AntiTrust Law and M&A Deal Value

by | Tuesday, December 15th, 2015

RE:INVENTION, inc. frequently helps companies with sell and buy-side pre-merger brand planning and post-merger brand/business integration. The process of combining and rearranging businesses to realize merger and acquisition (M&A) deal value is complex and riddled with numerous antitrust and other legal issues.

Because understanding operational integration issues and antitrust risks in M&A transactions is important to current and potential RE:INVENTION Clients, we’re committed to sharing solutions here on RE:INVENTION’s blog. Our discussion today involves the antitrust litigation related to Thai Union (Chicken of the Sea) and their recently dissolved M&A deal with Bumble Bee Foods. Bumble Bee Foods’ headquarters are located just a stone’s throw away from RE:INVENTION in downtown San Diego.

Today’s interview features Cooley LLP AntiTrust Practice Leader, Howard Morse, one of the country’s leading antitrust lawyers.

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RE: Can you tell our readers a little bit about yourself and your background in antitrust law with respect to company mergers and acquisitions (M&A)?

Howard Morse, Cooley

Morse: I am a Washington, DC-based partner and chair of the antitrust practice at Cooley LLP, where we represent clients, particularly in high-tech industries – including tech, life sciences and telecom companies – as well as automotive parts and consumer product companies.

Early in my career I spent 10 years at the Federal Trade Commission (FTC), where I was a staff attorney, deputy for policy and assistant director of the Bureau of Competition, and was responsible for more than 50 merger enforcement actions under the Hart-Scott-Rodino (HSR) Act.

For the last 15 years, I have been guiding mergers and acquisitions through the regulatory approval process at the Department of Justice (DOJ) and FTC.

RE: Can you provide a basic overview of the nature/concept of “antitrust” for our readers?

Morse: The term “antitrust” was coined at the turn of the 20th century, as the government established laws to counter the “trusts” or holding companies of the day, such as John D. Rockefeller’s oil trust (Standard Oil) and J.P. Morgan’s steel trust (U.S. Steel), which were recognized to have gained monopoly power.

What we call “antitrust law” and much of the rest of the world calls “competition law” restricts agreements in restraint of trade, monopolization or abuse of dominance, and mergers and acquisitions that may lessen competition.

The goal of antitrust is to prevent conduct, including mergers and acquisitions, that is likely to lead to higher prices – or lower quality, reduced service or less innovation – to the detriment of customers and consumers. It is not, as some mistakenly believe, aimed at protecting competitors from competition.

RE: When is a merger or acquisition likely to run into antitrust concerns?

Morse: The government focuses its attention on mergers and acquisitions among the largest competitors in concentrated markets, say when #2 and #3 of 4 major firms in a market propose to combine.

The key question that the government asks is will the merged firm raise prices, compared to likely prices if the merger were not to take place, either unilaterally because the merging firms’ products are close substitutes or the merged firm will dominate the market or through coordinated interaction or tacit collusion among remaining firms.

RE: When announcing the recent abandonment of the Bumble Bee / Thai Union deal, the DOJ declared that “the parties knew or should have known from the get go – that the market is not functioning competitively today, and further consolidation would only make things worse.” What do you make of that specific statement from DOJ Assistant Attorney General for AntiTrust, Bill Baer?

Morse: Public reports indicate that the DOJ has issued subpoenas and is conducting a criminal investigation into whether the ‘big three’ canned tuna producers – Bumble Bee, Chicken-of-the Sea and Starkist – fixed prices. While the DOJ has not commented specifically on that investigation, there have been a number of civil lawsuits filed since the announcement that Thai Union was suspending its offer to acquire Bumble Bee in July.

Companies considering a merger or acquisition with a competitor in a concentrated market ought to recognize that proposed transactions and the companies’ internal documents will be carefully scrutinized by antitrust authorities. If there are suggestions of price fixing or market division in company documents, the companies may find not only that they can’t complete their proposed deal but also that they become the target of a criminal investigation, which can mean large fines and even jail time.

RE: To wit, Del Monte Foods originally considered selling Starkist to Bumble Bee before selling to Dongwon Industries back in 2008. Pre-deal information sharing has obviously already happened – with great frequency – in the tuna industry. At this point, is any merger and acquisition (M&A) in the tuna industry bound to be riddled with antitrust issues?

Morse: Transactions involving smaller firms in a market – even deals in which they are acquired by one of the big firms – are likely to be looked at quite differently than those combining two of the big three players.

RE: The Hart–Scott–Rodino Antitrust Improvements Act of 1976 (Public Law 94-435, known commonly as the HSR Act) guides the premerger notification and merger review process. Can you tell our readers a little bit about the Act and the waiting period?

Morse: The HSR Act requires notification of proposed transactions that meet specified thresholds to the DOJ and FTC to allow the antitrust authorities to investigate whether they may lessen competition before they are consummated.

Most deals are subject to an initial 30-day waiting period. If the authorities believe a thorough investigation is warranted, the reviewing agency will issue a so-called “Second Request” requiring the parties to produce additional data and documents before they can proceed with the deal.

During FY2014, HSR filings were made for 1,663 transactions and 51 second requests were issued, in 3.2% of all transactions.

The HSR rules are complex – much like the tax code – so firms are advised to consult with counsel but generally need to consider whether they have to make an HSR filing when they make an acquisition or will hold securities of the target company, valued over $76.3 million.

Some transactions that firms may not even think of as M&A, such as entering into an exclusive license, may require an HSR filing if thresholds are met.

RE: Due diligence and integration planning are vital for M&A deal success. But companies need to avoid unlawful pre-merger coordination. What are some of the things that a company can do to avoid antitrust issues during the HSR waiting period?

