Hot Topics in Antitrust Review of Transactions

Antitrust has become one of the key considerations in the valuation, timing, and feasibility of transactions given that: (1) strategic acquisitions today outpace financial acquisitions; and (2) antitrust enforcement agencies, the Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") are very proactive. This paper focuses on both the procedural and substantive trends in merger review in the United States as well as the challenges posed from having 60 plus nations with mandatory premerger requirements. The bottom line is that while a vast majority of transactions remain feasible, the cost of completing transactions has increased---both in terms of the concessions that may be needed to obtain governmental clearance and the time expended as part of the antitrust review---and the federal enforcement agencies appear more willing to commence preliminary injunction actions to block mergers and/or to impose terms that result in the transaction's abandonment.

1. Proliferation of International Premerger Regimes and Implications for Timing. The United States adopted the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") over twenty years ago. During the last five years, the number of jurisdictions with premerger notification requirements has grown exponentially to over 60. While some jurisdictions use triggering thresholds similar to those found in the HSR Act, the threshold levels differ substantially around the world. In addition, some jurisdictions use a "market share" test. As a result, foreign filing requirements and timetables need to be evaluated, if possible, in the planning stages of a transaction or as soon thereafter as feasible in order to minimize the chances of delay in consummation.
2. Role of Federal Agencies and States.
   • State Attorneys General Seek Active Merger Review Role. A number of state attorneys general have signed a compact agreeing to coordinate the review of mergers and the collection of HSR Act information from parties willing to supply such information. In March 1998, the federal enforcement agencies and the National Association of Attorneys General issued a protocol for coordinating merger investigations between the federal agencies and the states. The quid pro quo for receipt of HSR information under the compact and participation in the process under the protocol is supposed to be the participating state's agreement to: (1) keep the information confidential; (2) limit discovery request to the "second request" issued by the federal agency; and (3) abide by the HSR Act waiting period for the state's investigation. In practice, the states have, at least in some recent transactions, sought the benefits of the compact and protocol without adhering to the restrictions. The federal agencies have been largely receptive to the idea of state involvement in the premerger review process. In the Staples/Office Depot litigation, the FTC supported a motion by several state attorneys general to gain access to the HSR Act materials in that case.
   • State Attorneys General Enforcement. States remain active in antitrust review of mergers, participating alongside or in lieu of the federal enforcement agencies. For example, states have: (1) participated in several federal investigations of HSR Act reviewable transactions; (2) entered into consent decrees or civil actions with federal enforcement agencies or in separate consent decrees following joint federal/state investigations; and (3) investigated and obtained consent decrees in transactions in which the federal government did not participate.
3. Illustrative Mergers.
   • State Attorneys General Scrutinize Supermarket Mergers. Supermarkets seem to be the quintessential local market and an area ripe for state attorney general intervention. The cases bear this observation out. For instance, Albertson's merger with Buttrey Foods, the FTC worked closely with the Wyoming Attorney General. Also, in the Ralph's/Hughes transaction the California Attorney General acted alone in negotiating a consent requiring the divestiture of certain stores. The Alaska Attorney General most recently obtained a consent decree in the merger of Safeway and Carr's.
   • Role in Evaluating Gas Station Brand Consolidation. States were active in the FTC's review of two large oil company transactions. The FTC's investigation and consent involved the states of California, Oregon, Hawaii, and Washington in the Texaco/Shell joint venture. Shell Oil Company, 62 Fed. Reg. 67, 868 (Dec. 30, 1999). States were also involved in the reviewing of British Petroleum/Amoco merger. The British Petroleum p/c, 64 Fed. Reg. 4,659 (Jan. 29, 1999). Not only was Ohio able to get state-specific relief in the form of a provision protecting retail gasoline sellers in Toledo and Youngstown, but also the state negotiated its own separate consent with the parties.
   • Healthcare Mergers. For the past two decades, the health care industry has been consolidating in order to achieve efficiencies and the resulting lower health care costs. The FTC and DOJ have both been active in reviewing and challenging, hospital mergers, (See, e.g., FTC v. Terset Healthcare, 17 F.Supp. 2d 937 (E.D. Mo. 1998); United States v. Long Island Jewish Medical Center, 983 F. Supp. 121 (E.D.NY 1997) and drug wholesaler merger (FTC v. Cardinal Health, Inc. 12F. Supp. 2d. 34 (D.D.C. 1998)). In addition, the FTC has threatened to block one retail drug chain merger previously and entered into several consents involving drug stores, pharmaceutical companies, and medical device compromises. The states have also been very active in the healthcare field.
