin, marketing, sales, etc. and this became the bottom line. So simply said, we never sold below full apportioned cost and every transaction at least broke even.
But smaller competitors did not do this or have these same concerns unless it was a dumping issue or there were other atmospherics surrounding the transactions.

You're describing avoiding a predatory pricing conviction by INCREASING costs relative to your competitors, and never selling below that cost? That doesn't make any sense. You wouldn't be predatory pricing at all there, because you're selling above/at cost ... and you're doing so by actually making your costs look larger ... when someone actually engaging in a predatory pricing scheme would be likely to try to decrease their apportioned costs so it looked like they were still selling at a profit when they really weren't.

 

[Pardlion]

OP, you should turn yourself in. Bring a toothbrush.

 

[katchthis]

Better get Putin to
Scrub this post .

 

[Ct. Lion]

You're describing avoiding a predatory pricing conviction by INCREASING costs relative to your competitors, and never selling below that cost? That doesn't make any sense. You wouldn't be predatory pricing at all there, because you're selling above/at cost ... and you're doing so by actually making your costs look larger ... when someone actually engaging in a predatory pricing scheme would be likely to try to decrease their apportioned costs so it looked like they were still selling at a profit when they really weren't.

Sorry for the confusion. The company was not increasing costs but simply making sure that all of the real costs that go into creating a final product are counted and this becomes a fully apportioned cost element. This would be the deep discount test at which if we sold below the fully apportioned cost element we would in a predatory pricing situation as you describe. The objective is to sell above the fully apportioned cost element so that there is no predatory pricing. We would not be increasing costs but simply counting what we actually incurred to create this final product for sale.
Complicating this pricing strategy is the concept of "similarly situated" between customers so that we also make sure that not only do we not discriminate against competitors but we don't discriminate between similarly situated customers showing pricing favoritism towards one customer over another. The concept of "most favored nation status" is an example of this issue.

 

[Art]

Once again you utilize a sports business analogy incorrectly. Even accepting the veracity of your factual recitations, operating a sports organization at a loss, while the value of the organization increases, is not predatory pricing.

It has no relevance to what the OP is describing.

If you're actually doing what the OP is describing, as you claimed you were, you are engaging in criminal activity.

Illegal predatory pricing can be thought of as requiring 3 basic elements (dumbing it down): 1. Pricing below your own costs; 2. Intent to eliminate competitors to procure a dominant/more dominant place in the industry; 3. Intent to harm consumers by substantially raising prices to harm consumers after element 2 is effectively implemented.

Obviously your sports analogy has ZERO relevance there. It's not even in the same stratosphere as the actual discussion.

The OP described a situation where they would drop their pricing below costs with the intent of driving out competition and then later raising prices to recoup their losses. A textbook violation of antitrust law.

It also doesn't really describe how PE firms work, or is, at best, a gross oversimplification.

 

[blion72]

Yeah, that’s what the link says.

More likely to be an issue for you is this concept of a “war chest”. Why would you need the PE firm to inject that kind of liquidity into the company, and what would they ask in return? This guy is probably looking to jack his multiple by taking competitors market share and getting a preferred payout on exit by offering the “war chest” with strings attached. Sounds like your horizon might be short, though, so this would be some other guys problem.

you are correct, I am merely transition - no longer than Dec 2021. I get released from any contract clawbacks that the other guys exiting have to contend with. they have a faster liquidity event but some back end risk, that i avoid by helping finalize. This business model will not be my problem.

The purpose of the war chest is to allow the business to potentially take on large losses to grow business. They capture share by just buying business. As the competitors drop, eventually the concept is the price escalates as you then can more easily dominate. historically, we would never have absorbed massive losses to gain share, with the idea of getting it back later. too risky for most of the owners. most of the ownership will become PE and strategic investors - not the remaining group from our current owners.

 

[blion72]

Yeah, that’s what the link says.

More likely to be an issue for you is this concept of a “war chest”. Why would you need the PE firm to inject that kind of liquidity into the company, and what would they ask in return? This guy is probably looking to jack his multiple by taking competitors market share and getting a preferred payout on exit by offering the “war chest” with strings attached. Sounds like your horizon might be short, though, so this would be some other guys problem.

i think it is clear that these PE guys are looking to do a 3-5 yr expansion of the company and exit themselves with a multiplier. I am spit balling as their investor motives are kept privately - we just came to a happy agreement to exit with their price. like all private sales, there are some clawbacks but not as bad as others we saw. They have a decent track record of buy and exit with a good multiple. Their LP's seem happy. Thanks for all the insight on their tactics, and it sounds like what they are proposing would be predatory pricing.

 

[blion72]

Once again you utilize a sports business analogy incorrectly. Even accepting the veracity of your factual recitations, operating a sports organization at a loss, while the value of the organization increases, is not predatory pricing.

It has no relevance to what the OP is describing.

If you're actually doing what the OP is describing, as you claimed you were, you are engaging in criminal activity.

Illegal predatory pricing can be thought of as requiring 3 basic elements (dumbing it down): 1. Pricing below your own costs; 2. Intent to eliminate competitors to procure a dominant/more dominant place in the industry; 3. Intent to harm consumers by substantially raising prices to harm consumers after element 2 is effectively implemented.

Obviously your sports analogy has ZERO relevance there. It's not even in the same stratosphere as the actual discussion.

The OP described a situation where they would drop their pricing below costs with the intent of driving out competition and then later raising prices to recoup their losses. A textbook violation of antitrust law.

thanks for the 3 basic tests...…..and I think that is their philosophy. price well below fully loaded costs (i.e. 30-40% price discounts in a market that normally sees 5-10% off gross. pre-tax ROS in this business is around 15-20%. then they think share grows fast and marginal competitors fail (they even talked about the ideal "strike zone" being now due to "COVID weakness". once the weakest players fail, then you dominate. is the US government the plaintiff in these cases? sounds like it, but is there also civil issue with the customers?

the PE partner showed the old Boston Consulting Group 3x3 strategy matrix to explain. again not critical for me.....as I will be out of here. They have a new CEO ready to go who has executed their playbook. I do think they may be underestimating how long the weaker players will hang in, and whether the Tier 1 customers will just let this happen. Thanks so much all.

 

[Agoodnap]

I'm going to throw a few thoughts out here for you to consider.

Market Price and Cost are unrelated. The market price is set by the market while your profit is a combination of price and cost. So, if you want to grow you need to be at or below market price with interchangeable products.

Pricing based on fully loaded costs typically invites competition to eat your lunch on all new pieces of business. Sometimes it's necessary to Direct Cost (Materials + Direct Labor + Direct Other such as transportation, tax, etc.) in order to determine if you will have a positive cash flow, because negative cash flow will sink a company.

You never know what the new market price will become until you attempt to take someones business so it's a very risky affair. Much better to set new market pricing on new pieces of business that can be differentiated (and setup on contract, not book pricing) from current business else you'll experience rapid price erosion.

Crashing market price with a plan to become profitable is a some what common business activity. Without a plan it can be a serious legal issue, but with a private company it's almost impossible to prosecute...except in cases of government contracts.

Oh, I almost forgot. This PE that attempted to explain business to you is an idiot. Get far away from him as fast as possible.

I feel sorry for those employees you're leaving behind. The only way these guys can make it work in the short run is slash costs, that would be every support person, in order to keep cash flow positive. When all support disappears it takes customer 6 to 9 months to figure it out and another 6 to 9 months to change suppliers so the PE's can have a very good 12 to 18 month run before things start to fall apart.