United States: Mergers
Trump-era US merger enforcement policy drew into clearer focus over the past year as the new administration's antitrust leadership nominees – Makan Delrahim as Assistant Attorney General of the Department of Justice Antitrust Division (DOJ) and Joseph Simons as chairman of the Federal Trade Commission (FTC) – were confirmed and took office in September 2017 and May 2018 respectively. While the teams remain relatively new to their positions, early suggestions are that they will largely stay the course with respect to prior antitrust enforcement principles, with some right-leaning changes at the margins that may make the overall deal environment slightly more permissive than during the Obama administration. Interestingly, vertical enforcement has been a somewhat surprising early priority, with the DOJ's unsuccessful vertical challenge to AT&T/Time Warner representing the single highest profile action to date by the new administration, and both the DOJ and FTC making it a point to question the appropriateness of behavioural remedies to address concerns in vertical deals.
The landmark AT&T/Time Warner case: vertical enforcement strikes out
The DOJ's November 2017 decision to challenge the US$108 billion AT&T/Time Warner transaction was the first litigated vertical merger challenge in decades, calling into questions long-held assumptions about the risks and expected antitrust path to clearance for transactions giving rise to vertical antitrust concerns. When the transaction was announced in October 2016, most observers assumed that the transaction would clear antitrust review relatively easily due to the parties' lack of horizontal overlap and the relatively modest remedies imposed in prior vertical acquisitions raising antitrust issues in the media space.
In one sense, the AT&T/Time Warner decision involved familiar antitrust issues. AT&T is a significant competitor in the multichannel video programming distribution (MVPD) market through its DirectTV satellite and broadband cable subscription services and is also a major player in the broadband and wireless markets that are increasingly important to television distribution. Time Warner, in turn, controlled popular, allegedly 'must have' programming such as HBO, TNT and CNN. The government contended AT&T could use ownership of Time Warner's valuable media content to disadvantage AT&T's rivals at the MVPD level. These concerns echoed similar issues raised in prior subscription television mergers such as 2011's Comcast/NBC Universal transaction and 1996's Time Warner/Turner merger. Each of these transactions were met with significant criticism from MVPD and programming competitors concerned that the transaction would create or enhance incentives for the combined firm to use its integrated operations to foreclose or raise the costs of rivals.
The DOJ decision to sue to block the Time Warner acquisition surprised many observers because antitrust concerns in prior media deals had been addressed through settlements that imposed various conduct remedies designed to ensure fair treatment of unaffiliated MVPDs and programmers, while the DOJ sought to simply block the AT&T/Time Warner deal. Part of this difference may relate to procedural distinctions between the transactions – AT&T/Time Warner, unlike most prior mega-deals in the television industry, was structured to avoid concurrent Federal Communications Commission (FCC) review that in prior deals had been an equally important element in addressing competition-related concerns as the formal antitrust review by the FTC or DOJ. In the prior deals, the FCC, rather than DOJ or the FTC, took the lead in imposing and enforcing conduct-based merger remedies designed to address the vertical concerns raised by those deals.
The lack of FCC review meant that the DOJ did not have a regulatory agency to outsource monitoring of any remedy – if behavioural remedies were part of the solution for fixing any concerns raised by the merger, the DOJ would have to take on this role itself. This it declined to do. Assistant Attorney General Delrahim has espoused and voiced the view that 'regulatory' functions such as ongoing monitoring of decree compliance are fundamentally inconsistent with the antitrust agencies' law enforcement mission. While some might question why setting aside marketplace choices entirely by seeking to block a merger is less 'regulatory' than allowing such private market decisions to proceed with modifications requiring occasional government oversight, this DOJ position meant that the only means of addressing its antitrust concerns that it would accept was through 'structural' divestitures that would eliminate or reduce the post-merger firm's ability and incentive to harm rivals.
