Antitrust: Merger Review in a Tough Economy

Almost exactly a year ago, the Wall Street Journal warned that "U.S. Signals More Scrutiny of Mergers, Antitrust". Just as President Obama had promised in his campaign, antitrust merger review was going to be a lot different from what we'd seen during the Bush Administration: The DOJ Antitrust Division and the FTC wouldn't waste any time showing that there was a new cop on the beat. Except things haven't quite worked out that way--not yet, anyway. The agencies have been busy: DOJ has continued its highly successful criminal prosecutions of price fixing and other hard-core antitrust violations, while the FTC has brought an ambitious case against Intel and is still pursuing longstanding agenda items like its campaign against some pharmaceutical patent infringement settlements.

When it comes to mergers though, does anything stand out? Ticketmaster-LiveNation was a pretty interesting deal, but you wouldn't know it from the DOJ's case. Instead of the provocative vertical (e.g., manufacturer and input supplier) issues that people have been anticipating from the new administration, the case focused on issues peripheral to the deal's potent combination of "the dominant primary ticketing service provider in the United States" and "the country's largest concert promoter." Nor have we seen much interesting merger work from the FTC lately.

Of course, a key reason for this is that firms like yours just aren't doing deals these days like they used to. Hart-Scott-Rodino premerger filings at the U.S. agencies dropped to about 700 in fiscal 2009, less than a third of the number just two years before. To their credit, the agencies haven't sat idly by waiting for the recession to end. What they've come up with though, it almost makes you wish they had. One FTC Commissioner has enthused that this lets the agency go after cases under FTC Act Section 5, which prohibits "unfair" conduct. More on that development in a later column. And the decline in new, competitively significant deals has led both FTC and DOJ to look for cases that they would not have even bothered with a few years ago: among consummated deals that are so small that they did not even have to be reported under HSR.

In the past couple of years, rummaging through the deal attic has yielded a handful of consummated, unreviewed deals that the agencies thought were worth undoing. In 2007, the DOJ went after a 2004 merger between the two daily newspapers in Charleston, W.Va. At the end of 2008, the FTC sued to undo Ovation Pharmaceuticals' January 2006 acquisition of what the agency called the only drug that competed with a product of Ovation's. (The complaint said only that the transaction did not reach the relevant HSR threshold, suggesting that the transaction's value fell below $53.1 million.) Earlier this year, DOJ challenged Dean Foods' $35 million acquisition of a rival dairy's business. And just last week, the FTC sued over Dun & Bradstreet's $29 million acquisition of its primary competitor in the provision of marketing data relating to kindergarten through twelfth-grade schools and educators.

Each of these four cases is still pending (there's a proposed consent decree before the court in the Charleston case), so it's unwise to try to draw any final lessons from them just yet. But each of them has the look of low-hanging fruit, especially in the eyes of a case-hungry agency. Each combined what the suing agency portrayed as the two leading players in the market; in fact, three of the cases involved what the agencies were able to describe as a "two-to-one" merger--a merger to monopoly. In both Dean Foods and Dun and Bradstreet, the complaints could only predict future harm, despite roughly a year-long post-merger track record. FTC evidently had more to work with in Ovation: it alleged that after buying the rival drug, Ovation promptly raised its price nearly 1,300 percent. Facts like these, even if they ultimately don't pan out at trial, will get an agency's attention every time. And even if the agencies lose, if the parties have to spend millions to prevail, the legal costs can overwhelm the upside of a $30 million deal pretty quickly.

Moreover, we're in a time where these facts are accessible to the agencies with an ease and immediacy that were unthinkable 10 years ago. With any number of publications like The Deal broadcasting details of transactions as they happen, even a busy prosecutor can keep an eye on deals that would never have even been noticed in the late 1990s. And as long as the drought in significant new deals persists, the agencies will have time and resources to bring to bear on small deals new and old. This means that you can't count on potentially troublesome deals avoiding scrutiny the way they may have in the past, when deal flow kept the agencies' pipeline full of deals worth examining, if not challenging. So if, after you've looked at a potentially problematic antitrust issue, the best thing you can say about a deal is that no one's likely to notice, that may be a sign that it's time to think some more about it, and to make a clear-eyed assessment of your taste for risk.

And try not to raise your prices 1,300 percent.

Chris Kelly

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