United States: Mergers
Aggressive enforcement continued to characterise the United States merger review process over the last year, with agencies requiring substantial divestitures in numerous deals and rejecting proffered remedies in several other deals that the agencies filed suit to block. While the agencies’ track record in these suits was mixed – winning major victories or causing the parties to abandon their deals in Staples/Office Depot, Electrolux/GE and BakerHughes/Halliburton, while losing litigated challenges in Steris/Synergy Health, Advocate/NorthShore and Penn State Hershey/PinnacleHealth – the upshot for parties is that the agencies remain willing to challenge competitive harm where they perceive it. The agencies have been notably active in challenging business-to-business (B2B) transactions where the perceived competitive harm is to very large corporations, while also continuing to pay close attention to transactions affecting healthcare and other consumer interests. The election year promises to result in changes in the leadership of the agencies, but there is little evidence that these changes will result in a reduction in enforcement activity (and some suggestions that the opposite may be true).
Protecting the big guy
Many of the prominent antitrust enforcement actions over the past year have concerned B2B deals in which the affected customers were large – often very large – businesses rather than the ‘little guy’ small businesses and consumers that vigorous antitrust enforcement is sometimes thought to protect. This partly reflects the deals being reviewed: agencies do not choose which mergers are presented to them. It also illustrates, however, the pitfalls of relying on the intuitive argument that big customers can take care of themselves in the competitive process. Because antitrust agencies evaluate how transactions impact the pre-merger status quo, much of the ability of large customers to take care of themselves is baked into their analysis: if the customers are already getting better deals than their smaller counterparts, a reduction of their ability to continue doing so is a reduction to competition, and one that the agencies have been eager to police.
The FTC focused on alleged harm to the largest US corporations in its landmark victory in the US$6.3 billion Staples/Office Depot transaction, which concluded a trilogy of major decisions in the office supplies arena dating back over a 20-year period. Staples and Office Depot first sought to merge in 1997, but abandoned their transaction following a preliminary injunction based on the deal’s impact on consumers and small businesses in an alleged market of retail superstores in more than 40 metropolitan areas.
When the FTC returned to office superstores in 2013 in reviewing the Office Depot/Office Max transaction, it concluded that the landscape had changed sufficiently due to the rise of online competition and large discount stores like Wal-Mart and Target to eliminate the risk that a combination of office superstores would reduce retail competition.1
The FTC also observed in its 2013 Office Depot/Office Max closing statement that the B2B contract sales to ‘large multi-regional or national customers’ had become a dimension of competition between the merging parties, but found at that time that competition – both from Staples and from larger non-superstore suppliers like WB Mason – was sufficient to constrain the post-merger firm.
The FTC’s 2016 challenge to the subsequent Staples/Office Depot transaction focused exclusively on such sales to large, multi-regional or national customers, defining a product market focused on commercial customers purchasing US$500,000 or more in office supplies.2 The merging parties contended that the FTC’s market definition artificially focused on the impact from the merger on the largest Fortune 100 companies to the exclusion of the thousands of other companies purchasing office supplies. As Staples argued at trial, ‘The FTC ... has focused on protecting the most powerful, richest companies on Earth ... they have all kinds of ways to make sure they get the best price from their vendors...’
While the district court expressed criticism toward the FTC’s case at various points in the trial – a dynamic that likely contributed to the parties’ unusual decision to rest their case without offering defence evidence – in the end, the court observed that the parties’ documents made clear that they viewed competition for the largest customers as a distinct part of their businesses, with more demanding service and price requirements than other customers, supporting the FTC’s market definition. Moreover, the substantial evidence that the parties and their customers viewed Staples and Office Depot as the closest competitive substitutes for one another by a considerable margin helped convince the court that the proposed merger was anticompetitive. While the parties sought to establish that entry by Amazon and others would be sufficient to replace any lost competition, the court was unconvinced.