   • Other. State attorneys general have recently involved themselves in a number of significant DOJ and FTC settlements. However, the involvement of multiple state attorneys general with differing agendas often complicates such settlements. They can also provide the agencies with additional leverage. Recent settlements in which state attorneys general have been involved include Sony/Cineplex (movie theaters) (United States v. Sony Corporation of America, 63 Fed. Reg. 25,071 (May 6, 1998)); Texaco/Shell (refining and retail assets) (In the Matter of Shell Oil Company, 62, Fed. Reg. 67,868 (Dec. 30, 1997)); United Waste/USA Waste (landfills and waste disposal) (United States v. USA Waste Services, Inc., 62 Fed. Reg. 47,680 (Sept. 10, 1997)); Cargill/Asko (road and table salt) (United States v. Cargill Inc., 62 Fed. Reg. 26,559 (May 14, 1997)); Thomson/West (legal publications) (United States v. Thomson, 949 F.Supp. 907 (D.D.C. 1996)); and Kimberly-Clark/Scott (paper products) (United States v. Kimberly-Clark Corporation and Scott Paper Company, 60 Fed. Reg. 66,557 (Dec. 22, 1995)).
4. Regulated Industries.
   • The FERC and State PUCs Play Active Role in Utility Mergers. The deregulation and unbundling of natural gas and electric operations has led to the announcement of several significant utility mergers. These transactions are very complex, often subject to approval by the Federal Energy Regulatory Commission ("FERC"), DOJ, and state public utility commissions. While each regulatory agency decides whether the merger is, in its view, "in the public interest," the criteria employed are sometimes ambiguous and often conflicting. Although FERC issued a policy statement that adopted the FTC/DOJ Merger Guidelines as its analytical framework, the ultimate standards applied by the DOJ and the FERC are still unfolding. In addition, state utility commissions and some attorneys general are involving themselves in the recent wave of announced utility mergers. In March 1998, for instance, the administrative law judges at the Pennsylvania Public Utility Commission recommended that the merger of two electric utilities, Allegheny Power System, Inc. and DQE, Inc., be deferred for eighteen months to allow the parties to resolve competitive concerns.
   • Federal Reserve has Primary Role in Bank Mergers. States and DOJ have Active Supporting Roles. State attorneys general have also been increasingly active in reviewing bank mergers, and are often holding up transactions for concessions that are, at best, tangentially related to competition. Even as they undertake this activity, substantial arguments can be made that they do not have antitrust standing under the Bank Holding Company Act of 1956, as amended, or the Bank Merger Act. In most cases, state attorneys general will participate in the DOJ's merger investigation and in the selection of branches to be divested. Often state attorneys general will issue burdensome subpoenas for documents and data, and seek additional "non-traditional" remedies from merging parties (such as measures to limit job loss or to increase lending in poor areas).
   • FCC and States PUCs Have Concurrent Jurisdiction in Telecommunications Transactions. The relaxation of ownership limitations and increased competition affecting structure of industry. The Federal Communications Commission ("FCC") has traditionally regulated broadcast and interstate telecommunications companies. Due to regulatory, technological and marketing changes, many companies operating in these areas are now seeking to combine. The passage of the Telecommunications Act of 1996 accelerated the pace of consolidation in the telecommunications and radio industries, partly based on the expectation that competition will supplant the need for regulation in the near future. These mergers are still subject to FCC and/or state public utility commission approval. Increasingly, however, the DOJ has taken a more active role in the review of these transactions.
   • Defense Industry Mergers Are Subject to Department of Defense Review. With the downsizing of military expenditures in the post-Cold War era, consolidation of existing suppliers has been crucial to ensure continuing viability and innovation. A smaller, more consolidated industry would be more efficient, thereby lowering costs overall. Shipyards are the latest of the defense sectors faced with proposed consolidations. They build and maintain navy ships and submarines. In February 1999, General Dynamics announced an unsolicited tender offer from the only other nuclear-powered submarine manufacturer, Newport News. The merger would result in the combination of the largest and the third largest firms in the defense shipbuilding industry. This would leave only three companies remaining in the industry post-merger. The General Dynamics bid followed the announcement by Newport News that it intended to merge with Avondale Industries, the fourth largest defense shipbuilder. The Defense Department has been actively involved in investigating these transactions.
