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Antitrust Laws Pertaining To Mergers And Acquisitions
Antitrust the body of law that seeks to discourage concentration of corporate power – ranks high among the legal areas that acquirers investigate when negotiating a Mergers & Acquisitions (M&A) deal. In the United States, the Department of Justice (DoJ) and the Federal Trade Commission (FTC) have the primary responsibility for enforcing federal antitrust laws. In the past two decades, the DoJ has filed more than one thousand cases on antitrust violations, including hundreds involving merger or acquisition transactions. Antitrust policies are derived from the belief that any large company, in order to grow, may have restrained the trade of its competitors and once a company is large, its sheer size may harm the smaller competitors. Hence Antitrust regulators focus more on M&As.
2. M&A EXAMINATION CATEGORIES
While examining a merger, Antitrust regulators put emphasis on the following two questions –
Will the merger lead to horizontal and/or vertical integration(related to structure) and
Whether it will enable collusion and/or exclusion ( related to practice)
Horizontal integration involves an acquisition of or alliance with a competitor and may lead to monopolistic or oligopolistic market situation. Vertical integration involves examples such as acquisition of suppliers. Collusion among companies leads to price fixing at a higher level instead of mutual competition. Exclusion is a practice to prevent entry or growth of a competitor by methods such as tying or exclusive dealing. These four concepts related to structure and practice form a kind of Antitrust Quadrant (Appendix A).
Horizontal Merger – Ticketmaster & Live Nation (2010)
The DoJ approved the merger of Live Nation (Concert promoter and venue owner) and Ticketmaster (U.S.A’s largest ticket seller) only after they agreed to divest a subsidiary of Ticketmaster’s and license a technology to competitors along with other conditions. DoJ believed that the merger, as originally proposed, would have substantially lessened competition for primary ticketing in the United States, resulting in higher prices and less innovation for consumers.
Vertical Merger – Time Warner & Turner Corporation ( 1996)
The Federal Trade Commission (FTC) was alarmed by the fact that a merger between Time Warner (a major cable operator), and Turner Corporation (producer of CNN, TBS, etc) would allow Time Warner to monopolize much of the programming on television. Ultimately, the FTC voted to allow the merger but stipulated that the merger could not act in the interests of anti-competitiveness to the point at which the public good was harmed.
3. KEY ANTITRUST LAWS IN U.S.A.
The three main U.S. antitrust laws are the Sherman Act and the Clayton Act, which outlaw monopolies, and the Hart-Scott-Rodino Antitrust Improvements Act, which requires the parties to a proposed acquisition transaction to furnish certain information about themselves and the deal to the Antitrust Division of the DoJ and to the FTC.
Passed in 1890, it remains the most important source of antitrust law today. From an M&A perspective, the following sections are important –
Section 1 – Prohibits new business combinations that result in monopolies
Section 2 – Prohibits a firm with monopoly power from maintaining that monopoly power through means that go beyond competition on the.
Section 18 – Prohibits stock purchase with an intention to monopolize.
The act specifies broad conditions and remedies for firms that are found to violate the current antitrust laws. It applies to all transactions involved in interstate commerce or, if the activities are local, all transactions and business affecting interstate commerce.
ILLUSTRATIVE CASE -
United States v. Microsoft (2000)
Federal District Court in Washington ruled that Microsoft violated Section 2 of the Sherman Act by engaging in a series of exclusionary, anticompetitive, and predatory acts to maintain its monopoly power. They also assert that Microsoft attempted to monopolize the Web browser market, likewise in violation of Section 2. Finally, they contend that certain steps taken by Microsoft as part of its campaign to protect its monopoly power, namely tying its browser to its operating system and entering into exclusive dealing arrangements, violated Section 1 of the Act.
Passed in 1914 to strengthen the Sherman Act, the Clayton Act was created to help government stop a monopoly before it developed. Section 7 of Clayton Act is related to M&As. Under Section 7, it is illegal for one company to purchase the stock of another company if their combination results in reduced competition within the industry. Unlike the Sherman Act, which contains criminal penalties, the Clayton Act is a civil statute. A violation of Section 7 may give rise to a court-ordered injunction against the acquisition, an order compelling divestiture of the property or other interests, or other remedies. In November 1990, the Interlocking Directorate Act was passed by the Congress, amending Section 8 of the Clayton Act. It prohibited any person from presiding as a director of two competing companies. This provision does not apply to transactions in which the combined sales are “small" (definition linked to nation’s GDP) or where one of the participants is small.
