Since President Trump took office in January 2017, a number of mergers and acquisitions have been challenged, blocked, or abandoned on antitrust grounds in a diverse array of industries, including health insurance, television and media, petroleum storage, and daily fantasy sports, among others. Some of these were large multi-billion dollar transactions, while others were much smaller, under $100 million in size. These antitrust challenges have taken place against the backdrop of an increase in global M&A activity.
This article discusses notable recent developments in antitrust M&A review and practical takeaways for companies looking to do deals.
New Leadership at the Federal Antitrust Agencies
After a lengthy hiatus, there is new leadership in place at both federal antitrust agencies, the Antitrust Division of the U.S. Department of Justice (Antitrust Division or DOJ) and the Federal Trade Commission (FTC).
The Antitrust Division is headed by one Assistant Attorney General (AAG), nominated by the President and confirmed by the U.S. Senate. He or she is the ultimate decision-maker on all antitrust matters, including mergers, that come before the Antitrust Division. The FTC is headed by five Commissioners, also nominated by the President and confirmed by the Senate, who serve staggered 7-year terms, with one Commissioner acting as Chair. No more than three Commissioners can be of the same political party. Enforcement actions of the FTC require a majority vote.
While history suggests that a Republican-led Antitrust Division and FTC tend to be somewhat more restrained in antitrust merger enforcement than Democratic-led antitrust agencies, any such expectations (or hopes) that the business community may have had for the Trump Administration have not come to pass. Both the Antitrust Division and the FTC continue to be very active in investigating and challenging M&A transactions on competition grounds. This is not entirely surprising: an aggressive approach to antitrust merger enforcement, which has a primary goal of protecting consumers, is consistent with President Trump’s populist message. Also, the staff attorneys and economists at the agencies who handle the day-to-day investigative work are not political appointees and typically do not move with administrations, providing some degree of continuity.
The main takeaway is that companies doing deals should not expect a free pass from the antitrust agencies under the current administration. Transactions that raise competitive issues will still be carefully reviewed. Companies and their advisors should continue to build this into their timelines and assessments of completion risk.
In fact, antitrust authorities may be getting even tougher in some areas of merger enforcement, as discussed below.
Greater Antitrust Risk for Vertical Mergers?
A vertical merger is a combination of businesses operating within the same industry but at different levels of the supply chain, such as a manufacturer of widgets acquiring a distributor of widgets. Unlike a horizontal merger, which directly reduces competition by eliminating a competitor in a particular market, a vertical merger does not combine competitors and can generate valuable cost savings, so its likely impact on competition is more ambiguous and harder to predict. Nevertheless, vertical mergers have attracted greater antitrust scrutiny in recent years, including during the Obama Administration, e.g., Comcast/NBC Universal, Ticketmaster/Live Nation, Google/ITA Software, and General Electric/Avio.
A major change in antitrust policy under the Trump Administration has been a shift in the attitude of the antitrust agencies, especially the Antitrust Division, towards remedies for vertical transactions that raise competitive concerns. Previously, the long-standing policy of the Antitrust Division and the FTC was to resolve concerns in vertical deals with “behavioral” (aka conduct) remedies, which prescribe certain aspects of the merged firm’s post-consummation business conduct. Common behavioral remedies used in numerous vertical transactions included information firewalls, non-discrimination commitments, mandatory licensing, and anti-retaliation provisions. Such remedies were usually not viewed by transaction parties as particularly onerous, hence vertical mergers rarely failed due to antitrust concerns.
However, beginning with a speech on November 16, 2017, and on several occasions thereafter, Makan Delrahim, President Trump’s nominee to head the Antitrust Division who was confirmed last September, has expressed significant skepticism of behavioral remedies for vertical deals, since they often require government oversight for an extended period of time and are difficult to police. Instead, AAG Delrahim has stated a strong preference for structural relief, such as asset divestitures, which historically has been used mostly in horizontal mergers of competitors, and which is much “cleaner” and easier to enforce.