The Department of Justice (DOJ) expressed similar concern for the welfare of large customers in its challenge to the US$3.3 billion Electrolux/GE merger. Electrolux involved the proposed combination of two of three primary global manufacturers of ranges, cookers and wall ovens, which sold their products primarily to: large retailers; and large homebuilders and similar multi-unit apartment/hotel operators that typically purchase appliances by contract from the manufacturers. In 2006, the DOJ had cited the power of these large customers as justification for its decision not to challenge the similar Whirpool/Maytag transaction in the residential laundry appliance space. By contrast, in Electrolux, the DOJ explicitly rejected the likelihood that such customers would constrain the competitive activity of the merging parties, contending instead that large retailers had incentives to pass on increased prices rather than seek to thwart them.
Staples/Office Depot and Electrolux/GE are examples of a relatively common dynamic of enforcement actions whose immediate beneficiaries are large corporate customers. Other recent cases with similar dynamics include Ball/Rexam (discussed further below), where remedies were imposed in a combination of two of three global producers of aluminium cans, the bulk of sales of which are to four multinational beverage companies, and GE/Alstrom, where the DOJ required a divestiture to preserve competition in aftermarket gas turbine parts sold to electrical power companies. The importance of these large customers to the merger review process in B2B deals makes it paramount to have an effective customer outreach status early in the merger process in order to minimise the risk that such customers will use their resources to lobby the agencies to protect their advantaged purchasing positions.
A remedy to cure what ails every anticompetitive merger?
US authorities have expressed scepticism in recent deals toward the ability of major structural remedies to redeem otherwise anticompetitive deals, particularly when the proposed remedies are not crystallised in a signed purchase agreement with a viable buyer. While close scrutiny of remedy proposals is not a new development, agency focus has sharpened in the wake of well-publicised failed divestitures in the Hertz/Dollar Thrifty and Albertson’s/Safeway mergers.
Halliburton/Baker Hughes highlights the limitations of ill-defined remedy proposals to address serious antitrust concerns. As then-Assistant Attorney General Bill Baer put it, in the kind of deals that agencies believe ‘should never leave the boardroom,’ the agencies have shown a willingness to reject divestiture proposals designed to save such deals and litigate where necessary.
Halliburton bid some US$28 billion to acquire Baker Hughes, one of its two major global competitors across a host of oilfield services markets. While the parties clearly recognised the antitrust challenges associated with the bid, they evidently believed that targeted divestitures would allow them to surmount those challenges – a belief Halliburton was willing to underwrite with a US$3.5 billion reverse break fee.
To address the antitrust hurdles raised by the transaction, the parties offered a massive divestiture proposal reflecting approximately US$5.2 billion in revenue, roughly a quarter of Baker Hughes’ total revenue. The DOJ baulked, however, at the complexity of the mix-and-match carve-out required for the divestiture and concluded that such a package, cobbling together the less desirable elements of various business lines of the two companies, did not create a robust competitor capable of replicating the pre-merger status quo. The DOJ contended instead that the proposal was inadequate because it did not include full business units, withheld critical assets and personnel, involved ongoing entanglements between the buyer and merged company and generally failed to replicate pre-merger competition. In these respects, the Halliburton proposal echoed the divestiture package found inadequate by the district court in last year’s Sysco/US Foods decision. Halliburton’s divestiture proposal had an additional problem in that it was just that: a proposal. Halliburton had failed to solidify that proposal through an actual purchase agreement with a credible buyer, making the complex package more difficult to defend.
The US$7.7 billion Ball/Rexam transaction illustrates that even complex divestitures in deals presenting significant antitrust issues can be accepted by authorities in the US in circumstances where they have confidence that the divestiture will succeed. Like Halliburton, Ball/Rexam involved a combination of two of the three major global competitors in an industry in which the authorities concluded that significant entry barriers existed. Also like Halliburton, the parties in Ball assembled a large (the Ball package was sold for over US$3 billion) and relatively complex divestiture package involving the separation of previously integrated assets to be either divested or retained. The Ball package had advantages over that of Halliburton, however: all assets in the United States divestiture were from a single company, avoiding the complexities of a mix-and-match divestitures (though assets of both companies were involved in the global package). More importantly, Ball signed an agreement with an established packaging industry competitor, Ardagh, to buy the divested assets, helping to give the FTC confidence that the package would actually succeed in replicating competition threatened by the deal.