United States v. Continental Can Co. (1956)
In 1956, Continental Can Company, the Nation's second largest producer of metal containers, acquired all of the assets, business and good will of Hazel-Atlas Glass Company, the Nation's third largest producer of glass containers, in exchange for 999,140 shares of Continental's common stock and the assumption by Continental of all the liabilities of Hazel-Atlas. The Government brought this action seeking a judgment that the acquisition violated Section 7 of the Clayton Act and requesting an appropriate divestiture order. The government claimed ten product markets existed, including the can industry, the glass container industry, and various lines of commerce defined by the end use of the containers. The United States District Court for the Southern District of New York found three product markets: metal containers, glass containers, and beer containers. Trying the case without a jury, the District Court found that the Government had failed to prove reasonable probability of anticompetitive effect in any line of commerce, and accordingly dismissed the complaint at the close of the Government's case.
Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976
HSR Act requires that acquisitions involving companies of a certain size cannot be completed until certain information is supplied to the federal government and a specified waiting period has elapsed. The information supplied allows the FTC and the DoJ to determine whether the proposed transaction would have any anticompetitive effects after completion. If so, in general, these effects must be cured prior to the transaction’s closing as it is exceedingly difficult to break up a merger once it has taken place. The thresholds for reporting transactions were raised via Amendments passed in 2000.
HSR Filing is necessary for all M&As that meet the three size criteria. Size criteria are adjusted annually by the increase in the GDP. The following sizes will trigger review, effective February 20, 2010:
Size of transaction test : The buyer purchases assets or securities in excess of $63.4 million ( transactions greater than $253.7 million are reportable, regardless of this test) or
Size of person test: It measures the size of the “ultimate parent entity" of the buyer and seller. The criterion is that the buyer or seller has annual sales or assets of $126.9 million or more, and the other has annual net sales or assets of $12.7 million or more.
One of the persons involved is engaged in U.S. commerce or in an activity affecting U.S. commerce.
Bidding firms must execute and HSR filing at the same time as they make an offer to a target firm. The target firm also is required to file within 15 days following the bidder’s filing. Filings consist of information on the financial statements and operations of the two companies. The waiting period begins when both parties have filed. Either the DoJ or the FTC may request a 20 day extension of the waiting period for transactions involving securities and 10 days for cash tender offers. The parties may request early termination of the waiting period. If the deal doesn’t raise any antitrust concerns, the regulatory authorities may grant the request at their discretion but if they have concerns they will file a lawsuit to obtain a court injunction to prevent the transaction.
Even if the FTC’s lawsuit is ultimately overturned, there is a risk that the perceived benefits of the merger would be disappeared by the time the lawsuit has been decided. Potential customers and suppliers become sceptical in signing lengthy contracts with the target firm during the period trial.
JDS Uniphase merger with SDL
This case highlights the criticalities of the time taken by regulatory authorities to give their approval. JDSU (optical networking components for the Internet) needed a DoJ approval for a merger with SDL Inc.( an optical networking components maker) that could result in a supplier(JDSU-SDL) that could exercise pricing power over products ranging from components to packaged products purchased by equipment manufacturers) . The regulators took around 7 months to decide the case.
Regulators were concerned that the joint entity could control the market for Pump lasers (supplied by SDL) used in a wide range of optical equipment. JDS is one of the largest suppliers of the chips used to build them and it also supplies to other manufacturers of pump lasers like Nortel Networks, Lucent Technologies, etc. These manufacturers complained to regulators that they would have to buy some of the chips from JDSU, which in combination with SDL also would be a competitor.
On February 6, 2001, JDSU agreed as part of a ‘Consent Decree’  to sell a Swiss subsidiary, which manufactures pump laser chips to Nortel Networks. When the deal closed on February 12, 2001, JDSU shares had fallen from their 12-month high of $153.42 to $53.19. The deal that originally had been valued at $41 billion when first announced, more than seven months earlier, had fallen to $13.5 billion on the day of closing, a huge loss of more than two thirds of its value.
State Antitrust Laws
The state laws are often similar to federal laws. The states were given increased antitrust authority as part of the HSR Improvement Acts of 1976. Under federal law, states have the right to sue to block mergers they believe are anticompetitive, even if the DoJ or FTC does not challenge them.