Rather an acceding to reported DOJ demands to a divestiture of either DirectTV or Time Warner's Turner Network (including CNN) assets, AT&T made a commitment to arbitrate any disputes with rival MVPDs regarding the terms of carriage for AT&T's networks post-merger that was modelled on similar 'regulatory' remedies in prior FCC-reviewed television mergers. While the DOJ rejected the sufficiency of this offer, it ultimately proved significant at trial, as Judge Leon considered 'natural experiment' evidence of the effect from prior vertical mergers including such provisions as analogous to the AT&T/Time Warner transaction specifically because AT&T had committed to such arbitration provisions.
Ultimately, after a six-week trial, Judge Leon issued a 172-page decision rejecting the DOJ's bid to block the AT&T/Time Warner merger. Judge Leon observed that in vertical mergers, there is no quick path for the DOJ to establish a prima facie case through showings of high market share or the like, so that the government was tasked with demonstrating on the particular facts that the merger was likely to substantially lessened competition when both the potential harms and likely efficiency benefits of the merger were taken into account.
Judge Leon found that under the circumstances of the pay television industry, the fact that Time Warner's programming was popular 'must have' content for MVPDs did not necessarily mean that the transaction would lead to an anticompetitive increase in Time Warner's bargaining position against the MVPDs. This was because failed negotiations with an MVPD would continue to be as ruinous for Time Warner as for the MVPD after the transaction, rejecting testimony by the DOJ economist that Time Warner would be better-positioned to absorb the losses from non-carriage on some MVPDs by recoupment in increased MVPD subscriptions by AT&T in markets affected by such a negotiation. This was but one of many concerns Judge Leon expressed with the complex economic model at the heart of the government's antitrust challenge, illustrating the difficulty that the kind of complex economic analysis underlying so much of modern antitrust practice can have in persuading non-specialist audiences.
Judge Leon was similarly dismissive of testimony from customers and competitors of AT&T and Time Warner regarding the likely harms resulting from the transaction, finding them speculative and undermined by the potential self-interest of the witnesses. This concern echoes findings from judges in other antitrust challenges that, in the words of Judge Walker in the 2004 DOJ challenge to the Oracle/PeopleSoft transaction, 'unsubstantiated customer apprehensions do not substitute for hard evidence'. This raises the paradox for antitrust practitioners that the kind of customer feedback evidence that is typically viewed as critical toward the antitrust agencies' decision of whether to challenge particular transactions may count for little once a transaction is actually challenged.
At the end of the day, Judge Leon found more persuasive the evidence that there has been a long history of vertical integration in the pay television industry that has not led to the kind of harms alleged by the government. While many of the specifics in the AT&T challenge were rooted in the particular and changing dynamics of the television industry, it illustrates the difficulty that agencies will have in successfully challenging vertical transactions that typically entail significant pro-competitive synergies and that, by their nature, do not involve the type of clear elimination of competition that courts can most easily assess. The DOJ has filed a notice appealing Judge Leon's decision, so the final chapter on the AT&T/Time Warner saga has yet to be written.
Finally, some have suggested that the DOJ's decision to challenge the AT&T/Time Warner deal might have been motivated at least in part by President Trump's oft-stated disdain for Time Warner-owned CNN, and thus that US antitrust enforcement may have entered a more political chapter than has been the norm over recent administrations. With respect to the AT&T case, the DOJ strongly denied that political considerations or pressure had any influence on its decision to challenge the deal, and Judge Leon denied discovery relating to the DOJ's White House communications, finding that AT&T had failed to meet the 'rigorous' burden required for such an unusual intrusion into the prosecutorial deliberative process. More generally, it is perhaps noteworthy, with respect to the hypothesis that presidential grievances might drive antitrust policy in the new regime, that the acquisition of Whole Foods by Amazon, another of the president's frequent rhetorical targets, cleared antitrust review within two months of announcement. At least to date, antitrust policy remains explicable based on traditional antitrust considerations.
A smoother path for horizontal mergers?