Where approved, merger remedies must typically be completed within a short time after the closing of the primary deal, particularly at the FTC, although recent decisions show that the FTC can be flexible on divestiture timing when confident that a ready market exists for the divested assets. In Energy Transfer/Williams, the parties’ US$37.7 billion deal to create one of the three largest energy companies in North America would have combined ownership of both natural gas pipelines used to serve parts of the Florida market. In conditioning approval of the deal on the divestiture of one of the relevant ownership interests, the FTC allowed the parties up to 180 days from closing of the main transaction to complete the divestiture, explaining that this approach was justified in light of the pipeline’s status as a ‘high-value, low-risk asset likely to generate substantial interest among more than one potentially acceptable buyer.’ Similarly, in Air Liquide/Airgas, the FTC allowed the parties up to four months from closing of the US$13.4 billion acquisition to complete the required divestiture of a variety of assets from the merging parties, explaining that ‘there are a number of parties interested in purchasing the assets to be divested that have the expertise, experience and financial viability to successfully purchase and manage [the divested assets].’
The adequacy of remedies to address competitive harm from mergers is likely to remain a topic of discussion in the coming year. Last year’s failed Albertson’s/Safeway divestiture, where the buyer of 146 divested grocery stores filed for bankruptcy within months of the divestiture, leading to Albertson’s to repurchase a number of the divested stores out of bankruptcy, was a significant black eye for the FTC, particularly coming relatively soon after a similar failed divestiture in the 2013 Hertz divestiture. The topic of whether merger remedies are sufficient to prevent merger-related harm from anticompetitive mergers has bubbled into mainstream politics, notably in the form of a 29 June 2016 speech by Senator Warren in which she cited failed merger remedies and argued that ‘Where a merger raises fundamental antitrust concerns, regulators need to stand tall and say no.’ Against this backdrop, the FTC’s ongoing merger remedy study of 92 merger remedies adopted between 2006 and 2012, is likely to produce a report in the new year that will be closely watched for signs of a further tightening of agency remedy practice.
Healthcare mergers remain an enforcement priority
Antitrust enforcers have continued their long-standing diligence regarding mergers impacting the delivery of healthcare to consumers. Hospital mergers remain a particular focus, with the FTC litigating three hospital merger challenges in early 2016, later losing bids to enjoin two of the three mergers in district court. While the FTC’s enforcement decisions in each of these decisions can be explained on the basis of traditional concentration analysis, each also illustrates developing fault lines in hospital merger practice:
- Advocate/NorthShore. Advocate and NorthShore are the two largest hospital providers in the northern suburbs of Chicago, and by the FTC’s analysis, the merging parties accounted for more than half of hospital admissions in that area. This analysis, however, excluded several options elected by substantial numbers of patients in the northern suburbs, such as ‘destination’ hospitals like Northwestern Memorial and Rush in Chicago. While the FTC contended that insurers could not use such destination hospitals to create coverage networks they could market to residents of the northern suburbs, the district court concluded that the FTC’s approach assumed the answer to the question it purported to address by ignoring the fact that, for example, Northwestern Memorial was the second or third-closest substitute for most of the party’s hospitals in the northern suburbs. The FTC has filed a notice of appeal with respect to the decision.
As its market definition approach illustrates, the FTC is increasingly concerned with how hospital combinations impact the bargaining positions of hospital groups and insurers. Academic literature has explored whether combinations between merging providers even with minimal coverage overlap can increase prices to insurers by creating ‘must have’ healthcare networks within particular regions, and the Advocate complaint clearly reflects the FTC’s sympathy toward this concept (‘Without either of [the merging parties’] hospital systems, it would be very difficult for commercial payers to market a health plan provider network to employers with employees living or working in the North Shore Area’). To date, the lack of a limiting principle to these network-effect theories of harm in hospital mergers has limited its usage, but Advocate/NorthShore suggests that this concern will continue to influence the FTC’s approach to hospital deals.
