Anti-trust concerns are suddenly back in vogue for federal regulators, and by extension for board directors as well.
Now that the Department of Justice and the Federal Trade Commission have published proposed revisions to their “Horizontal Mergers Guidelines,” companies should prepare themselves to reconsider how they pursue mergers and what procedures they have in place to assure that acquisitions won’t run into trouble. The FTC and the Justice Department use the guidelines to evaluate the competitive effects of so-called “horizontal mergers” between two business rivals, as well as to convey the agencies’ general views on antitrust policy and enforcement.
The text of the rules has not been updated since 1992, so the new merger guidelines differ substantially from the old. In most respects, however, they simply seem to embody existing regulatory practice, “rather than indicating a significant change in merger enforcement policy,” says Brian Meiners, an anti-trust partner at the law firm King & Spalding.
Toby Singer, a partner with law firm Jones Day, agrees: “They really are a codification of current practice.”
Still, some provisions could alter how companies proceed with an acquisition. Previously, the starting point for any review of a deal’s competitive effect had been “market definition”—that is, a structured analysis of the market as a whole. The new guidelines favor “fact-based evidence” to assess whether a merger will dampen competition, based on analyses of mergers that have already occurred.
“If I were on an audit committee right now, I don’t think I would change dramatically what I had been doing in the past,” says Kathleen Murray, founder and managing director of McMorran Strategists, and former managing director at PricewaterhouseCoopers. However, she advises, prior to any offers or negotiations being made, a firm should be “very clear about its strategy and why it’s doing a merger.”
Meiners says that more than anything else, the new merger guidelines remind companies that if they want to cut deals in concentrated markets, the merging parties will need have clear, compelling arguments for why the deal makes sense. In other words, due diligence matters.
In practical terms, that due diligence means “a pretty good sense from the CEO and the management team” about what kind of growth the company wants, who your competitors are, and whether there’s a chance that the merger will be challenged, Murray says. “If you’re running your firm appropriately to start with, and you know what your strategy is, than you’d have all this well-defined before you get into having to deal with the Justice Department or the FTC.”
Murray also notes that 95 percent of mergers do pass regulatory muster after the typical 30-day waiting period. Depending on your company’s industry and who your competitors are, “you pretty much know … whether you’re going to be in that 5 percent that’s challenged or not,” she says.
Getting the Ducks in a Row
The new merger guidelines say regulators will also consider whether the merging parties are substantial head-to-head competitors, and how much of a disruption the merger would cause that might lesson market competition. As a result, Singer says, board directors’ very first question should be whether the proposed deal actually is a merger with a competitor. If not, the board has considerably less to worry about.
“If you’re running your firm appropriately to start off with and you know what your strategy is, than you’d have all this well-defined before you get into having to deal with the Department of Justice or the FTC.”
—Kathleen Murray,
Managing Director,
McMorran Strategists
If a merger is challenged, Murray says, the Justice Department is sure to interview your primary customers—so be sure they know what is happening, and why. “You would want your key customers to be in favor” of the merger, she says. “Something you’d want to do as a good board member is to know your key customers, and whether your key customers would view this merger as good or bad.”
Indeed, Meiners says, some of the best hard evidence regulators are likely to find about the possible effects of a merger are customers’ reactions to it. If merging businesses want to avoid a lengthy (read: expensive) regulatory review, “they need to make sure that customers are not going to voice concerns to the agencies,” he says.
Meiners
Companies should also tread carefully on how they draft business and strategic plans in the ordinary course of business, as well as the documents that analyze a proposed transaction, Meiners says. “Overall, I think these [regulatory] guidelines emphasize that the parties need to exercise greater care in how they discuss and document competition in the markets they operate, and also pricing decisions in that marketplace.”
Because the guidelines do take a “much more flexible, less rules-based” approach, Murray advises that companies lean heavily on help from the general counsel and perhaps the internal audit department to assure that all appropriate documents are drafted correctly. For the most part, board members should already be familiar with this process.
Singer
“Typically, when the executives are reporting to the board on the transaction, part of what they will report is the anti-trust analysis and the antitrust risks,” Singer says. “So that should be folded into any kind of assessment of legal risks, as part of evaluating whether or not to enter into a particular transaction.”
In addition, any anti-trust counsel the companies hire to help prepare and file a merger notification form should already know the guidelines and would be able to advise the company’s legal department about any regulatory implications, Singer says. “The general counsel can then advise the board on what the anti-trust risks of the transaction are, based on these guidelines.”
Above all, Singer says, the person responsible for the legal and compliance functions at the company must have potential anti-trust issues on his or her checklist for any transaction with a horizontal competitor. “If it’s any kind of significant competitor that the merger is with, than they absolutely have to get anti-trust counsel, and anti-trust counsel can then advise the company on the risks,” he says.
Companies may also need to be flexible about how courts react to litigation over a proposed merger, should the deal lurch into a lawsuit. Courts are not required to pay heed to the new merger guidelines, and the judiciary has extensive case law on the books that already spells out how many judges will approach an anti-trust fight, Meiners says. “Only time will tell how much weight the courts are going to give these revised guidelines in their more flexible approach.”
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