This shift in approach stems, at least in part, from AAG Delrahim’s view that “antitrust is law enforcement, it’s not regulation,” a statement that has been echoed in recent months by other senior Antitrust Division officials and is consistent with the Trump Administration’s broader goal of reducing regulation. As Delrahim noted in his November 16 remarks: “[A]t times antitrust enforcers have experimented with allowing illegal mergers to proceed subject to certain behavioral commitments. That approach is fundamentally regulatory, imposing ongoing government oversight on what should preferably be a free market.”
Structural remedies, by contrast, typically do not involve long-term government entanglement in the market at issue. Since Delrahim articulated the Antitrust Division’s current position regarding remedies for vertical mergers, certain FTC officials have made similar remarks, although it is still unclear if all or even a majority of the new Commissioners share Delrahim’s views on this issue.
This policy shift means that companies must now consider the risk of being forced to divest assets as a condition to obtaining antitrust approval for vertical mergers that raise competitive concerns. Interestingly, the agencies’ resolve on this issue may be tested following DOJ’s recent unsuccessful challenge to AT&T Inc.’s acquisition of Time Warner Inc.
The AT&T/Time Warner Decision
On November 20, 2017, just four days after AAG Delrahim’s first public remarks about remedies in vertical mergers, DOJ sued to block AT&T’s $85 billion acquisition of Time Warner, easily the most high-profile merger challenge since Trump took office. Importantly, this was not a merger of competitors, rather it was a vertical merger of a content creator, Time Warner, which owns a collection of television and film content, and a content distributor, AT&T, which owns satellite pay-TV provider DirecTV. The lawsuit came as a surprise to many and fueled speculation that it was politically motivated, given President Trump’s prior public criticisms of the transaction and his well-known animosity towards CNN, which is owned by Time Warner.
DOJ’s main concern was that the combination would enable AT&T to use its ownership of Time Warner’s “must-have” popular content to increase its bargaining leverage and extract higher fees from traditional video programming distributors such as cable and satellite TV companies, which would be passed on to consumers through higher prices. DOJ also alleged that the proposed combination would slow innovation by giving the merged firm the incentive and ability to impede the growth of online video distribution services, and would allow the parties to restrict competitors’ use of Time Warner’s HBO network as a promotional tool. Reflecting its recent shift in policy towards remedies in vertical mergers, DOJ insisted on a structural remedy that would have required AT&T to divest its entire DirecTV business or Time Warner’s Turner Broadcasting business. AT&T refused, culminating in litigation.
On June 12, 2018, after a six-week trial, U.S. District Court Judge Richard Leon ruled in favor of the companies. In his 172-page opinion, Judge Leon provided a very fact-specific analysis of how the government failed to meet its burden to show that the combination was likely to substantially lessen competition in violation of Section 7 of the Clayton Act. In so doing, he ruled that DOJ’s evidence fell far short of adequately supporting any of its theories of competitive harm. Judge Leon found that the government’s case depended on a flawed economic model that raised too many questions about the potential price increase to consumers, noting that it lacked “both reliability and factual credibility,” and accepting instead the defendants’ economist’s attacks on the model’s input data and assumptions. Neither was the court persuaded by internal company documents and regulatory filings submitted by DOJ as evidence, nor the testimony of competitor witnesses. Though he accepted DOJ’s contention that Time Warner’s content is valuable and does provide some bargaining leverage, Judge Leon explained that this is already true today, and the government had failed to show how the merger would materially alter the current landscape.
By contrast, the opinion referenced multiple times the changing nature of the industry and the rise in competing internet-based video distribution services, including “virtual” programming distributors such as DISH’s Sling TV, Sony’s Playstation Vue, Google’s YouTube TV, and AT&T’s DirecTV Now, as well as subscription video on demand services such as Netflix, Hulu, and Amazon Prime. Judge Leon also noted a shift from reliance on television advertising to targeted digital advertising and seemed to accept defendants’ position that the combined company would be able to better compete against large technology companies with powerful digital advertising platforms such as Facebook and Google.