- Penn State Hershey/PinnacleHealth. Penn State Hershey and PinnacleHealth are the two largest hospital service providers (and two of the three significant providers) in the Harrisburg, Pennsylvania area, making their merger a relatively straightforward enforcement decision when viewed through that prism. As in Advocate/NorthShore, however, the merging parties persuaded a district court to reject the FTC’s market definition through evidence of competition from larger hospitals outside the Harrisburg area. The FTC is appealing the district court’s preliminary injunction denial.
The district court’s decision was coloured by two important factors for practitioners. First, the parties’ two primary insurance customers had entered long-term contracts protecting them from price increases, which the court found to blunt the impact of the structural reduction in competition alleged by the FTC (‘the FTC is essentially asking the Court [to] prevent this merger based on a prediction of what might happen to negotiating position[s] and rates in 5 years. In the rapidly-changing arena of healthcare and health insurance, to make such a prediction would be imprudent…’). Because long-term contracting is a variable susceptible to control by the merging parties during the course of in-depth merger investigations, Penn State/PinnacleHealth is a useful reminder of its strategic value.
Second, the district court also noted favourably the parties’ efficiencies argument that the merger would allow Penn State Hershey to address its capacity constraints by shifting patients to Pinnacle facilities rather than having to invest in a US$277 million expansion. While this illustrates the role efficiency arguments can play at the margin of contested deals, it also demonstrates the narrowness of the agencies’ views of efficiencies as a defence to otherwise anticompetitive mergers. In its appeal to the district court decision, the FTC has argued both that the parties’ efficiency arguments were insufficiently documented and that they did not reflect true efficiencies at all – in the FTC’s view, the abandonment of a planned expansion is an anticompetitive output reduction, not an efficiency.
- Cabell Huntington/St Mary’s involves the combination of two hospitals in the Huntington, West Virginia area that would create a near-monopoly in the area. As in Advocate and Penn State, the merging parties disputed this market definition, but at the same time changed the rules of engagement by working with the West Virginia legislature to pass a new law insulating mergers like that of Cabell Huntington and St Mary’s from federal antitrust scrutiny provided they receive approval from West Virginia’s Health Care Authority and Attorney General. The FTC ultimately dropped its challenge to the merger following approval under the new law by both West Virginia agencies, in doing so cautioning that it viewed laws like that of West Virginia as a threat to the preservation of competition and warning that it might pursue challenges to mergers protected by such laws in future cases.
Beyond the hospital arena, the agencies have also devoted substantial attention to healthcare-related transactions in the insurance and pharmaceutical space. In pharmaceuticals, the FTC required divestitures in a number of deals, notably including two, Hikma/Roxane and Lupin/Gavis, involving reductions in the number of post-merger competitors from five to four. While five-to-four deals in other industries present a reasonable prospect of approval without remedy (about one in three such deals involving a second request are cleared), enforcement data suggest that Hikma and Lupin are consistent with the FTC’s past practice of requiring such remedies in virtually all such pharmaceutical deals.
In health insurance, the planned US$48 billion Anthem/Cigna and US$37 billion Aetna/Humana transactions have been challenged in parallel by the DOJ and multiple state Attorneys General at the time of this article. Both deals raise significant overlaps, and the challenges suggest that the DOJ concluded that the proposed divestitures that had been publicly reported were inadequate to solve the antitrust issues raised by the transactions, an echo of the DOJ’s approach to the Halliburton/Baker Hughes deal.
