When teaching M&A, one of the most complex areas is antitrust. The reason is
simple: it often doesnít make sense. After all, even the pros have had great
difficulty. Look at the legendary CEO of GE, Jack Welch, who thought his
purchase of Honeywell would sail through the antitrust regulatory process.
Or, look at the recent case of First Data's $7.1 billion purchase of Concord EFS.
The parties believed this acquisition would get antitrust approval. The Justice
Department, however, thought differently and filed a lawsuit to block the
combination.
Why the complications? First of all, when dealing with complex commercial
transactions, things can get quite fuzzy. Many companies have diverse product
lines that span global markets. What is the relevant market? Will competition be
diminished by a merger? Basically, the simple supply-and-demand charts taught in
basic Economics courses are of little help. Rigorous antitrust analysis involves
heavy use of statistics and quantitative data. And, of course, it is difficult
to get economists to agree on anything. Politics also get in the way. We like to
think that the Federal Trade Commission (FTC) and the Justice Department are
impartial, but the reality is quite different. The executive branch has a big
say in who populates these important bodies.
During the 1960s, the Democrats were in office and, not surprising, there was
strict antitrust enforcement. It was so strong that companies rarely engaged in
horizontal acquisitions, but instead engaged in conglomerate mergers (after all,
how can it be anticompetitive if you buy an unrelated company?). In the 1980s,
during the ìReagan revolution,î antitrust enforcement was almost nonexistent.
The decade has become famous for scores of major horizontal transactions.
Little Deal Activity
Interestingly enough, the recent downturn in M&A activity has influenced
antitrust policy. Most notably, the authorities are going "down market" and
analyzing smaller deals.
A striking case is MSC Software, a ìsmall capî ($280 million market
capitalization) software developer focusing on the engineering marketplace --
which has been lagging. Between 1998 and 1999, MSC purchased two companies for
an approximate total consideration of $10 million. Both companies were
struggling and may have gone bust but for the acquisitions. After the mergers,
MSC increased the price of its software. One of the customers was unhappy and
contacted the FTC.
The big issue was: what is the relevant market? MSC argued it was the broad
Computer Aided Design (CAD) marketplace. The government, on the other hand, said
it was rather a specific market within the CAD industry.
MSC decided to fight the lawsuit and racked up about $5 million per quarter in
attorneysí fees and expenses. Realizing that the litigation would go on for
years and be a waste of resources, MSC decided to settle. As part of the
settlement, MSC was required to provide a royalty-free license to a competitor.
This arrangement also included rights to the source code and access to MSC
developers.
Lessons
According to a recent bulletin from the FTC, those transactions that do not have
to file under the Hart-Scott-Rodino (HSR) Act will now "require greater
attention." It goes on to state:
"Consequently, we need to identify (through means such as the trade press and
other news articles, consumer and competitor complaints, hearings, and economic
studies) those unreported, usually consummated, mergers that could harm
consumers. So far this fiscal year, the Commission has challenged two
non-reportable mergers."
In other words, no deal is really too small. So, dealmakers should consult with
antitrust counsel for added protection. This may not be cheap, but it can save a
lot of expense and turmoil in the long run. This is something MSC -- as well as
others -- have learned the hard way.
MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the
managing editor of our MergerPlace M & A Advisor™ E-zine.
Tom has been quoted extensively in the press, including the Wall
Street Journal, USA Today, Barron's, and The Los Angeles Times, and has
provided commentary on CNBC, CNN, and Bloomberg TV, as well as
appeared on a variety of top radio stations across the country.
Tom Taulli is an expert in the M&A process. He is the author of the
critically acclaimed The Complete M&A Handbook (Random House) as well
as six other books written for publishers such as Bloomberg and
McGraw-Hill. Tom also teaches M&A at the USC School of Business.