Mega-mergers such as the controversial Rogers-Shaw deal or Canadian Pacific’s acquisition of Kansas City Southern Railway have caused a public outcry and pushback from regulators as concentration increases in Canada.
But there is a largely hidden and growing trend which is quietly reshaping and harming the economy: the intentional consolidation of fragmented industries through small “serial acquisitions,” sometimes called “creeping acquisitions,” which are now endemic to Canadian life. Whether it is funeral homes, insurance companies, third-party Amazon sellers, manufacturing firms, automotive parts and supply businesses, retirement homes, or veterinary and dental practices – as a recent Globe and Mail article chronicled – many local businesses that consumers think are independent are actually being consolidated in serial acquisition sprees by both private and public companies.
While small mergers or acquisitions may not seem to pose much of a threat, they fall in a competition policy blackhole, meaning that competition regulators are flying blind. Companies are required to report to the bureau in advance any merger and acquisition proposals where the value of the deal is more than $93 million or where the combined Canadian assets or revenues of the parties exceed $400 million. As a result, many small deals may lead to significant concentration within an industry without triggering an automatic review by regulators, although the bureau does have the power to review any merger or acquisition.
Private equity funds are known to use these “rollup” strategies, often pursuing disaggregated industries and consolidating them for “efficiencies” and economies of scale. But another often-untold reason is to aggregate market power, which givens these companies the ability to charge consumers more for products and services, and to extract lower prices from suppliers.
To prevent this kind of harm to competition and consumers, the federal government should act in several ways: setting specific merger notification rules for those sectors where rollup strategies are common, reforming the Competition Act; and giving broad new powers to the Competition Bureau.
Last year saw the highest private-equity deal count on record in Canada. According to Canadian Venture Capital (CVCA,) most of that money was invested in small- and medium-sized businesses, with 84 per cent of all deals where the value is known falling under $25 million. But private equity firms aren’t the only ones using this strategy; increasingly, public companies do this too.
The case of Park Lawn Funeral Homes
Take, for example, Park Lawn Corporation (PLC), the second-largest publicly traded funeral, cremation and cemetery provider in North America, and the fastest-growing company in the industry. Since 2013, PLC has grown from six locations to more than 304 across Canada and the U.S., as of November 2022. This occurred through a high volume of small acquisitions, most of which were too small to have been reported to the Competition Bureau or to U.S. regulators at the Federal Trade Commission.
A recent company investor presentation touts its 122-per-cent stock market return since January 2016 and how the large number of impending Baby Boomer deaths “will provide opportunities for growth” in a $22-billion industry. PLC has acquired 146 funeral homes and cemeteries since 2019 and “plans to continue its acquisition growth strategy,” which it says is the best use of capital for the company. “Margin expansion” – another term for charging higher prices to consumers – is referenced throughout, with current profit margins at 23.6 per cent.
All of this translates to higher funeral costs for Canadians. Park Lawn’s largest competitor is Service Corporation International (SCI). Nearly 10 years ago, Bloomberg journalists found that prices at SCI facilities were 42 per cent higher than at independently owned competitors. Park Lawn is following SCI’s playbook in acquiring its way to scale, calling itself the “second-largest funeral home and cemetery consolidator in our industry.”
Harms and policy gaps
The harms from serial acquisitions include traditional consolidation issues such as high consumer prices and lower wages, but there are also broader economic consequences: increased foreign ownership instead of independent local ownership; potential negative effects on supply chain resiliency; and the lost competitiveness of small businesses.
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Canada’s competition law has serious gaps that hamper the Competition Bureau’s ability to both identify these serial acquisitions and to do something about them. For example, the bureau has acknowledged the need for changes to Canada’s merger notification system to see more clearly what is happening in markets. In the most recent federal Budget Implementation Act, changes were made to the Competition Act that may make it easier for the bureau to identify smaller “related” mergers. But this change does not go far enough, nor does it give the bureau the right tools to prevent serial acquisitions.
Canada can look to the U.K., which has taken a sectoral approach to regulating serial acquisitions in the grocery sector. The U.K. requires large grocery retailers to notify its Office of Fair Trading of any acquisition of another grocery store with 1,000 square metres or more of retail space. To help the Competition Bureau better identify rollups, we could draw inspiration from the U.K.’s system by setting specific merger notification rules for those sectors where rollup strategies are common.
Even if the bureau can better identify serial acquisitions, Canada’s current Competition Act and existing jurisprudence are inadequate to properly tackle them and the harm they cause. There is some relevant case law that gives the bureau a few tools to address serial acquisitions. In 1992, the Competition Tribunal ruled on an abuse-of-dominance case against Laidlaw Waste Systems, a B.C. waste management company. The tribunal found that Laidlaw engaged in a “program of acquisitions” that was anti-competitive and ordered that Laidlaw be prohibited from acquiring a competitor for three years. While the case law from this provides a bit of optimism, it is insufficient alone to adequately address the strategies and harms of modern serial acquisitions.
There are serious shortcomings with Canada’s law on abuse of dominance that can provide a kind of “safe harbour” for serial acquisitions. Businesses usually justify serial acquisition strategies by saying that they make markets more efficient because fixed operating costs are spread over more products or services. In Canada, the law has a business justifications defence for abuse of dominance, meaning that a company can pursue serial acquisitions that harm competition if it claims they are improving efficiency. The business justification defence is akin to the efficiencies defence for mergers, which permits harmful mergers if they create notable cost savings for businesses and their owners. Canada’s abuse-of-dominance laws need to be reformed to do away with this business justification.
When it comes to identifying harms from serial acquisitions, most deals – due to their small size – will not cause immediate or visible harm when evaluated in isolation. However, harm adds up collectively when we look at the aggregate effects across the economy. For this reason, a provision should be added to the Competition Act that would enable the bureau to consider the collective anti-competitive harm of all acquisitions made by an acquirer in a particular market or industry over the last six years, as suggested in Australia (regardless of whether there is evidence that these transactions are related to one another or part of a broader strategy). In addition to better empowering the bureau, spelling this out in legislation would bring clarity to the business community.
Another approach – which was ultimately adopted in 2011 in Australia’s revisions to its competition law – is to impose different standards for acquirers that have a high degree of power in the market. For these companies, the bureau would not be required to show that acquisition of a small company by a large, dominant company causes a substantial lessening of competition, but only a lessening of competition. While the effectiveness of this approach has not been empirically tested, it is questionable because it does not allow the bureau to consider the cumulative effects of multiple, small mergers.
As markets continually evolve, and serial acquisitions play an increasingly big role in shaping industries, Canada needs to evaluate its legislative and regulatory ability to deal with this growing trend. More research should be done to determine how prevalent these strategies are. As well, securities regulators and the Competition Bureau should think about how to increase transparency in private markets, in particular. The upcoming Competition Act review provides a golden opportunity to consider structural holes in our regulatory regime. Rollups are an obvious target.