The FTC suffered a notable litigation defeat in its effort to block the US$1.9 billion combination of medical device providers Steris/Synergy Health. Steris involved a somewhat unusual potential competition theory that UK-based Synergy Health would have entered the US market with its x-ray-based sterilisation products and offered competition to Steris and Sterigenics, the two primary providers of radiation-based sterilisation products in the US. While the FTC argued that Synergy Health would have entered the market but for the merger and curtailed its pre-merger entry plans only in response to its merger agreement with Steris, the court found that the evidence established unrelated business reasons for the decision. While the FTC lost its challenge, Steris shows that the agencies will pursue potential competition cases when persuaded that they involve significant competitive harm.
Non-horizontal enforcement: not dead
Horizontal mergers will continue to be the focus of US enforcement activity, but the agencies have made clear that they will investigate and challenge combinations under vertical or similar theories in appropriate cases. For example, in Charter/Time Warner Cable, the merging parties did not compete with one another, but together would have had increased negotiating power to cause video programmers to discriminate against alternative video distribution providers through exclusive contracts. The DOJ conditioned its approval of the transaction on behavioural remedies prohibiting the merged company from including discriminatory provisions regarding such alternative distribution outlets in its contracts with programmers. While such behavioural remedies are generally disfavoured by the agencies, Charter/Time Warner is a reminder that they remain a tool for agencies, particularly to address non-horizontal theories of harm.
International coordination: smooth sailing, mostly
Where multiple agencies identify antitrust concerns with a global transaction, harmonised remedy approaches are highly valued by the agencies, though not always achieved. The agencies touted their close coordination with sister agencies from other jurisdictions in a number of recent transactions, including NXP/Freescale (divestiture of facilities in the Netherlands and Philippines as part of a coordinated FTC review of US$11.8 billion semiconductor merger with the European Commission, JFTC and KFTC), Iron Mountain/Recall Holdings (DOJ-approved divestiture of storage facilities in various cities in connection with coordinated review by the DOJ, the Australian Competition and Consumer Commission, the UK Competition & Markets Authority and the Canadian Competition Bureau) and the aforementioned settlements in GE/Alstrom (coordinated DOJ/European Commission review) and Ball/Rexam (coordinated FTC, European Union and Brazilian CADE review).
Though rare, substantive differences between reviewing agencies sometimes lead to inconsistent results. In Superior Plus/Canexus, the FTC and Canadian Competition Bureau each reviewed the US$982 million combination of two of the leading suppliers of chemicals to the pulp and paper industry. While both agencies concluded that the transaction would reduce competition, the CCB cleared the transaction, relying on the statutory efficiency exception in the Canadian Competition Act to conclude that the transaction’s efficiencies outweighed its likely anticompetitive effects, while the FTC challenged the transaction, leading it to be abandoned. Given the historical reluctance for US agencies to accept efficiencies as a defence to otherwise anticompetitive deals, SuperiorPlus may well not be the last divergence between US and Canadian results in cases presenting significant efficiency arguments.
Election tea leaves: aggressive enforcement likely to continue
One near-certain result from the upcoming presidential election is a change in antitrust leadership: the Antitrust Division is currently headed by interim leadership (as is typical in an election year) and two of the five commissioner positions at the FTC are vacant. The substantive approaches of the new enforcement teams are necessarily an unknown, but public statements suggest that new leaders are likely to be at least as aggressive as the current regime. For her part, Secretary Clinton has vowed to ‘strengthen the antitrust enforcement arms’ of the agencies and ‘appoint aggressive regulators to take on troubling concentration.’ Donald Trump has been less specific in his policy proposals, but his broadly populist stance and willingness to invoke antitrust language questioning the motives of Amazon founder and Washington Post owner Jeff Bezos gives no real indication of an inclination to move away from aggressive antitrust proposals apart from his current party affiliation.
- As an aside, although similar dynamics cut across many retail markets, the FTC’s 2015 decision conditioning approval of the US$9.2 billion Dollar Tree/Family Dollar transaction on the divestiture of 330 stores illustrates that bricks-and-mortar retailer deals can still raise issues in particular cases, as does the FTC’s currently pending in-depth investigation of the US$17 billion Walgreens/Rite-Aid transaction.
- The FTC’s administrative complaint initially focused on customers purchasing US$1 million or more in office supplies annually.