ANTITRUST MERGER GUIDELINES
For Horizontal Mergers
In 1968, the DoJ started issuing guidelines indicating the types of M&As the government would oppose. Intended to clarify the provisions of the Sherman and Clayton Acts, the largely quantitative guidelines were presented in terms of specific market share percentages and concentration ratios. In 1992, both the FTC and the DoJ announced a new set of guidelines indicating that they would challenge mergers creating or enhancing ‘Market Power’  , even if there are measurable efficiency benefits. The guidelines were revised in 1997 to take favourably into account the long term efficiency benefits. On August 19, 2010, the FTC and DoJ jointly released the revised Horizontal Merger Guidelines. A key theme of the 2010 Guidelines is to favour a more flexible, integrated, and fact-specific analysis directed at competitive effects, and to move away from the more rigid analytical process outlined in the 1992 Guidelines. The Guidelines incorporate a number of noteworthy revisions. First, they significantly raise the Herfindal-Hirschman Index ("HHI" – Appendix B) based concentration thresholds at which mergers warrant greater scrutiny. Second, they de-emphasize market definition as a foundation for merger analysis. Third, they place greater reliance on economic models in mergers involving differentiated products.
For Vertical Mergers
The horizontal merger guidelines also apply to vertical mergers. Vertical mergers may become a concern if an acquisition by a supplier of a customer prevents the supplier’s competitors from having access to the customer. Alternatively, the acquisition by a customer of a supplier could become a concern if it prevents the customer’s competitors from having access to the supplier. In the above mentioned case of JDSU-SDL merger, a supplier acquired a customer which caused the customer’s competitors to approach the DoJ because they now perceive their supplier to be a competitor.
For Collaborative Efforts
On April 7, 2000, the FTC and DoJ jointly issued new guidelines called “Antitrust Guidelines for Collaborations among competitors". The collaborative efforts describe a range of horizontal agreements among competitors, such as JVs, alliances, etc. Generally, agencies will allow the collaborative efforts under the following conditions –
The participants have continued to compete through separate, independent operations or through participation in other collaborative efforts
The financial interest in the effort by each participant is relatively small
Each participant’s ability to control the effort is limited
Effective safeguards prevent information sharing and
The duration of the collaborative effort is short
Google – Yahoo proposed Advertising Deal (2008)
U.S. Antitrust regulators denied a proposal that gave Yahoo an alternative to hostile takeover from Microsoft. The proposal was for Google to place ads alongside some of Yahoo’s search results. Google and Yahoo would share in the revenues generated by this arrangement. This deal was supposed to bring sufficient cash flow to Yahoo that would enable it to thwart Microsoft’s attempt.
DoJ alleged that the alliance would severely reduce competition in online advertising, resulting in higher fees charged to online advertisers. The regulatory agency further alleged that the arrangement would make Yahoo more reliant on Google’s already superior search capability and reduce Yahoo’s efforts to invest in its own online search business. The regulators feared this would limit innovation in the online search industry. On November 6, 2008, Google and Yahoo announced that they would cease any further efforts to implement an advertising alliance.
4. CROSS-BORDER TRANSACTIONS – A EUROPEAN PERSPECTIVE
In this era of globalization, many U.S. companies have expanded their operations across the globe. In Europe, the EU’s antitrust policy, much like its US counterpart, ensures that healthy competition is not hindered by anticompetitive practices by companies. EU competition law is contained in Articles 85 and 86 of the Treaty of Rome and is administered and enforced by the European Commission, which can impose fines and sanctions and has extensive investigatory powers. Decisions of the Commission can be challenged in the Court of First Instance of the European Courts of Justice (ECJ). Regarding Mergers, a Regulation known as the ‘Merger Regulation’ came into effect on 30 October 1990. It applies to ‘concentrations’ with a ‘community dimension’, which are:
acquisitions (i.e., of shares); and
joint ventures that create an autonomous economic entity (i.e., ‘concentrative’ joint ventures not ‘cooperative’ joint ventures);
with a combined worldwide turnover of more than EUR5,000 million;
where at least two of the undertakings have a combined turnover of more than EUR250 million within the EU; but
do not earn more than two-thirds of their turnover in a single member state (i.e., their combined turnover).