Morse: The HSR rules prohibit firms not only from consummating deals but also from exercising control over the other party before the waiting period expires. And since the firms remain independent, allocating customers or coordinating prices can violate antitrust law.

During due diligence, competitors need to consider antitrust issues when exchanging competitively sensitive confidential information. For example, they should ensure that they only share information required for due diligence and take steps such as restricting personnel that have access to information and limiting use of information shared, and in some cases setting up “clean teams” to review the most sensitive information.

Firms can plan integration but cannot actually integrate during the HSR waiting period. Firms have gotten themselves in trouble when they started answering phones and handing out business cards at the target with the acquiring firm’s name, have had personnel report to managers at the other firm, or have sought approval from the other firm before giving discounts to customers.

RE: What are some of the consequences or penalties companies face when their merger deals are scrutinized by the DOJ for HSR Act antitrust violations?

Morse: A transaction may be delayed for months by a government investigation, even if the government never takes enforcement action. Keeping language out of offering memoranda, management presentations and other documents that must be provided to the government with HSR filings that may be misinterpreted by government can avoid such delay.

If the government does conclude that a transaction will lessen competition, the typical remedy is divestiture of competing product lines. Where that is not possible deals may be blocked altogether or abandoned in the face of threatened enforcement, as we have seen recently with GE/Electrolux, Sysco/US Foods, and Comcast/TimeWarner.

RE: Companies in a concentrated market with three or fewer competitors seem particularly susceptible to potential antitrust violations and tacit collusion. When companies are considering a merger or acquisition in a concentrated market, what if anything can they do to pre-empt collective dominance and collusion issues?

Morse: Defending every case requires a careful examination of the facts. In some cases, one can argue the definition of the product or geographic market is broader and so not concentrated; in others one can argue that new entry will prevent anti-competitive effects; and in others one can argue that small fringe competitors or power buyers will constrain the merged firm. In dynamic, high-tech markets one can argue that the products are highly differentiated and rapidly changing, making collusion among remaining firms unlikely. In any case, it is important to consider the efficiencies that may result from the transaction, lowering costs or resulting in improved products to customers.

RE: If companies in a concentrated market set the same prices for similar products does that always indicate an agreement to fix prices?

Morse: Absolutely not. Two gas stations across the street from each other may well sell gas at the same price, posting their prices on a sign and their tanks for all to see, without fixing prices. Price fixing requires an agreement, though not an agreement in writing.

RE: Originally there were rumors that Bumble Bee and Thai Union received subpoenas from the DOJ but Starkist didn’t, suggesting that Starkist may have been a whistleblower. Can you speak a bit about amnesty/corporate leniency for the first co-operator in an antitrust lawsuit?

Morse: In order to encourage self-reporting of price fixing cartels, the government provides immunity or leniency to those that self report.

The first company to report a cartel will be entitled to immunity if it does so before the government begins an investigation, it cooperates with the government, it was not a ringleader, it promptly ends its involvement in the cartel, and it makes restitution. Leniency may be available to the first company to come forward even after the government has begun an investigation.

RE: Could seeking leniency for price fixing be a good alternative strategy for companies opposed to a proposed merger among competitors?

Morse: For sure, it is a good bet the government will be skeptical of a merger in a concentrated market where there is a history of recent price fixing.

Of course, while the first company to file for leniency may avoid criminal charges, it may still find itself liable for damages in civil antitrust suits. While in most antitrust cases, plaintiffs can recover treble damages, Congress in 2004 created an additional incentive for companies to report cartels, limiting civil damages recoverable from a corporate amnesty applicant to actual damages.

RE: You provided expert commentary on the DOJ’s enforcement action against Flakeboard. What similarities or lessons learned (if any) do you see between the Bumble Bee / Thai Union DOJ investigation and the Flakeboard/Sierra antitrust lawsuit?

Morse: DOJ obtained a $1.9 million civil penalty from both Flakeboard and Sierra Pine for violating the HSR Act, and they agreed to disgorge $1.15 million in “ill-gotten gains” for gun jumping.

After announcing their merger, in the face of a labor dispute arose at one of the firm’s facilities, the firms consulted and reached agreement to close the facility and transfer customers to the other firm’s nearby facility, while the transaction was still being reviewed.

DOJ alleged that conduct, which was undertaken without any assurance that the underlying transaction would be consummated, was per se unlawful under the antitrust laws, as well as gun jumping under the HSR Act.

Whether what is at issue in the Bumble Bee / Thai Union matter is similar “gun jumping” activity, price fixing that pre-dated the merger, or lawful activity remains to be seen.

RE: We’ve addressed what companies can do DURING the merger process and HSR waiting period to avoid anti-trust issues, Howard. Are there any steps pre-acquisition that companies can take to avoid running into problems with the DOJ? Meaning, as companies are considering an acquisition, what are the do’s and don’ts they should take to avoid running into problems later?

Morse: Companies should avoid language in documents that suggest a deal is anti-competitive, for example, projecting that the deal will lead to price increases. At the same time, is important that companies consider, analyze and quantify efficiencies that will result from proposed transactions, and be able to explain why the deal will be good for customers. Certainly, companies should avoid writing documents that are a red flag for scrutiny, like I saw in one deal, when I was with the government, that said the proposed acquisition would allow the acquirer to “monopolize the industry … in an expeditious and timely manner.”

RE: Are there any other Cooley antitrust resources you can point our readers to for reference?

Morse: Sure. Here’s a link to Cooley’s “How to Avoid Gun-Jumping” Article, a practical how-to for companies considering M&A opportunities.

We hope RE:INVENTION’s interview with one of the nation’s leading M&A antitrust lawyers sparks thought and discussion among our blog readers. We invite you to share your thoughts and stories in comments below. Many thanks to Howard Morse for sharing his insights.

(Blog Image Infographic Source: Deloitte)

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