     In March 1994, the Defense Science Board Task Force on Antitrust Aspects of Defense Industry Consolidation issued a report outlining the Department of Defense's role in antitrust review of such mergers. Since 1994, considerable deference has been accorded to the military by the antitrust enforcement agencies. As a result, almost all defense industry mergers had been approved by federal antitrust officials with only minimal divestitures and structural consents (e.g., firewalls). See, e.g., L-3 Communications/Allied Signal's Ocean Systems (United States v. Lehman Brothers Holdings Inc. and L-3 Communications Holdings, Inc., 63 Fed. Reg. 17,454 (Apr. 9, 1998)); Raytheon/Hughes Aircraft (United States v. Raytheon Company, 62 Fed. Reg. 60,267 (Nov. 7, 1997)).
5. FTC v. DOJ.
   • Introduction. The FTC and DOJ have concurrent jurisdiction over the review of transactions, although each has established expertise in certain industries or for certain companies. Although both the FTC and DOJ apply the same Merger Guidelines and employ similar methodologies for analyzing the transactions procedural and substantive differences exist between the agencies today that can, in a few transactions, impact the outcome.
   • FTC. The FTC consists of 5 commissioners, each with his or her own views. It takes a majority of the commissioners for the FTC to act (i.e., block a transaction, provisionally accept a consent agreement, etc.). In an injunctive proceeding brought by the FTC under ' 13(b) of the Federal Trade Commission Act, the judge's role is limited to determining whether the FTC has proven the likelihood of prevailing on the merits of the case---not in ordering the final relief. Accordingly, so long as the judge finds a violation is likely to exist in some asserted relevant market, the FTC wins.
   • DOJ. DOJ's Antitrust Division is headed by one individual---the Assistant Attorney General---who decides what action to take (i.e., to bring suit, to accept public comment on a proposed final judgment, etc.). It is a federal court judge that decides ultimately whether to approve a consent decree as well as, in an action to block a transaction, and the relief to be imposed including any relief short of completely forbidding the transaction.
6. Hot Issues in Federal Review.
   • Network Effects. The agencies have paid extra attention to transactions in which there may be "network externalities." Network externalities arise when the value of a product increases as more people use it. Many markets are characterized to one degree or another by this phenomenon. For example, a computer operating system is more valuable if widely used because more software applications will be written for and more hardware will be produced to run the system. Another benefit from higher market penetration stems from the compatibility and interchangeability of the content by end users. In addition, once consumers select a particular network, the investment the individual consumers make---both in training time and money---can have a "lock-in" effect such that consumers will hesitate in switching to a rival. operating system, even if that rival system is superior to the original network.
   • Unilateral Effects and Econometrics. During the past three years, both the FTC and the DOJ have embraced an economic theory relating to so-called "unilateral effects" of a merger or "differentiated products" of the parties to a merger in analyzing the impact of a merger. The theory employs econometric models to determine whether the particular products sold by firms contemplating a merger are particularly close substitutes for one another because of unique product characteristics or brand positioning. The theory presumes that such close substitutes exert a unique price discipline on one another as compared with products that are more distant, differentiated substitutes. The agencies. models purport to predict the incentive and ability of a firm unilaterally to raise prices of closely substitutable products as a result of a merger. The following factors are important to this analysis.
     • Documentary evidence suggesting products are close substitutes. Marketing studies and other documents in the files of the merging parties very often bias the agencies. views as to whether the merging parties. products are next-best substitutes, or only distant and diverging brands.
     • The unilateral effects theory bypasses traditional product market definition and concentration thresholds. Although the Merger Guidelines indicated that an unilateral effects analysis would only be undertaken where it is expected that the merged firm will hold at least a 35% share in a defined product market, the agencies. recent application of the theory is not constrained by conventional market definition or the Merger Guidelines. Herfindahl-Hirshman Index ("HHI") concentration thresholds. The current view is that if the econometric models predict significant unilateral price increases (although no threshold price level has yet been delineated), then there is no need for the agency to define a relevant product market. This aspect of the theory creates additional uncertainty in merger analysis.
