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Morse Slides For Conference Board Merger Integration Program June 25, 2009


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Slides presented to the Conference Board 2009 Post-Merger Integration Conference, Getting Past the Antitrust Hurdle, What has Changed? What is the Same? June 25, 2009, San Francisco, CA

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Morse Slides For Conference Board Merger Integration Program June 25, 2009

  1. 1. The Conference Board 2009 Post-Merger Integration Conference Successful Mergers in Today’s Environment Getting Past the Antitrust Hurdle What has Changed? What is the Same? M. Howard Morse Drinker Biddle & Reath LLP Washington, D.C.
  2. 2. <ul><li>What has changed? </li></ul>
  3. 3. Antitrust in the Headlines
  4. 4. <ul><li>Process is controlled by the Hart-Scott-Rodino Act </li></ul><ul><ul><ul><li>Requires notification + waiting period before closing </li></ul></ul></ul><ul><li>Substantive review is controlled by Section 7 of Clayton Act </li></ul><ul><ul><ul><li>Makes illegal transactions the effect of which “may be substantially to lessen competition” in any line of commerce </li></ul></ul></ul>Mergers & Acquisitions
  5. 5. <ul><li>“ No person shall acquire, directly or indirectly, any voting securities or assets of any other person” unless notification and waiting requirements satisfied </li></ul><ul><ul><ul><li>$65.2 million “size of transaction” threshold, indexed to GNP </li></ul></ul></ul><ul><ul><ul><li>“ 4(c) documents”: analyses prepared by or for officers and directors </li></ul></ul></ul><ul><ul><ul><li>30-day initial waiting period, except cash tender offers, bankruptcy </li></ul></ul></ul><ul><ul><ul><li>“ Early termination” common </li></ul></ul></ul><ul><ul><ul><li>“ Second Request” extends investigation until 30 days after compliance </li></ul></ul></ul><ul><ul><ul><li>After investigation, FTC/DOJ must seek injunction; most challenges resolved through consent agreement or deal is abandoned </li></ul></ul></ul>Hart-Scott-Rodino Act
  6. 6. The Review Process Government Challenges Transaction in Court Consent Decree Requiring Divestiture or Other Relief Government Closes Investigation Depositions of Business Officials Hart-Scott-Rodino Filing (Starts the Clock) “ Clearance” Between DOJ and FTC Early Termination of HSR Waiting Period Respond to Document Requests and Interrogatories Expiration of Initial HSR Waiting Period Respond to Informal Requests During Initial Waiting Period Agency Decision to Challenge Certify Compliance (Starts the Clock) Letter of Intent or Definitive Agreement Agency Decision to Investigate Second Request (Stops the Clock)
  7. 7. Substantive Merger Analysis CONCENTRATION depends on product / geographic market definition, only a “starting point for analysis” ENTRY timely, likely and sufficient to deter or counteract effects UNILATERAL MARKET POWER or COORDINATED INTERACTION EFFICIENCIES lower costs, increased output or new products enhance competition BOTTOM LINE: will prices rise, quality fall, service decline or innovation slow to detriment of consumers ?
  8. 8. <ul><li>+ </li></ul><ul><li>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. </li></ul><ul><li>+ </li></ul><ul><li>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. </li></ul>The Bush Administration Record <ul><li>The Bush DOJ + FTC lost efforts in court to block: </li></ul><ul><ul><li>Oracle/PeopleSoft, SunGard/Comdisco, Arch Coal/Triton Coal, Equitable Resources/Peoples Natural Gas, Western Refining/Giant Industries </li></ul></ul>
  9. 9. Merger Enforcement Actions Source: American Antitrust Institute, Transition Report on Competition Policy (data based on DOJ + FTC statistics)
  10. 10. Criticism of the Bush Record <ul><li>“ the pendulum has swung too far in the direction of nonintervention” </li></ul><ul><li>“ too-ready acceptance by some courts and enforcers of unproven non-interventionist economic arguments about concentration, entry and efficiencies” </li></ul><ul><li>propose measures to “reinvigorate horizontal merger enforcement” </li></ul><ul><ul><ul><ul><ul><li>Jonathan Baker & Carl Shapiro, “ Reinvigorating Horizontal Merger Enforcement ,” in How Chicago Overshot the Mark (Robert Pitofsky ed., 2008) </li></ul></ul></ul></ul></ul>
  11. 11. 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.”