While US merger enforcement principles are, to a large degree, a matter of bipartisan consensus, practitioners typically expect horizontal merger enforcement to be somewhat more aggressive in Democratic administrations and somewhat less aggressive in Republican ones. Limited evidence is available to test that expectation at this point, given that the neither the DOJ nor the FTC Trump administration leadership teams have been in place even a full year, but there is some indication that DOJ enforcement activity has been relatively light, with only five announced consent decrees and abandoned mergers halfway into 2018. For contrast, there were 19 announced merger challenges and decrees at DOJ in 2016, the last year of the Obama administration. The FTC shows no similar signs of easing of the antitrust reins, however, with a dozen announced decrees and merger challenges in the first half of 2018. Thus, while some signs point to a climate that may be somewhat more permissive at the margins than during the Obama administration, it is a far cry from 'anything goes'.
Merger remedies: your mileage may vary
The antitrust agency leadership reiterated in public remarks over the last year that mergers raising antitrust issues are best remedied through structural divestitures rather than by behavioural relief, and that such divestitures be comprised of ongoing, viable businesses rather than complex carve-outs of selected assets from larger businesses. Indeed, DOJ Deputy Assistant Attorney General Barry Nigro described asset carve-out remedies in a February 2018 speech as 'inherently suspect'. That said, actual agency practice has shown a continued willingness to accept more limited remedy packages in appropriate circumstances.
• In May 2018, the DOJ secured its largest divestiture in history in the US$66 billion Bayer/Monsanto transaction with a US$9 billion divestiture to BASF of various genetically modified seed businesses. While this divestiture consisted of a carve-out of assets used primarily by, or critical to, the operation of the divested businesses rather than the kind of standalone business preferred by DOJ, the credibility of the carve-out was bolstered by the fact that:
• the buyer was a financially strong, highly credible entity with unquestioned industry knowledge that was paying a substantial amount for the divested business; and
• the investigation and remedy was made in coordination with the European Commission, Canadian Competition Bureau, and the Administrative Council for Economic Defence of Brazil.
• In the June 2018 Northrop Grumman/Orbital ATK and July 2017 Broadcom/Brocade transactions, the FTC made exceptions to its stated preferences by accepting consent decrees using behavioural remedies to fix competitive problems. In both cases, the post-merger entity agreed to use firewalls between different parts of the acquiring and acquired businesses in order to prevent potential vertical harms to firms that would otherwise rely on the post-merger firms as suppliers and partners at one level of the market and as key competitors at another level. While such remedies are disfavoured, these examples show that they are still accepted in some cases.
Post-merger enforcement of merger remedy consent decrees is typically an area making little news, but a number of developments over the last year are worth noting for the practitioner.
• Assistant Attorney General Delrahim has pushed to make enforcement of DOJ consent decrees a priority by creating an Office of Decree Enforcement (bringing the DOJ into organisational line with the FTC, which has had a similar compliance section for many years) and to make it easier for the DOJ to enforce its consent decree by changing the language in consent decrees governing subsequent DOJ enforcement of decree violations from 'clear and convincing' to 'preponderance of the evidence'. At the same time, Assistant Attorney General Delrahim has moved to winnow the number of decrees the DOJ has to enforce by launching an initiative to review and, where appropriate, vacate old consent decrees whose competitive purposes have been superseded by time.
• In GE/Baker Hughes, the June 2017 DOJ approval of the transaction had been conditioned on the timely divestiture of GE's Water & Process Technologies unit. In October 2017, the DOJ applied to modify the decree after GE failed to complete its divestiture on time due to international regulatory issues. The modified decree imposed a US$1,500 daily fine on GE for each jurisdiction in which the agreed-upon divestiture had not been implemented, with the payments terminating on the day the divestiture was completed in such jurisdictions. While not particularly large, the payments represent an interesting balance between the comity-based recognition that multinational merger reviews proceed at different timetables in different jurisdictions and the DOJ's typical instance that its decrees be rigorously followed.
• In March 2018, the FTC announced a modification of its 2014 CoreLogic/DataQuick consent decree in order to address CoreLogic's failures to provide the full scope of data that the prior decree required to be divested in a timely or complete manner. The amended decree extended CoreLogic's decree obligation by three years while expanding the scope of data to be provided, illustrating that the agencies can increase as well as decrease consent decree demands as situations warrant.