   • Industries Most Likely Effected. Because the unilateral effects theory focuses mainly on consumer perceptions of the similarities and brand positioning of products, the theory is most relevant to industries that interface directly with end-use consumers:
     • Consumer products companies, e.g., health and beauty aids, food products and toys.
     • Differentiated retail stores, especially "category killers," e.g., office supply superstores.
     • Radio stations. The DOJ applies differentiated products theory to radio station formats, e.g., pop/rock, classical and talk radio. Since the Telecommunications Act of 1996, nine cases have been filed by the DOJ providing for the restructuring of particular radio transactions and three transactions have been abandoned in the face of DOJ opposition (see, e.g., United States v. Chancellor Media Co., Inc. (deal abandoned on March 21, 1998). Most opt for a restructuring of the transaction, as in Capstar's proposed acquisition of radio stations from Triathlon Broadcasting in Kansas.
   • Refocus on Safe Harbors and Moderately Concentrated Markets. The Merger Guidelines provide certain concentration safe harbors; for transactions falling with these safe harbors, the agencies will typically not investigate extensively and/or require relief. For moderately concentrated markets (i.e., post-merger HHI of 1000-1800) an increase in HHI of up to 100 is within the safe harbor; for "highly concentrated market, (i.e., post-merger HHI of 1800 and above) an increase of up to 50 is within the safe harbor of an HHI. In practice, however, for several years neither agency sought relief or to block a transaction in which the post-merger HHI was below the 2000-2200 range. This is no longer the case. The FTC has---both in the consents it has entered and in recent public statements---indicated that in transactions resulting in post-merger HHIs in the 1500 range (or even below), it will become concerned. Moreover, the FTC required the parties to divest assets in order to gain approval for transactions in which the post-merger HHIs were only within the 1500 range in order to ensure that the HHI increase was below 100. See The British Petroleum Co. p.l.c., 64 Fed. Reg. 4,659 (Jan. 29, 1999) (retail station divestitures required in markets with in excess 1400 terminals divestitures required in which post-merger HHIs are above 1,000 to bring increase to within 100); Shell Oil Company, 62 Fed. Reg. 67,868 (Dec. 30, 1997).
   • Purchase of Minority Interests. Although there have been prior instances in which the federal government has taken action to limit certain minority holdings by competitors or suppliers (See, e.g., In the Matter of Time Warner, Inc., 62 Fed. Reg. 11,202 (March 11, 1997) (requiring that TCI divest its share of Turner Broadcasting as a result of the Time-Warner/Turner merger); United States v. E.I. duPont de Nemours & Co., 303 U.S. 586 (1957) (duPont's 23% interest in GM could give it advantage in supplying GM with paint supplies)) the DOJ and FTC are now routinely probing and taking remedial actions in transactions directly or indirectly causing a minority position in competitors. See e.g., United States v. AT&T Corp., 64 Fed. Reg. 2,506 (Jan. 14, 1999); United States v. Hicks, Muse, Tate & Furst Incorporated, 63 Fed. Reg. 18,214 (Apr. 14, 1998); United States v. Northwest Airlines Corp., No.: 98-74611 (E.D. Mich., filed Oct. 23, 1998, amended Dec. 18, 1998); Medtronic, Inc., 63 Fed. Reg. 53,919 (Oct. 7, 1998).
   • More Transactions Challenged and Transactions Abandoned.
     1. FTC Preliminary Injunction Actions. In 1998, the FTC obtained injunctions blocking two mergers. In July, Judge Stanley Sporkin enjoined two mergers that involved the leading four wholesale prescription drug distributors. FTC v. Cardinal Health, Inc., 12 F. Supp. 2d 34 (D.D.C. 1998). In another action, the FTC and the Missouri Attorney General prevailed in a suit to block the merger of the only two hospitals in Butler County, Missouri. FTC v. Tenet Healthcare, 17 F. Supp. 2d 937 (E.D. Mo. 1998).