  12. 12. New Antitrust Leadership <ul><li>Christine Varney Assistant Attorney General for Antitrust </li></ul><ul><li>“ 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” </li></ul><ul><li>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 </li></ul>“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.”
  13. 13. New Antitrust Leadership <ul><li>Jon Leibowitz Chairman, Federal Trade Commission </li></ul><ul><li>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”. </li></ul><ul><li>Named Chairman by President Obama on March 2, 2009; Commissioner since September 2004, term expires September 25, 2010 </li></ul><ul><li>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 </li></ul>
  14. 14. “ Vigorous Antitrust Enforcement in this Challenging Era” <ul><li>“ Vigorous antitrust enforcement must play a significant role in the Government’s response to economic crises to ensure that markets remain competitive” </li></ul><ul><li>“ In past years, with the exception of cartel enforcement, the pendulum swung too far” </li></ul><ul><li>“ We must change course and take a new tack” </li></ul><ul><li>“ 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” </li></ul><ul><li>“ 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” </li></ul>
  15. 15. 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)
  16. 16. The Economic Crisis and Merger Enforcement <ul><li>“ Too big to fail” </li></ul><ul><ul><li>Is failure to stop mergers one cause of the problem? </li></ul></ul><ul><ul><li>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? </li></ul></ul><ul><ul><li>Is the concern limited to networked industries? </li></ul></ul><ul><li>Entry conditions </li></ul><ul><ul><li>With capital tight, entry may be more difficult  </li></ul></ul><ul><li>Failing company defense </li></ul><ul><ul><li>Firm 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 </li></ul></ul><ul><li>Impact on HSR procedures </li></ul><ul><ul><li>15 day HSR waiting period in bankruptcy; no HSR filing for deals with government controlled entity (e.g., GM) </li></ul></ul><ul><li>Political pressure on enforcers to clear deals </li></ul>
  17. 17. The Legal Landscape Recent Developments <ul><li>Inova/Prince William, Whole Foods/Wild Oats, CCC/Mitchell, CSL/Talecris </li></ul><ul><ul><li>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” </li></ul></ul><ul><li>Microsemi/Semicoa, Polypore/Microporous, Ovation Pharmaceuticals/NeoProfen, Endocare/Galil Medical </li></ul><ul><ul><li>DOJ + FTC challenging deals too small to be reported under HSR </li></ul></ul><ul><li>A Supreme Court hostile to antitrust? </li></ul>
  18. 18. Foreign Pre-merger Filings <ul><li>90+ jurisdictions have antitrust regimes, many require pre-merger notification </li></ul><ul><ul><ul><li>EU + Member States </li></ul></ul></ul><ul><ul><ul><li>Argentina, Australia, Brazil, Canada, India, Israel, Japan, Korea, Mexico, Russia, South Africa, Taiwan </li></ul></ul></ul><ul><ul><ul><li>China the latest wild card: Coca Cola/Huiyuan </li></ul></ul></ul><ul><li>Filing requirements vary widely </li></ul><ul><ul><ul><li>Sales, asset, market share thresholds based on global and local operations </li></ul></ul></ul><ul><ul><ul><li>Timing for filing, review </li></ul></ul></ul><ul><ul><ul><li>Approval, not just time to investigate, in some, mere notice in others </li></ul></ul></ul><ul><li>Governments coordinate; arguments must be consistent </li></ul>
  19. 19. <ul><li>What has remained the same? </li></ul>