Two days after Judge Leon’s decision, AT&T and Time Warner closed their deal, with DOJ announcing that it would not to seek a stay of Judge Leon’s ruling. DOJ agreed to this only after receipt of a letter from AT&T outlining separations that the parties would put in place between Time Warner’s Turner Broadcasting unit and AT&T’s communications business until the earlier of February 2019 or the conclusion of any appeal. On July 12, DOJ announced that it would appeal the district court’s decision.
While the outcome at trial was a blow to the government, Judge Leon’s decision turned on specific facts and evidence and certainly should not be seen as removing all antitrust barriers to vertical mergers. However, it does highlight the difficulties with successfully challenging a vertical merger on competition grounds and will likely give transacting parties more confidence to pursue large vertical tie-ups. It is no coincidence that the day after the AT&T/Time Warner decision, Comcast Corp. made a $65 billion cash offer for 21st Century Fox’s entertainment assets.
Despite the widespread media attention lavished on the AT&T/Time Warner case, companies should also keep in mind that competitors wishing to merge in horizontal combinations will find little or no solace in Judge Leon’s decision. Both federal antitrust agencies have an excellent track record in recent years of successfully challenging problematic horizontal mergers.
More Post-Closing Merger Challenges
Since President Trump’s inauguration, there has been a flurry of antitrust challenges to consummated M&A deals, even more than the annual average under the Obama Administration. These challenges serve as a stark reminder that, first, antitrust enforcers have legal jurisdiction over all M&A transactions that affect U.S. commerce, irrespective of the size of the parties, the transaction, or the markets involved; and second, deals can be challenged anytime, even after closing.
Most of the recent post-closing challenges involved deals that were not reportable under the Hart-Scott-Rodino (HSR) Act, because they fell below the statutory size thresholds that trigger a mandatory HSR notification to the FTC and DOJ. For example, in December 2017 DOJ filed a complaint against TransDigm Group Inc.’s $90 million acquisition of two commercial airplane restraint system businesses from Takata Corporation, a non HSR-reportable deal that had closed in February 2017. DOJ found that the transaction had eliminated TransDigm’s closest (and in some cases, only) competitor in the markets for various types of restraint systems, which was likely to lead to higher prices and less innovation. To avoid the expense and burden of continued investigation and litigation, TransDigm entered into a settlement with DOJ in which it agreed to divest the airplane restraint system assets it had acquired from Takata, effectively unwinding the acquisition.
Also in December 2017, the FTC filed an administrative complaint seeking to unwind a merger consummated three months earlier between two manufacturers and suppliers of microprocessor prosthetic knees, Otto Bock HealthCare North America, Inc. and FIH Group Holdings, LLC (aka Freedom Innovations). According to the FTC’s complaint, the transaction eliminated direct and substantial competition between Otto Bock and its most significant and disruptive competitor, Freedom Innovations, further entrenching Otto Bock’s position as the dominant supplier of microprocessor prosthetic knees. After closing the acquisition in September 2017, Otto Bock had already begun to integrate the Freedom Innovations business, but in light of the FTC action and the possibility of a forced divestiture, it agreed to take steps to hold separate and preserve the acquired business until the case is resolved.
We have also seen a rare post-closing challenge to a deal that was HSR-reportable, involving Parker-Hannifin Corporation’s $4.3 billion acquisition of CLARCOR Inc., a manufacturer of filtration products. In an unusual twist, DOJ challenged this transaction in September 2017, nine months after it had allowed the HSR waiting period to expire. Reportedly, after the transaction received HSR clearance, a third party notified DOJ of a small competitive overlap in aviation fuel filtration systems. DOJ investigated and found that Parker-Hannifin and CLARCOR were the only two domestic manufacturers of such products. DOJ filed a lawsuit to force Parker-Hannifin to divest the aviation fuel filtration assets it acquired from CLARCOR, which the company ultimately agreed to do. Notably, the divested business had annual revenues of around $60 million, which accounted for less than half of one percent of the merged companies’ combined annual revenues of over $13 billion, and yet DOJ still expended the time and resources to investigate and bring a challenge.
