The Antitrust Division Pulls Out a Switchblade on Private Equity

The Department of Justice just used an unusual and quick maneuver to oppose a merger of government contractors. Is this the roadmap to taking on private equity?

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Today, the Department of Justice Antitrust Division filed a challenge to a small merger between Booz Allen and EverWatch Corp, both of whom are what are called Prime contractors to the government. Specifically, both sell operational modeling and simulation services to the National Security Agency, the intelligence bureau tasked with breaking codes and making sure that the government’s communication channels are secure from foreign code-breakers.

Operational modeling and simulation services for the NSA is a highly specialized and technical area, a market in which competitors require a good team of talented professionals with security clearances, as well as a whole set of subcontractors. For decades, Booz Allen had been the primary servicer to the NSA, but EverWatch recruited some Booz Allen employees and figured out a more efficient way to deliver the service. Both firms were about to bid on a new three year NSA contract when Booz Allen suddenly made a deal to acquire its competitor.

Booz Allen is a giant contractor, while private equity shop Enlightenment Capital combined four other firms into EverWatch, which has itself made seven acquisitions since 2018. The Booz Allen-EverWatch deal looks like a pretty standard hostage strategy, with EverWatch creating leverage for a good price from Booz Allen by threatening a monopoly contract it has with the NSA.

This merger is what is known as a ‘merger to monopoly,’ and one that enforcers could easily challenge under anti-merger law, the Clayton Act. And indeed, the DOJ did so. But Clayton Act cases take a long time, and courts are often in no hurry to rule on them because as long as the two firms are kept separate, it doesn’t seem like an urgent matter.

This time, the DOJ brought an additional claim that the merger agreement itself is a ‘restraint of trade’ under Section One of the Sherman Antitrust Act. The argument is that after the firms agreed to merge, they would no longer vigorously bid against each other for the NSA contract because EverWatch executives would fear annoying their future bosses. So blocking the agreement itself quickly is essential to maintain competition for the NSA bid.

The Sherman Act is a different law, and it’s easier to get a fast injunction from a court than it is with the Clayton Act. Since the end of conglomerate challenges in the 1980s, entire new industries and financing models - like private equity - have emerged. And there’s very little precedent in applying antitrust law to these areas. A Sherman Act claim to stop a merger might be applicable to a whole host of transactions that you couldn’t reach under standard merger law. The Sherman Act is also a law that private plaintiffs can use far more easily than the Clayton Act’s anti-merger provision, so moves like this open the door to entities other than the government challenging mergers. That’s good.

Anyway, one of the themes we’re seeing out of the Department of Justice Antitrust Division is more legal creativity in the kinds of cases they are willing to bring. This is one more example.