Concentrations falling within the (i) to (iii) threshold have a ‘community dimension’. Any decision of a national court on EU law can be appealed to the ECJ. On May 1, 2004, the new EC Merger Regulation (139/2004) came into effect, replacing the original Regulation No. 4064/89 of December 21, 1989. The main objective of the New Merger Regulation is to ensure uniform and effective application of EC competition law throughout the Community. The new regulation significantly increases the powers of the Commission to review and, if necessary, block transactions having a Community dimension. Its core features are -
revision of the substantive standard to determine whether proposed mergers pass examination;
allocation of merger review jurisdiction/one-stop-shopping;
higher degree of flexibility in the review process; and
the enhancement of the Commission’s powers of investigation and increased fines for undertakings.
Whether a transaction has a Community dimension depends on whether it satisfies certain turnover thresholds as illustrated in APPENDIX C. Like the US government, EU antitrust regulators are entitled to review mergers between non-EU companies with certain revenue thresholds that conduct significant business in the EU.
GE – Honeywell Merger case (2001)
GE (an American company) proposed for a merger with Honeywell(another American company), citing that Honeywell’s avionics and engines unit would add significant strength to GE’s jet engine business and result in $1.5 Billion in annual cost savings. U.S. regulators approved the deal due to its potential customer benefits but EU regulators denied it based on the negative impact on the competitors. EU regulators wanted GE to make some major concessions, which it was unwilling to do.
The collapse of GE-Honeywell merger brings out the philosophical differences between EU and US antitrust regulations. In U.S., the focus is on the impact of a proposed deal on customers whereas in the EU, the key concern is about maintaining a level playing field for competitors. In other words, in the United States, there is emphasis on protecting the competitive process without impeding efficiencies, and in the EU there is emphasis on protecting competitors. In the U.S., competitors generally have no standing to appeal merger control clearances. Third party challenges to mergers are extremely rare and are rarely successful. In the EU system, competitors have virtually automatic standing and third party challenges have a good history of success.
The EU Commission possesses what is fundamentally final decision-making authority to block a proposed merger, whereas the Justice Department or Federal Trade Commission would need to bring a case before a court. Conglomerate mergers usually pose less risk of competitive harm than horizontal and vertical mergers. Under European law, there is no ‘attempt to monopolize’ claim, but rather a claim that a company already having a dominant position is abusing that position. Dominant position is determined based on analysis of market power through a process of defining the relevant market, evaluating market share, and factoring in other issues such as barriers to entry. Moreover, unlike US antitrust law, EU law also ensures that competition is not hindered by the intervention of national authorities. In that respect, EU law prohibits state aid granted by EU members that distorts competition in the Internal Market.
In recent years there have been efforts to bring convergence in certain aspects. In merger control, convergence works extremely well, particularly when parties time their notifications to the different agencies so that the agencies can move forward on a case together, discussing their thinking, and coordinating their information gathering. An illustrative case in this aspect is Thomson’s acquisition of Reuters in 2007. Approval was required from antitrust regulators in the European, U.S., and Canadian agencies. Designing a deal acceptable to each country’s regulator involved extensive cooperation and coordination. A good example of convergence is the introduction of a "Power Buyer" Defence in the 2010 U.S. Revised Horizontal Merger Guidelines. In a significant addition, the Guidelines recognize that certain customers, identified as "powerful buyers," can constrain the merging parties from raising price post-merger. The European Union had already incorporated this concept into their merger guidelines.
5. ANTITRUST LAWS - THE GLOBAL PERSPECTIVE
With increasing globalization, multijurisdictional mergers are now becoming commonplace and thus have to face review by multiple antitrust authorities. Each regulatory authority tends to follow customized standards, fee structures and demands differing amounts of information for review.
Coca-Cola’s acquisition of Cadbury Schweppes (1999)
When Coca-Cola acquired Cadbury Schweppes in 1999, it had to obtain antitrust approval in 40 jurisdictions globally. The regulator’s fees ranged from $77 in Austria to $2.5 million in Argentina. In U.S. the fee is in fact limited to $280,000 for transactions whose value exceeds $500 million.
