Antitrust Considerations Affecting M&A

Wednesday, November 20, 2013 - 11:04

The Editor interviews Paul B. Hewitt, Partner, Akin Gump Strauss Hauer & Feld LLP.

Editor: Please tell us about your background and experience.

Hewitt: I developed an interest in antitrust in college as an economics major. After graduating from law school, I clerked for a year and then went to the Federal Trade Commission. I left the FTC in 1978 to go to Akin Gump, where I have worked on a very large number of mergers and acquisitions over the years, including litigating a post-closing DOJ merger case that lasted for nine years – which we won. I’ve also been very active in Hart-Scott-Rodino matters.  I currently chair the ABA Antitrust Section’s M&A Committee.

Editor: Please describe the current M&A climate.

Hewitt: From a business perspective, M&A transactions have come back from the low in the depths of the great recession, but not as much as many people in the industry had predicted or hoped. Although there are a number of large publicized deals, there are concerns that are holding back many companies from doing deals. Some of this is non-antitrust regulatory uncertainty based on what’s going on in Washington. I don’t have a good crystal ball to predict when there might be a really large upsurge in M&A.

Editor: What about the trends in M&A antitrust review at the DOJ and FTC?

Hewitt: The DOJ’s antitrust division has become much more aggressive about bringing cases in court challenging mergers. As compared with the previous administration — or even the early years of the Obama administration — there is much more backbone at the DOJ to litigate if they don’t get an acceptable settlement. An example of that is the DOJ’s case against AT&T and T-Mobile, which helped to crater that deal. Other examples are DOJ’s court challenges to H&R Block/Tax Act and American Airlines/ US Air. DOJ has also been retooling market definitions in certain industries in ways that make cases bigger and harder to settle.  

I can give two examples: One is the AT&T/T-Mobile case, which involved the potential merger of two wireless providers. Previously, DOJ had looked at wireless geographic markets as local. In AT&T/T-Mobile, they alleged not only local markets, but also, for the first time, a national market in which smaller carriers do not compete.  It reasoned that large corporations like to contract with single providers to get nationwide service, meaning that there were only four carriers in the market and making this a four to three merger. That market definition put the entire deal at risk and made the case much harder to settle, and ultimately it was not settled.

In the American Airlines/US Air case, the Antitrust Division also came up with a brand-new market definition not used in any prior airline cases. They said that one-stop service actually competed with nonstop service. In all previous cases, they defined the markets as either just nonstop service between two cities or one-stop services for leisure travelers. What we see is that the FTC has also been very aggressive in going to court. Therefore, at either agency, parties with problematic deals can’t expect to just go in and negotiate a very soft settlement and say, “Oh, that will keep us out of court.” Sometimes the agencies do, in fact, sue, and they’re becoming more confident and aggressive in doing so.

The other thing is that, in M&A cases, the DOJ and the FTC went through a stretch of losing a number of preliminary injunction cases, including losing six or seven hospital merger cases in a row. Lately, they’ve been much more successful. They’ve brought in seasoned litigators from the outside to lead cases, and they’re doing a better job on relevant market definition, an issue that has caused them trouble in the courts in the past.

Editor: Please discuss trends in antitrust law and complexities resulting from the adoption by a growing number of countries of Hart-Scott-Rodino counterparts and communications with respect to their application to particular transactions among international agencies involved in their implementation.

Hewitt: From a global standpoint, antitrust merger review is a growth industry. There are more than 75 jurisdictions worldwide that have merger control regimes. Most of them have mandatory filing requirements. Filing is still voluntary in a few places like Australia and the UK.

One of the complexities is simply trying to decide in what jurisdictions you need to file. It can be a daunting process because of the data needs and because jurisdictions change their rules over time. It is still true that the vast majority of mergers and acquisitions reported in the U.S. and to foreign antitrust authorities sail through relatively quickly with no remedies because they don’t present any material competitive concerns. China is an exception, where lengthy delays are common.  Where international transactions do present antitrust problems, multiple jurisdictions may investigate, and there is definitely very active communication among the antitrust agencies worldwide. DOJ and FTC routinely request that the merging parties sign agreements allowing those agencies to speak to their counterparts in other countries. It’s my observation that parties usually agree to this because, with a completely uncoordinated approach, remedies might be sought in different jurisdictions that could be incompatible with each other. Therefore, most parties tend to sign these waiver agreements in order to get the advantage of at least some semblance of one-stop shopping. That said, of course the merger standards and review delays and procedures in the various jurisdictions around the world are different.