Ongoing enforcement in non-reportable deals: no filing doesn't mean no worries
The agencies continue to pursue occasional post-closing investigations and challenges in deals falling below Hart-Scott-Rodino (HSR) thresholds where evidence of antitrust concern comes to light. Examples over the past year included TransDigm/Takata, where the DOJ required the divestiture of a US$90 million acquisition alleged to have created a monopoly in commercial airline restraint systems, and Otto Bock/FIH Group Holdings, where the FTC brought an administration action to challenge a non-reportable deal alleged to eliminate head-to-head competition between the dominant supplier of microprocessor knees used by amputees and a disruptive competitor.
More unusually, in one recent case, the DOJ mounted a post-closing challenge to a transaction in which HSR filings had been submitted and waiting period clearance obtained. In Parker Hannifin/Clarcor, the DOJ required Parker Hannifin to divest an aviation filtration system business it acquired from Clarcor in February 2017. While the DOJ had investigated the acquisition pursuant to the parties' HSR filings before closing, it reopened its investigation following post-closing customer complaints. In explaining its unusual move of challenging a deal previously investigated under HSR, the DOJ alleged that 'Parker-Hannifin failed to provide significant document or data productions in response to the department's requests' in the original investigation, perhaps suggesting that had the parties been more forthcoming in their original HSR engagement, the post-filing action could have been avoided.
Healthcare enforcement a continuing agency priority
One consistent theme from year-to-year is that the antitrust agencies continue to spend a substantial amount of enforcement energy on transactions impacting the healthcare sector. Highlights include the following.
• In pharmaceuticals, the FTC continued its establish pattern of requiring divestitures in markets where the merging parties are among four or fewer of the existing market participants or near-term pipeline challengers. Representative transactions requiring divestitures of four-to-three overlaps included Baxter/Claris, Integra/J&J and Amneal/Impax.
• In healthcare delivery, the FTC successfully sued to block the acquisition of a small physician group by one of two significant hospital networks in the Bismarck, North Dakota area in the Sanford Health/Mid Dakota transaction. The FTC contended that the transaction would lead to Sanford Helath controlling more than 85 per cent of physician services in the Bismarck area, and argued that 'power buyer' health insurers would be unable to resist post-merger price increases by Sanford Health. Sanford Health illustrates that the FTC is willing to challenge even small deals falling below HSR thresholds when convinced that doing so is necessary to protect healthcare consumers.
• The US$17 billion Walgreens/Rite Aid transaction was abandoned in its original form in June 2017 in the face of FTC antitrust resistance. Rite Aid was subsequently sold in part to Walgreens in a pared down US$4.4 billion acquisition of approximately 2,000 locations, with the remaining Rite Aid merging with Albertson's.
Consumer goods: the power of the brand?
The FTC challenged the US$285 million JM Smucker/Wesson acquisition due to concerns that the transaction would give the post-merger firm a 70 per cent share in branded canola and vegetable oils. While the parties argued that private label and alternative types of oil (such as corn and peanut oils) competed with the parties' branded canola and vegetable oils, the FTC argued that sustained price differences and the parties' internal documents undermined that claim. Interestingly, outgoing FTC chair Ohlhausen made a point in remarks delivered shortly after the parties abandoned the Wesson acquisition in the face of the FTC's challenge that determinations of private label versus branded market share were 'highly fact-specific' and that 'one cannot assume that nationally branded products always or never meaningfully compete with house brands based simply on a previous transaction in a different market'. As private label continues to grow in market importance, the message is that each private label transaction will be assessed in terms of specific market conditions.
Minority interests draw antitrust interest
While the vast majority of merger challenges involve full mergers and acquisitions by a strategic buyer, antitrust issues can arise with respect to minority investment positions as well, as the FTC's recent challenge in RedVentures/Bankrate illustrates. In RedVentures, the FTC focused not on overlaps between the merging parties, but instead on an overlap in the senior living referral service market between an entity that was 34 per cent owned by two of the acquiring party's major shareholders (collectively holding 34 per cent) and Caring.com, a subsidiary of Bankrate. The FTC ultimately required the divestiture of Caring.com as a condition of the larger US$1.4 billion merger.