As these recent cases demonstrate, companies that assume a small deal is safe from antitrust scrutiny do so at their peril, especially if the merging businesses are close competitors in a market with few players. Non HSR-reportable acquisitions involve unique risks and strategic considerations, particularly for the buyer. In addition, the agencies will examine even relatively minor overlaps between large companies.
Uptick in State Antitrust M&A Enforcement
In addition to the federal antitrust agencies, state attorneys general can and do investigate M&A transactions on antitrust grounds, and they can go to court to challenge deals that could harm consumers in a particular state. There is a long history of cooperation between federal and state antitrust enforcers in merger investigations. Several recent merger challenges brought by the Antitrust Division or the FTC were joined by one or more state AGs, including large national mergers such as Anthem/Cigna (eleven states and the District of Columbia) and Aetna/Humana (eight states and the District of Columbia), as well as smaller local transactions such as Sanford Health/Mid-Dakota Clinic (North Dakota).
Before Trump took office, there was speculation that if the Antitrust Division and the FTC became lax and took their foot off the merger enforcement pedal, the states would engage to fill the void. Despite the fact that the federal agencies have remained active, there has nevertheless been a recent increase in state AG merger enforcement, with a number of states, especially those with Democratic attorneys general, seemingly more willing to take the lead on matters or even “go it alone.”
In July 2017, California Attorney General Xavier Becerra sued to block Valero Energy’s proposed acquisition from Plains All American Pipeline of two petroleum storage and distribution terminals in the San Francisco Bay area. Notably, the challenge came after the FTC had already reviewed and cleared the transaction. The companies subsequently abandoned the deal. In August, Washington State Attorney General Bob Ferguson filed a suit seeking to unwind Franciscan Health System’s consummated 2016 acquisition of WestSound Orthopaedics. That case is currently in litigation. Other Democratic state AGs, such as New York, have publicly stated a willingness to pursue antitrust cases, including merger cases, independently of the federal agencies.
State antitrust involvement is most likely in transactions that impact local geographic markets (e.g., hospitals, funeral homes, waste services, gas stations, grocery stores, other brick & mortar retail), national mergers with the potential to affect a large number of the state’s consumers (e.g., health insurance), and those where the state or its subdivisions are significant purchasers of the merging parties’ products or services.
As the recent cases in California and Washington demonstrate, companies increasingly must consider state reactions to proposed M&A deals and also need to recognize that state concerns do not always replicate federal views. State AGs tend to heavily scrutinize a transaction’s likely impact on local market conditions in their state and will sometimes challenge deals that are cleared by the FTC or DOJ, as in Valero/Plains. States may also influence the scope of remedies required for transaction approval: for example, an investigation by the New York AG’s office (in conjunction with the FTC and several other states) caused retail pharmacy chain Walgreens to restructure its 2017 purchase of almost two thousand Rite Aid stores to acquire 184 fewer Rite Aid stores in New York State than had been identified in its original acquisition proposal. Another important difference between federal and state M&A enforcement stems from the fact that the vast majority of state AGs are publicly elected rather than appointed, resulting in some states including non-antitrust-based concerns, such as job preservation, within the scope of merger investigations.
Conclusion
These recent developments highlight the importance of transacting parties performing antitrust due diligence early and irrespective of deal size. Often, parties will be able to rule out any serious antitrust issues with minimal time and expense. An upfront antitrust risk assessment can ensure companies go into a deal with their eyes wide open and can help avoid unpleasant surprises.