     2. DOJ Preliminary Injunction Actions. The DOJ brought five preliminary injunction actions in 1998; four were terminated either through abandonment of the transaction (Lockheed Martin's merger with Northrup Grumman, Citicorp's purchase of EBT's Transactive division, and Primestar's acquisition of the satellite assets of MCI and Newscorp) or ended in settlement (Waste Management's merger with Eastern Environmental Services). In the remaining action, the DOJ is proceeding against Northwest Airlines in their proposed takeover of Continental Airlines. United States v. Northwest Airlines, No. 98-74611 (E.D. Mich., filed Oct. 23, 1998, amended Dec. 18, 1998).
     3. Government Does Not Always Win. Despite its track record in 1998, the government does not always win the preliminary injunction cases it brings. In October 1997, for instance, the DOJ lost a preliminary injunction action against the merger of North Shore Health System and Long Island Jewish Medical Center. United States v. Long Island Jewish Medical Center, 983 F. Supp. 121 (E.D.N.Y. 1997). Also in 1997, the DOJ lost on its product market definition in a case involving two producers of gel quality attapulgite clay. See United States v. Englehard Corp., 970 F. Supp. 1463 (M.D. Ga.), aff.d, 126 F.3d 1302 (11th Cir. 1997). See also FTC v. Butterworth Health Corp., 946 F. Supp. 1285 (W.D. Mich. 1996).
     4. Abandoned Transactions. The threat of litigation often induces companies, unwilling or unable to reach a consent agreement with the relevant authorities, to abandon their transaction. During the first two months of 1999 alone, three transactions were abandoned in the face of DOJ challenges: (1) Citicorp elected not to go forward with its proposed purchase of EBT's Transactive Corporation after the DOJ filed suit to block the transaction alleging substantial loss of competition in an alleged electronic welfare benefit transfer market; (2) Media One Group-Erie abandoned its purchase of several radio stations from Rambaldo Communications after the DOJ expressed concerns about the anticompetitive effect of the purchase on the local market for radio advertising; and (3) International Paper decided not to proceed with the sale of its high pressure laminate division to Formica Corporation after DOJ announced that it would challenge the transaction. In 1998, the threat of DOJ action caused six transactions to be abandoned. Prominent among them were Lockheed's proposed merger with Northrup and Primestar's acquisition of the direct broadcast satellite assets of MCI and News Corp. The other, more regionally oriented deals which fell through based on DOJ challenges were Talleyrand Broadcasting's purchase of radio stations from Citadel, Capstar's acquisition of radio stations in Texas and Iowa, Chancellor Media's acquisition of radio stations in Long Island, NY, and Haynes Holdings acquisition of Inco Alloys International. Late in 1997, Alcoa dropped its plan to acquire then shut down a Reynold's Aluminum plant two days after the DOJ filed suit.
        Threat of FTC enforcement action led to at least seven transactions being abandoned in 1998-99: (1) Pacific Corporation's proposed purchase of TEG's Peabody Coal Unit (proposed consent order was filed before TEG found another buyer for Peabody); (2) ICI's proposed sale of Tioxide, its titanium dioxide subsidiary, to DuPont and Kronos; (3) W.R. Grace's asset purchase from ICI; (4) Holly Corporation's transaction with Giant (in which the New Mexico Attorney General was also involved); (5) Hamot Health Foundation's proposed merger with Saint Vincent Health System (in which the Pennsylvania Attorney General was also involved); (6) Bell Helicopters. proposed sale of helicopter assets to Boeing; and (7) Adaptec's sale of high-end computer chip assets to Hyundai Electronics America.
   • "Gun Jumping" and Information Exchanges Premerger Consummation Get Increased Governmental Scrutiny. The FTC has investigated and in a few instances obtained consent decrees relating to pre-HSR Act clearance activity and information exchanges.
7. Trends in Consents.
   • Introduction. The FTC recently reviewed its past policies regarding consent decrees in merger cases and found them wanting. In order to remedy perceived problems, the FTC has initiated several new policies when accepting divestitures proffered as solutions to antitrust concerns:
     1. Shorter Divestiture Periods. The FTC is requiring that divestitures be completed in a period of four to six months from the signing of the consent agreement, as compared with past practice, typically allowing 12 months after a final order was entered following a two-month comment period.
     2. Trustees. The FTC is more likely to invoke the standard provisions in consent decrees providing for trustees to take over the process of selling divestiture assets, without regard to price, if the parties fail to consummate divestitures within the agreed-upon time period.