The severity of the cases like the one mentioned above led to the creation of the International Competition Network (ICN) in October 2001 by sixteen competition authorities from around the world. ICN now represents 104 antitrust enforcement agencies from 92 countries. Its mission is to provide antitrust enforcement agencies with a focused network for addressing practical antitrust enforcement and policy issues of common concern, and to formulate proposals for procedural and substantive convergence on competition policy. The initial focus was more on the procedural aspects of the merger review process and this resulted in ’Recommended Practices for Merger Notification and Review Procedures’ - a set of recommended practices that reflects international consensus on basic principles for merger notification systems. It has influenced changes by member jurisdictions to bring their merger notification and review systems into greater conformity with the recommended practices. China was the most recent large nation to pass antitrust legislation, which took effect in August 2008.
To improve the efficiency of multijurisdictional merger review, the ICN is now trying to foster convergence on substantive analysis. The ‘ICN Merger Guidelines Workbook’ is a comprehensive, practical presentation of the basic framework that many antitrust enforcement agencies use in the substantive assessment of mergers. In April 2010, the ICN adopted ‘Recommended Practices for substantive merger analysis’  , addressing –
Market Definition in Merger Review - Agencies should address the competitive effects of a merger within economically meaningful markets.
Failing Firm/Exiting Assets Analysis - Agencies should carefully review claims by the merging parties that a merger will not harm competition because the acquired firm and its assets would have exited the market absent the merger in any event.
According to a recent survey  , 96% of competition agencies surveyed make use of ICN work products and materials, and 94% distribute them inside the agency.77% use ICN materials for reference purposes, 46% for staff training and 40% for outreach. 69% of all agencies say they are pro-actively working towards applying ICN Recommended Practices (71% of emerging and 65% of established agencies).
Firms all over the world strive to be more efficient and profitable through mergers and acquisitions. Antitrust issues are paramount in many mergers, particularly those involving candidate companies of significant size especially if they have operations across multiple jurisdictions. The interested parties must take into account from early on, the time that would likely be consumed in obtaining the necessary consents, their costs and from how many regulatory agencies. If guidelines to analyzing the mergers are made clearer and the interested parties are provided with well defined procedures for obtaining consents, the regulatory hassles can be minimized, allowing the parties to focus on other areas of importance in the proposed deal.
Given the increasingly global nature of antitrust enforcement, cooperation among antitrust regulators has become imperative so that they seek to identify as quickly as possible those transactions that are not likely to harm competition and try to promptly close any investigations. Although, the ICN has taken a lot of steps to bring convergence in both the substance and procedure of merger review, a lot of ground still remains to be covered.
APPENDIX A - An Antitrust Quadrant
APPENDIX B - Herfindahl-Hirschman Index
The Agencies often calculate the Herfindahl-Hirschman Index (“HHI") of market concentration. The HHI is calculated by summing the squares of the individual firms’ market shares, and thus gives proportionately greater weight to the larger market shares. When using HHI, the Agencies consider both the post-merger level of the HHI and the increase in the HHI resulting from the merger. The increase in HHI is equal to twice the product of the market shares of the merging firms. The HHI number can range from close to zero to 10,000. The HHI is expressed as:
HHI = s1^2 + s2^2 + s3^2 + ... + sn^2 (where sn is the market share of the ith firm).
Based on their experience, the Agencies generally classify markets into three types:
Unconcentrated Markets: HHI below 1500
Moderately Concentrated Markets: HHI between 1500 and 2500
Highly Concentrated Markets: HHI above 2500
The Agencies employ the following general standards for the relevant markets they have defined:
Small Change in Concentration: Mergers involving an increase in the HHI of less than 100 points are unlikely to have adverse competitive effects and ordinarily require no further analysis.
Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely to have adverse competitive effects and ordinarily require no further analysis.
Moderately Concentrated Markets: Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny.
Highly Concentrated Markets: Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.
The purpose of these thresholds is not to provide a rigid screen to separate competitively benign mergers from anticompetitive ones, although high levels of concentration do raise concerns. Rather, they provide one way to identify some mergers unlikely to raise competitive concerns and some others for which it is particularly important to examine whether other competitive factors confirm, reinforce, or counteract the potentially harmful effects of increased concentration. The higher the post-merger HHI and the increase in the HHI, the greater are the Agencies’ potential competitive concerns and the greater is the likelihood that the Agencies will request additional information to conduct their analysis.
Source: U.S. DoJ Website - http://www.justice.gov/atr/public/guidelines/hmg-2010.html
APPENDIX C – The EU Merger Regulation Thresholds
Source - ‘The EU Merger Regulation- An overview of the European Merger Control Rules’, SLAUGHTER and MAY