The Federal Trade Commission (FTC) announced it is taking action to block the proposed merger of Black Knight by Intercontinental Exchange (ICE). The commission believes the deal between two major competitors in the mortgage technology industry would lead to increases in costs for consumers and reductions in innovation and fewer lenders’ choices for tools necessary to generate and service mortgages.
“For many Americans, buying a home is an important investment toward building financial security,” Patty Brink, acting deputy director of the FTC Bureau of Competition, said. “This deal would reduce competition in key areas of the mortgage process, ultimately raising costs for lenders and homebuyers. The FTC will intervene when illegal mergers risk harming competition in such critical markets.”
ICE and Black Knight are currently two direct competitors for a number of services, including loan origination software (LOS) and “ancillary services” like product pricing and eligibility engines (PPEs). According to the statement from the FTC, because the two companies are direct competitors, and both operate a large share of the market for many of the products and services they offer, should the acquisition be allowed to close, the market and consumers could both face harm.
“That's usually when the FTC gets involved in some of these things,” Marx Sterbcow, managing attorney at Sterbcow Law Group, explained. “They will look at the overall marketplace impact that a merger would create and determine the impact it is going to have on consumers, whether it will make it much more difficult for companies to shop around or find alternative products to use. With the Loan Origination Software technology the size of ICE has in place already, and as big as Black Knight is, the FTC is concerned with the aggregation of power in the marketplace.”
The consolidation of power in the marketplace is one of the primary concerns of any efforts by the federal government to block an acquisition.
“It could impact how much ICE can charge companies,” Sterbcow continued. “In a less regulated market, a company with a large amount of market share can effectively shut out competitors. It can create havoc, and ultimately what that does is increases costs. Then consumers wind up getting hit with these larger payments because there’s less competition in the marketplace to make things cheaper.”
“We are disappointed that the FTC has filed litigation to prevent ICE from closing our acquisition of Black Knight,” Tim Bowler, president of ICE Mortgage Technology, said. “The proposed acquisition can bring to life a true end-to-end solution for the mortgage industry, benefitting aspiring and current homeowners across the United States.”
ICE has maintained the deal to acquire Black Knight would be pro-competition and offer benefits to the market and industry.
“ICE has outlined its vision for a more equitable housing finance system, one which is currently fraught with inefficiencies, cybersecurity vulnerabilities, unnecessary delay, and requires robust digitization to lower costs for all participants,” ICE said in its press release. “The deal between ICE and Black Knight, which is intended to automate, streamline, and increase transparency in the mortgage industry, will help achieve that vision.”
The Black Knight proposed acquisition is the latest in a recent series of acquisitions by ICE, which is the likely reason that the FTC is concerned with this deal. Over the past five years, ICE has acquired the Chicago Stock Exchange, TMC Bonds LLC, Merscorp Holding, Simplifile, and Ellie Mae. These acquisitions have rapidly increased the breadth and depth of control ICE maintains over the mortgage and securities markets.
Whether ICE will ultimately see success in its attempts to garner regulatory approval may be up to other market participants, Sterbcow suggested.
It will depend on what Wall Street, the industry, and consumer groups as to what they think of the deal, he explained. If they don’t like it, they’ll do everything their money and power allows them to kill the deal by putting massive PR pressure on the FTC to block the merger.
For the proposed merger to have any chance of success, the FTC would have to consider the merger to not be anti-competitive and thus a potential disadvantage for the public, explained Howard Turk, founder and managing director at Mergers and Acquisitions firm Turk & Co.
“That both entities had mortgage software programs targeting similar customers concerned the FTC.” Turk said. “If it gets to the point where the company’s structure and complexion are different from what they are now, the FTC would potentially reconsider their position.”
Days before the FTC’s announcement, ICE and Black Knight made revisions to the proposed merger agreement which will see the sale of Black Knight’s Empower LOS business, including its Exchange, LendingSpace, and AIVA solutions, to a subsidiary of Constellation Software Inc.
The decision to sell portions of Black Knights mortgage LOS business was seen as an attempt to appease the FTC and avoid this action.
“It’s important to remember that an announcement of selling, and closing, are two very different things,” Turk said.
“Accretive synergies are an important element of a successful M&A transaction. A transaction can make a lot of sense to both entities involved, but still not be in the best interests of the public. The federal government’s responsibility is to decide whether the public’s interests are being served by this match. A transaction which potentially inhibits competition is not one which a regulator would look fondly upon. What the FTC has done is, to me, an example of the system working.”