The Conference Board

2009 Post-Merger Integration Conference Successful Mergers in Today’s Environment

Getting Past the Antitrust HurdleWhat has Changed? What is the Same?

M. Howard MorseDrinker Biddle & Reath LLP

Washington, D.C.

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What has changed?

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Antitrust in the Headlines

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Process is controlled by the Hart-Scott-Rodino Act

Requires notification + waiting period before closing

Substantive review is controlled by Section 7 of Clayton Act

Makes illegal transactions the effect of which “may be substantially to lessen competition” in any line of commerce

Mergers & Acquisitions

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“No person shall acquire, directly or indirectly, any voting securities or assets of any other person” unless notification and waiting requirements satisfied

• $65.2 million “size of transaction” threshold, indexed to GNP

• “4(c) documents”: analyses prepared by or for officers and directors

• 30-day initial waiting period, except cash tender offers, bankruptcy

• “Early termination” common

• “Second Request” extends investigation until 30 days after compliance

• After investigation, FTC/DOJ must seek injunction; most challenges resolved through consent agreement or deal is abandoned

Hart-Scott-Rodino Act

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The Review Process

Government ChallengesTransaction in Court

Consent Decree Requiring Divestiture

or Other Relief

Government ClosesInvestigation

Depositionsof

Business Officials

Hart-Scott-Rodino Filing (Starts the Clock) “Clearance”

BetweenDOJ and FTC

Early Terminationof HSR

Waiting Period Respond toDocument Requests

andInterrogatories

Expiration ofInitial HSR

Waiting Period

Respond toInformal Requests

DuringInitial Waiting

Period

Agency Decision toChallenge

Certify Compliance(Starts the

Clock)

Letter of Intent orDefinitive Agreement

Agency Decision toInvestigate

Second Request(Stops the Clock)

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Substantive Merger Analysis

CONCENTRATIONdepends on

product / geographic market definition,only a “starting point for analysis”

ENTRYtimely, likely and sufficient

to deter or counteract effects

UNILATERAL MARKET POWERor

COORDINATED INTERACTION

EFFICIENCIESlower costs, increased output or new products

enhance competition

BOTTOM LINE:will prices rise, quality fall,

service decline or innovation slowto detriment of consumers ?

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+DOJ concluded the companies did not compete in some segments;

alternative services were available; technological changes were expected to make them more attractive, and efficiencies would benefit consumers.

+DOJ concluded that despite the companies' high share of laundry

products, any attempt to raise prices likely would be unsuccessful because foreign manufacturers could increase imports and the parties substantiated large cost savings and other efficiencies.

The Bush Administration Record

The Bush DOJ + FTC lost efforts in court to block:

Oracle/PeopleSoft, SunGard/Comdisco, Arch Coal/Triton Coal, Equitable Resources/Peoples Natural Gas, Western Refining/Giant Industries

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0

20

40

60

80

100

120

ReaganI

ReaganII

GHWBush

ClintonI

ClintonII

GWBush I

Average FTCSecond RequestsPer Year

Average DOJSecond RequestsPer Year

Total AverageNumber ofSecond RequestsPer YearAverage MergerEnforcementActions Per Year

Merger Enforcement Actions

Source: American Antitrust Institute, Transition Report on Competition Policy (data based on DOJ + FTC statistics)

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Criticism of the Bush Record

“the pendulum has swung too far in the direction of nonintervention”

“too-ready acceptance by some courts and enforcers of unproven non-interventionist economic arguments about concentration, entry and efficiencies”

propose measures to “reinvigorate horizontal merger enforcement”

Jonathan Baker & Carl Shapiro, “Reinvigorating Horizontal Merger Enforcement,” in How Chicago Overshot the Mark (Robert Pitofsky ed., 2008)

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The Obama Administration

“the [Bush] administration has what may be the weakest record of antitrust enforcement of any administration in the last half century… an Obama administration will take seriously its responsibility to enforce the antitrust laws.”

“Ensure Competitive Markets: Foster a business and regulatory landscape in which entrepreneurs and small businesses can thrive, start-ups can launch, and all enterprises can compete effectively while investors and consumers are protected against bad actors that cross the line. Reinvigorate antitrust enforcement to ensure that capitalism works for consumers.”

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New Antitrust Leadership

Christine Varney Assistant Attorney General for Antitrust

• “Extensive experience … led the way in taking new approaches and utilizing newer theories … pioneered the application of innovation market theory analysis to transactions in both electronic technology and biotechnology”

• Personnel Counsel to Obama Transition Team, FTC Commissioner 1994-97, Assistant to President Clinton and Secretary to the Cabinet, Chief Counsel to Clinton-Gore Campaign, General Counsel to Democratic National Committee

“You can be assured that I will vigorously enforce the antitrust laws. Where the evidence shows a violation of the antitrust laws, I will prosecute.”

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New Antitrust Leadership

Jon Leibowitz Chairman, Federal Trade Commission

• Priorities include settlements between brand and generic pharmaceutical manufacturers, expanded use of Section 5 of the FTC Act which allows the FTC to challenge “any unfair method of competition”.