With respect to creation of joint ventures, there is a significant divergence in the filing rules internationally. China is particularly problematic. China has a filing rule for joint ventures that essentially says, if two companies form, say, a 50/50 joint venture, and those companies meet certain worldwide and Chinese revenue threshold tests, then a China filing is required even where the joint venture itself may not intend to do business in China. Similar issues can be presented in the EU, but because of the typical lengthy delays in the Chinese review process, the obligation to file in China can be of much greater concern to the parties.

Editor: How important are antitrust considerations in the due diligence process?

Hewitt: Extremely important for antitrust-sensitive transactions. When companies are contemplating a merger, antitrust lawyers for both sides are typically asked to do an antitrust analysis before the agreement is signed to see what antitrust risks might be presented both in terms of the risk of delay and the risk of non-completion. This is particularly important in an auction process where investment bankers are shopping the company. Typically, they get a number of bids, but the highest bid may come from a direct competitor. If there are antitrust problems with selling to that competitor, the possibly higher purchase price may not represent adequate compensation for the potential antitrust risks. To manage the risks, the buyer typically wants to negotiate into the agreement some antitrust risk-shifting. One example is a hell-or-high-water clause that says, if the deal can’t get antitrust approval, the buyer agrees to divest anything necessary to close the transaction by a date certain. Buyers are often not happy with that. Some agreements may limit the amount of required divestitures to certain assets or to assets accounting for a certain level of annual revenues.

Breakup fees can be another kind of risk-shifting. If a deal can’t close because of antitrust problems, the buyer might be required to pay an antitrust breakup fee, typically in the range of three to five percent of the value of the overall transaction. Sometimes you see huge antitrust breakup fees where the parties know there will be significant antitrust issues.  For example, when the AT&T/T-Mobile transaction did not go through, AT&T had to pay $3 billion dollars to T-Mobile, plus transfer certain valuable spectrum rights.

All of this needs to be worked out in due diligence and contract negotiation prior to signing the actual contract.

Editor: Do you counsel clients on antitrust and related considerations in specific business activities not involving M&A?

Hewitt: I do a fair amount of litigation. Right now, I’m representing a bank in private antitrust litigation that arose from the alleged manipulation of the LIBOR and TIBOR interbank rates. I’m also defending a pharmaceutical company in private litigation involving alleged reverse payments relating to a patent litigation settlement.   

Like most antitrust lawyers, I also have a steady diet of counseling clients on matters involving pricing, distribution, joint venture agreements and a full range of other issues. In my career, I sometimes feel like I’ve seen everything, but new issues are always arising.

Editor: What trends are you seeing in decisions of the Supreme Court in antitrust matters?

Hewitt: There was a string of cases in which this Supreme Court overruled or limited older, plaintiff-friendly antitrust doctrines. For example, in the Leegin decision, the Supreme Court overturned a 1911 case and held that minimum resale price maintenance was no longer per se illegal but would be subject to the antitrust rule of reason. Another example is Volvo Trucks, where the Court, in a decision by Justice Ginsberg, cut back substantially on a plaintiff’s ability to win Robinson-Patman cases.

Still another example is the monopolization decision in Trinko, where the Supreme Court criticized and limited older cases that had made bringing monopolization cases much easier. The Bush administration DOJ issued monopolization law guidelines that were largely based on what the Supreme Court had done. The Obama administration withdrew the Bush guidelines with great fanfare, although, contrary to predictions, it hasn’t actually brought any major monopolization cases since.

But, more recently, the Supreme Court has issued plaintiff-friendly decisions that have surprised people, including Actavis, which overturned the law in a number of circuits and held that patent settlements that don’t restrict competition beyond the scope of the patent could nonetheless be attacked under the antitrust rule of reason.

Editor: What is the impact of global implementation of antitrust laws?

Hewitt: There are more than 125 countries in the world that have antitrust or “competition” laws of one kind or another. What is obviously legal in one jurisdiction may be looked at much harder in another jurisdiction.

Editor: How does the presence of intellectual property affect M&A deals?

Hewitt: Where patents are involved in a transaction, you typically need to analyze each patent individually. If the acquired company has a patent in a particular area, you need to determine whether its acquisition will enhance the market power of the acquiring company and create barriers to entry. The agencies are very focused on IP issues right now, so companies can expect a hard look at transactions that involve significant transfer or consolidation of IP rights.

Please email the interviewee at phewitt@akingump.com with questions about this interview.