     3. Hold-Separates by Sellers. The FTC recently has required that sellers agree to hold and operate divestiture assets pending consummation of a divestiture, rather than allowing buyers to hold offending assets pursuant to a traditional "hold separate" agreement.
     4. Other Conduct Restrictions. In a number of vertical mergers, the federal enforcement agencies have required that the combined firm not discriminate against rivals. For example, in the Merck/Medco acquisition, the consent decree requires Medco to maintain an independent committee and an open formulary of drugs partially determined by that committee. In the Matter of Merck and Co., 63 Fed. Reg. 46,451 (Sept. 1, 1998). See also Cadence Design and CCT, Fed. Reg. 26,790 (1997) (agreement required nondiscrimination against competitors in access to computer framework); Raytheon Co., 62 Fed. Reg. 60,267 (1997) (agreement set forth procedures for information sharing between competitors in order to build antitank missile for the army). In one horizontal merger, the consent required Dow Chemical to build additional capacity at a plant that it would divest to a named competitor in order to get DOJ approval for a proposed merger. In the Matter of Dow Chemical, No. 971-0105 (FTC 1997).
     5. Divestiture by Initial Public Offering. In 1996, the FTC allowed two divestitures through an initial public offering, rather than by means of a sale of assets (Oerlikon Burhle and First Data-Money Gram). This solution was available because the divested business was a complete, stand-alone entity with a track record of independent viability. The FTC staff has indicated that IPO's and spinoffs are disfavored as remedies.
     6. Past Compliance Record. Failure to honor consent agreements in a timely manner can lead to future problems with enforcement agencies. In deciding to block the Rite Aid/Revco transaction in its entirety rather than requiring divestitures, the FTC noted that the parties had failed to divest assets under previous consent decrees in a timely manner. A good compliance record is essential for companies that wish to make repeat acquisitions.
     7. Upfront buyers. In an increasing number of transactions, the FTC requires the parties to identify divestiture buyers up-front before the FTC accepts the consent decree. This strategy ensures a viable competitor will take over the divested assets.
     8. Crown Jewels. The FTC increasingly inserts consent decree provisions requiring the divestiture of additional "crown jewel" assets if the initial divestiture is not accomplished within the agreed-upon time period. In 1997, 10 consent decrees contained crown jewel provisions. In 1998, that number slipped to 8 and so far in 1999, there has been 1. But compare Federal-Mogul/T&N plc (March 1998, proposed consent) ("reverse crown jewel," i.e., if buyer submits an affidavit stating that it does not want some parts of the package, then the firms can subtract them from the divestiture package). The DOJ usually does not insert crown jewel provisions into its consent decrees. However, in March 1999, a crown jewel provision did appear in the DOJ's proposed consent settlement in the Signature/AMR Combs transaction.
     9. Closings on Divestitures During Public Comment Period. In order to maximize the efficacy of the divestiture and eliminate the need for trustees or hold-separate arrangements to ensure that the divestiture assets do not convey in the merger, the FTC has permitted divestitures to occur prior to final approval of the consent so long as there remains the possibility to rescind and unwind the divestiture if, after the public comment period, the divestiture is rejected by the FTC. See, e.g., S.C. Johnson & Son, Inc., 63 Fed. Reg. 5,546 (Feb. 3, 1998); British Petroleum Co. p.l.c., 64 Fed. Reg. 4,659 (Jan. 29, 1999); CUC International, Inc., 62 Fed. Reg. 67,074 (Dec. 23, 1997).
     10. Acceptable Packages Increasingly Require Stand Alone Operations Rather than Licensing or Supply Arrangements.
     11. Broader Asset Packages. The FTC has, on occasion, required the divestiture of complementary products or assets in order to increase the viability of the divestiture. The FTC staff has also attempted to persuade parties to divest the larger of the two competing businesses on the theory that the larger business will be more viable. The FTC also negotiates consents in which the parties agreed to divest all of the assets of one of the parties in the relevant market, rather than allowing a mix of assets or a partial divestiture of assets. See, e.g., Koninklijke Ahold NV, 63 Fed. Reg. 60,347 (Nov. 9, 1998); Albertson's Inc., 63 Fed. Reg. 51,933 (Sept. 29, 1998).