  20. 20. Government officials may misunderstand inartful language <ul><li>Transaction will “give us a monopoly in a timely and expeditious manner” </li></ul><ul><li>Will make X dominant, much larger than remaining competitors </li></ul><ul><li>Will eliminate a maverick </li></ul><ul><li>Would allow X to raise prices, slow price decline, delay product development </li></ul><ul><li>Would give X leverage over customers, counteract power of buyers </li></ul><ul><li>Foreign / fringe competitors not a factor in market </li></ul><ul><li>Product X not a realistic alternative for customers </li></ul><ul><li>High barriers to entry </li></ul><ul><li>Deal has significant antitrust risk, may be blocked </li></ul>
  21. 21. <ul><li>Antitrust concerns </li></ul><ul><ul><ul><li>Sham negotiations or predatory conduct by one firm </li></ul></ul></ul><ul><ul><ul><li>Legitimate discussions may lead to future coordination </li></ul></ul></ul><ul><li>Balancing test </li></ul><ul><ul><ul><li>Industry structure, types of information exchanged </li></ul></ul></ul><ul><ul><ul><li>Due diligence business justification </li></ul></ul></ul><ul><li>Precautions and safeguards </li></ul><ul><ul><ul><li>Restrict distribution and use of information </li></ul></ul></ul><ul><ul><ul><li>Delay exchange of sensitive data </li></ul></ul></ul><ul><ul><ul><li>Aggregate data </li></ul></ul></ul><ul><ul><ul><li>Employ “firewalls” and “clean teams ” </li></ul></ul></ul><ul><li>Greatest risk </li></ul><ul><ul><ul><li>Competitively sensitive / current and future / customer specific / price and cost information / pricing plans, formulas </li></ul></ul></ul>Pre-Merger Information Exchange
  22. 22. “ Gun Jumping” <ul><li>Integration is prohibited until the HSR review is complete </li></ul><ul><ul><ul><li>companies must operate independently; no involvement in ordinary course business affairs </li></ul></ul></ul><ul><ul><ul><li>can plan future integration, but not implement </li></ul></ul></ul><ul><li>HSR Act prohibits (even if not competitors) </li></ul><ul><ul><ul><li>transfer of “beneficial ownership” </li></ul></ul></ul><ul><ul><ul><li>“ operational, management or decision-making control” </li></ul></ul></ul><ul><ul><ul><li>“ de facto acquisition” </li></ul></ul></ul><ul><ul><ul><li>as well as “acquisition” of voting securities and assets </li></ul></ul></ul><ul><li>Under Sherman Act, competitors may be subject to “price fixing” charges if they coordinate before transaction is consummated </li></ul>
  23. 23. <ul><li>Tasks </li></ul><ul><ul><ul><li>calculate synergies from possible transaction </li></ul></ul></ul><ul><ul><ul><li>plan integration, prepare for day one implementation </li></ul></ul></ul><ul><li>Benefits </li></ul><ul><ul><ul><li>avoids exchange of competitively sensitive data directly between companies, exchange only aggregate data </li></ul></ul></ul><ul><ul><ul><li>avoids possible impact on current operations </li></ul></ul></ul><ul><ul><ul><li>minimizes negative impact if deal is not consummated or divestiture is required to remedy antitrust concerns </li></ul></ul></ul>Clean Team Rationale
  24. 24. A clean team ensures that sensitive information is not shared directly between merging firms Company B Company A Data request Data request Request Synthesized data / analysis Counsel Clean Team Data Data Ensures that antitrust law is not violated and approves information sharing Steering committee / transformation teams
  25. 25. M. Howard Morse Drinker Biddle & Reath LLP 1500 K Street, N.W. Washington, D.C. 20005 202-842-8883 [email_address] Philadelphia, PA Chicago, IL Washington, DC San Francisco, CA Los Angeles, CA New York, NY Florham Park, NJ Princeton, NJ Berwyn, PA Wilmington, DE Albany, NY Milwaukee, WI © 2007 Drinker Biddle & Reath LLP