The sneaky way Facebook reportedly got its $400 million Giphy acquisition under regulatory radar is completely legal, experts say

Mark Zuckerberg, Facebook — Facebook CEO Mark Zuckerberg in New York City on Friday, Oct. 25, 2019.
AP Photo/Mark Lennihan

Giphy paid dividends to shareholders before Facebook bought it in 2020, Bloomberg reported.
That lowered the value of Giphy's assets, exempting it from telling officials of the deal before it closed.
Experts say the move was completely legal at the time, and it highlights potential holes in antitrust laws.
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US authorities continue to train their watchful eyes on Facebook over anticompetitive concerns, and more details just surfaced about its mid-2020 acquisition of gif creator Giphy.

Sources told Bloomberg Monday that Giphy paid dividends to investors before Facebook bought it, lowering the value of its assets and helping the deal fly under regulatory radar. Axios reported at the time a deal value of $400 million.

US law as of 2020 states that if a company's assets are worth less than $18.8 million, then it and the acquirer don't have to notify antitrust regulators about their deal. Facebook told Congress last year that it didn't report its Giphy acquisition because it wasn't required to.

Experts told Insider that it was categorically legal for Giphy to do what it reportedly did since the Federal Trade Commission didn't consider dividend pay-outs to be a tactic to avoid filing ahead of a deal.

It's something that appears across industries, not just in tech, said John Keplar, a Stanford professor who co-authored a research paper on the subject. Yet it shows how the tech industry, including Facebook and its controversial acquisitions of would-be competitors, can flourish with the current US regulatory framework.

Giphy's reported dividend pay-outs could highlight "the resource constraints of antitrust regulators," Keplar told Insider. "It seems plausible that there are just too many deals occurring in practice for them to keep up with,"

'Stealth acquisitions' versus merely 'non-reportable deals?'

Bloomberg reported that thousands of acquisitions and mergers go unreported, with only 10% of about 22,000 being reviewed before closing between 2018 and 2019.

By capping the notification requirement, regulators are spared the tedious process of having to review each and every acquisition, especially small ones that are unlikely to pose anti-competitive problems, said Maureen Ohlhausen, a Republican former FTC commissioner who referred to them as "non-reportable deals," in an interview with Insider.

Ohlhausen, who has been critical of government regulation, said pre-deal dividend pay-outs aren't really a loophole, since it's completely legal for companies to do - or at least was before September 2020.

"It's not common, but it does happen," said Ohlhausen, who was appointed to the FTC by former Presidents Barack Obama and Donald Trump.

Another former FTC employee, who served at the agency for more than a decade and described themselves as enforcement-oriented, similarly told Insider they wouldn't call it common and doesn't think Facebook and Giphy did anything to avoid scrutiny. However, they said "there is no acquisition that Facebook is going to do today that's going to evade the radar of the enforcers," given the attention that the tech world has drawn in recent years.

mark zuckerberg congress hearing — Facebook CEO Mark Zuckerberg on Capitol Hill in Washington, U.S., April 10, 2018.
Aaron P. Bernstein/Reuters

But on the other hand, there are concerns that companies can exploit the rule and structure their transactions to avoid seeking the green light from antitrust officials, who could pull the plug if they smell something amiss.

Kepler co-wrote a July paper titled "Stealth Acquisitions and Product Market Competition." It found a large number of acquisitions whose deal amounts land right below the required notification threshold.

Their findings "suggest that firms can successfully manipulate M&A deals to avoid antitrust scrutiny, thereby leading to anticompetitive behavior."

Keplar said that companies have "plenty of reasons" for paying dividends to shareholders, but "the question of whether it's legal to do so to avoid filing for antitrust is a bit trickier."

The Giphy deal reportedly prompted the FTC to change its rules

In 2003, the FTC created a rule that special dividends are never defined as a means to avoid telling regulators of a deal. But the agency tweaked those guidelines in September 2020, and now, managing the size of a deal to avoid filing can be considered an avoidance device.

A source told Bloomberg that the FTC changed the rule because of the Giphy deal earlier that year.

Facebook and Giphy did not respond to requests for comment.

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