• Named Chairman by President Obama on March 2, 2009; Commissioner since September 2004, term expires September 25, 2010

• Chief Counsel and Staff Director of Senate Antitrust Subcommittee 1997-2000, Chief Counsel to Sen. Herb Kohl (D-WI) 1989-2000, Vice President for Motion Picture Association of America, 2004-07

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“Vigorous Antitrust Enforcement in this Challenging Era”

• “Vigorous antitrust enforcement must play a significant role in the Government’s response to economic crises to ensure that markets remain competitive”

• “In past years, with the exception of cartel enforcement, the pendulum swung too far”

• “We must change course and take a new tack”

• “I hereby withdraw” the DOJ 2008 report on monopolization: “I do not share … concerns” with “overdeterrence,” the Report “goes too far” in its effort to preserve “possible efficiencies”

• “It is my hope that the Antitrust Division … will have the opportunity to explore vertical theories and other new areas of civil enforcement, such as those arising in high-tech and Internet-based markets”

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Back to the Future

Innovation Markets – focus on products under development and the pace and diversity of R&D in high tech industries

Compare Ciba Geigy/Sandoz (1996) with Genzyme/Novazyme (2004)

Vertical Mergers – concern vertical integration may create barriers to entry, raise rivals’ costs, and facilitate collusion, not focused only on horizontal mergers among direct competitors.

Compare Time Warner/Turner (1997) with Ticketmaster/Live Nation (2009)

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The Economic Crisisand Merger Enforcement

“Too big to fail”Is failure to stop mergers one cause of the problem?

Should mergers be blocked because the combined firms’ failure would have a catastrophic effect on the market as a whole? Or because the combined firm would be financially weak?

Is the concern limited to networked industries?

Entry conditionsWith capital tight, entry may be more difficult 

Failing company defenseFirm must be unable to meet financial obligations, unable to reorganize in bankruptcy, unsuccessful good faith effort to find an alternative buyer, assets would exit the market

Impact on HSR procedures15 day HSR waiting period in bankruptcy; no HSR filing for deals with government controlled entity (e.g., GM)

Political pressure on enforcers to clear deals

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The Legal LandscapeRecent Developments

Inova/Prince William, Whole Foods/Wild Oats, CCC/Mitchell, CSL/Talecris

FTC need only show “a reasonable probability that the acquisition may substantially lessen competition,” and raise “questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground for thorough investigation, study, deliberation and determination”

Microsemi/Semicoa, Polypore/Microporous, Ovation Pharmaceuticals/NeoProfen, Endocare/Galil Medical

DOJ + FTC challenging deals too small to be reported under HSR

A Supreme Court hostile to antitrust?

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Foreign Pre-merger Filings

90+ jurisdictions have antitrust regimes, many require pre-merger notification

EU + Member States

Argentina, Australia, Brazil, Canada, India, Israel, Japan, Korea, Mexico, Russia, South Africa, Taiwan

China the latest wild card: Coca Cola/Huiyuan

Filing requirements vary widely

Sales, asset, market share thresholds based on global and local operations

Timing for filing, review

Approval, not just time to investigate, in some, mere notice in others

Governments coordinate; arguments must be consistent

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What has remained the same?

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Government officials maymisunderstand inartful language

Transaction will “give us a monopoly in a timely and expeditious manner”

Will make X dominant, much larger than remaining competitors

Will eliminate a maverick

Would allow X to raise prices, slow price decline, delay product development

Would give X leverage over customers, counteract power of buyers

Foreign / fringe competitors not a factor in market

Product X not a realistic alternative for customers

High barriers to entry

Deal has significant antitrust risk, may be blocked

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Antitrust concerns Sham negotiations or predatory conduct by one firm Legitimate discussions may lead to future coordination

Balancing test Industry structure, types of information exchanged Due diligence business justification

Precautions and safeguards Restrict distribution and use of information Delay exchange of sensitive data Aggregate data Employ “firewalls” and “clean teams”

Greatest risk Competitively sensitive / current and future / customer specific / price

and cost information / pricing plans, formulas

Pre-Merger Information Exchange

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“Gun Jumping”

Integration is prohibited until the HSR review is complete

companies must operate independently; no involvement in ordinary course business affairs

can plan future integration, but not implement

HSR Act prohibits (even if not competitors)

transfer of “beneficial ownership”

“operational, management or decision-making control”

“de facto acquisition”

as well as “acquisition” of voting securities and assets

Under Sherman Act, competitors may be subject to “price fixing” charges if they coordinate before transaction is consummated

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Taskscalculate synergies from possible transaction

plan integration, prepare for day one implementation

Benefitsavoids exchange of competitively sensitive data directly between companies, exchange only aggregate data

avoids possible impact on current operations

minimizes negative impact if deal is not consummated or divestiture is required to remedy antitrust concerns

Clean Team Rationale

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A clean team ensures that sensitive information is not shared directly

between merging firms

Company BCompany A

Data request Data request

RequestSynthesized

data / analysis

Counsel

CleanTeam

Data Data

Ensures that antitrust law is not violated

and approves information sharing

Steering committee / transformation teams

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M. Howard MorseDrinker Biddle & Reath LLP

1500 K Street, N.W.Washington, D.C. 20005

202-842-8883howard.morse@dbr.com

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