U.S. President Joe Biden put his stamp on his country’s economy on Friday with a wide-ranging executive order aimed at encouraging competition and limiting corporate concentration.
After what Mr. Biden called a failed 40-year “experiment” that allowed companies to consolidate, the President pushed federal agencies to closely scrutinize mergers and acquisitions. The executive order is made up of 72 measures, aimed at increasing competition in sectors such as technology, banking and transportation. The President said his plan will stimulate growth and raise living standards.
“What we’ve seen over the past few decades is less competition, and more concentration that holds our economy back,” Mr. Biden said in a speech on Friday. “Rather than competing for consumers, they are consuming their competitors.”
The Biden administration’s move comes during an era of record-setting takeover activity and raises concerns that Canadian companies will face new regulatory barriers when bidding for U.S. rivals. For example, several of Canada’s banks own extensive U.S. branch networks and were expected to bid on U.S. regional banks when the COVID-19 pandemic eases and industry consolidation resumes. But Mr. Biden’s initiative introduces new regulatory risks on cross-border acquisitions.
An early test of the new order’s impact will come in the railroad sector, in which analysts said the President’s move increases the odds U.S. regulators will block Canadian National Railway Co. ’s planned US$29.9-billion takeover of Kansas City Southern (KCS) .
In the order, the Biden administration says, “In 1980, there were 33 ‘class 1′ freight railroads, compared to just seven today, and four major rail companies now dominate their respective geographic regions.”
Montreal-based CN Rail is currently seeking approval for its KCS bid from the Surface Transportation Board (STB), the U.S. railway regulator. Canadian Pacific Railway Ltd. also bid for KCS, which operates in Mexico and the midwestern United States, only to be trumped by its Canadian rival. If the STB turns down the CN Rail takeover, analysts say Calgary-based CP Rail is likely to come back with a new offer.
CN Rail needs to clear two regulatory hurdles to acquire KCS, and the process is expected to take at least a year. First, the STB must approve CN Rail’s request to establish a voting trust, which would purchase KCS and oversee the railway. That decision is expected this summer. Then, the STB would review the takeover, and if it signs off on the transaction, CN Rail would acquire the voting trust.
“We are assuming a low probability (i.e., 10-20 per cent) that CN Rail’s voting trust is approved later this month/early next by the STB,” a team of transport analysts at the New York investment bank Jefferies Group said in a report on Friday. “Its preclusion would be a simple and very public act that would exemplify the Biden administration’s pursuit of a ‘trust-busting’ reputation.”
CP Rail struck a friendly, US$25.2-billion takeover for KCS in March, only to be outbid by CN Rail the following month. If the CN Rail offer is blocked, Jefferies analysts said, “We believe CP Rail is prepared to move forward (at the right time) and our sense is that key policy makers and politicians view the Kansas City Southern/CP Rail transaction as either neutral to pro-competitive relative to the Kansas City Southern/CN Rail deal.”
Late Thursday, CN Rail issued a news release highlighting the customer-friendly elements of its takeover strategy. The release included a commitment to preserving “open gateways” that allow shippers to continue routing goods across their usual railroads, including the combined KCS and CN Rail networks.
Business groups were quick to criticize the Democratic President’s initiative. “This executive order smacks of a ‘government knows best’ approach to managing the economy,” the U.S. Chamber of Commerce said in a statement on Friday.
Mr. Biden’s executive order contained items targeted at several interest groups, including seniors. The plan allows for hearing aids to be sold over the counter in drug stores. The order also supports states and tribal governments that want to import lower-cost prescription drugs from Canada.
Other provisions of the order try to limit the power of large tech companies such as Google and Facebook, and it comes at a time when the U.S. Congress is working on new laws to govern the sector. The President’s plans also include a push for heightened regulatory scrutiny of takeovers in which a dominant player acquires upstarts that could eventually become a major competitor, a common tactic in the tech sector.
And Mr. Biden is asking the Federal Communications Commission to increase regulation of internet services providers, another sector that has been consolidating around its largest players on both sides of the border.
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