© Hogan & Hartson LLP. All rights reserved. Janet L. McDavid November 28, 2007 Brussels Recent U.S. Developments In Merger Review

© Hogan & Hartson LLP. All rights reserved.

Janet L. McDavid

November 28, 2007

Brussels

Recent U.S. Developments In Merger Review

© Hogan & Hartson LLP. All rights reserved. 2

Overview

• Overview of recent developments in US merger review

– Cost & Time Involved in Merger Review

– Merger Guideline Commentary

– Gun Jumping Enforcement

– Changes to FTC & DOJ Merger Review Processes

– Notable FTC & DOJ Merger Investigations

– Criticism of Recent Merger Enforcement


Cost & Time Involved in Merger Review

• Merger review can add significant time and expense to a deal– A large second request can typically require searching 50 or more employees for a

broad range of documents, submitting huge volumes of data and answering detailed interrogatories

– The expenses involved can also be significant. A recent report estimated that second requests typically last six months, with complex cases taking up to a year

• Exxon/Mobil merger review lasted 365 days

• Carnival/Princess merger review lasted 10 months

• Mandalay/MGM merger review lasted 8 months

– A typical second request can cost the parties $5 million, with complex cases costing $20 million or more

– If the case involves litigation, that typically adds 3-6 months costing at least $1 million/month

• FTC & DOJ have reformed their processes to attempt to reduce burden and cost, but with limited success

– In 2005, FTC received nine document productions that exceeded 1 million pages, up from 2 just a few years ago

– One recent merger at DOJ reportedly involved 25 million pages of responsive documents


Merger Guideline Commentary

• In March 2006, DOJ and FTC jointly released a commentary on their Horizontal Merger Guidelines

– The commentary is intended to increase the transparency of the agencies’ decision-making and incorporates numerous cases studies and statistical analyses

• The Commentary explained that the Agencies consider 5 factors in reviewing a proposed merger:

– Market definition and concentration

– Potential adverse competitive effects

– Entry conditions

– Efficiencies

– Failing and exiting assets

• Three general principles guide the review:– The agencies focus on competitive effects

– Investigations are intensively fact-driven

– The same evidence often is relevant to multiple elements of the analysis


Gun Jumping

• The federal antitrust enforcement agencies have become increasingly sensitive to the pre-closing activities of parties to a proposed merger that shift control to the buyer in advance of closing

– Gun jumping can violate Section 1 of the Sherman Act and the HSR Act

– The agencies take these issues very seriously and can investigate and impose significant penalties ($11,000/day/party under HSR Act)

– A gun-jumping investigation will delay merger review

• The overriding principle is that merging companies must remain separate entities and competitors until the merger is complete

– The seller must operate its own business and the buyer cannot operate control over seller’s business operations and assets prior to closing

– The parties cannot have access to each others’ competitively sensitive information that might be misused pre-closing or if the deal does not close

– The financial risk of the business must remain with the seller until closing


Recent Gun-Jumping Cases

• QualComm – Flarion (DOJ 2006)

– Merger agreement required that Flarion seek QualComm’s consent before undertaking certain activities, including submitting new proposals to customers, hiring employees or consultants, or licensing IP

– Materiality standards were low and there were no ordinary course of business exceptions

– The parties’ antitrust counsel identified these problems, revised the merger agreement, and advised DOJ of the problem

– As a result, the fines were substantially reduced to $1.8 million (from about $4 million)

• Gemstar – TV Guide (DOJ 2003)

– Companies agreed to stop competing for customers, jointly decided on prices and terms to be offered to customers, and jointly managed the business pre-closing

– DOJ imposed a fine of $5.67 million


Changes to the FTC Merger Review Process to Reduce the Burden

• In February 2006, the FTC announced reforms of its merger review process aimed at streamlining review and reducing the burden placed on merging companies. Among other things, the reforms included several new limitations and added transparency to the investigation.

• New Limitations:

– Parties need not search the files of more than 35 employees to comply with a second request

– The “relevant time period” for documents responsive to a Second Request generally is two years

• The 2-year limit does not apply to data

– Limits on backup tapes

• FTC staff informs parties of the competitive effects theories under consideration

• Parties must agree to conditions, including a more extended review period


Changes to the DOJ Merger Review Process to Reduce the Burden

• In late 2006, the DOJ amended its merger review process to reduce the burden on merging companies. The updates introduced the Process & Timing Agreement and modified the Model Second Request.

• The Process & Timing Agreement – Allows a company to limit document searches required by a Second Request to

certain files and a targeted list of 30 employees

– Is available only if a company:

• Provides certain critical information to the Division early in the investigation,

• Agrees to an investigation schedule, and

• Agrees to a sufficient period for the Division to conduct post-complaint discovery in the event that the investigation leads to litigation

• The modified Model Second Request – Reduces the relevant search period from 3 years to 2 in most cases

– Eliminates the need to conduct a “second sweep” for responsive documents if the second-request recipient complies with the second request in 90 calendar days

– Abolishes the requirement to produce electronic documents in hardcopy

– Allows a company to identify and preserve a select subset of backup tapes rather than produce them


Notable FTC Merger Investigations• Whole Foods – Wild Oats (2007)

– The FTC alleged that the merger between competing “natural and organic supermarkets” would allow Whole Foods to raise prices and reduce services and quality

– The court rejected the FTC’s market definition—finding the relevant market included traditional grocery stores so that any anticompetitive unilateral conduct would likely be unsuccessful—and denied the FTC’s motion for preliminary injunction

• Equitable – Dominion Peoples (2007)

– The proposed merger would create a monopoly in the distribution of natural gas in parts of Pennsylvania

– Although the Pennsylvania Public Utility Commission (PUC) established maximum prices, the merger would eliminate discounts the competing companies offered customers

– Although the district court dismissed the FTC’s complaint because the PUC had approved the merger, the Third Circuit enjoined the transaction pending appeal

• Western Refining – Giant Industries (2007)

– The FTC challenged the merger of two competing suppliers of light petroleum products in northern New Mexico

– In late May, the district court found that the defendants had rebutted the FTC’s “weak” prima facie case and denied the FTC’s motion for preliminary injunction


Notable FTC Merger Investigations

• Carlyle Group – Riverstone Holdings – Kinder Morgan (2007)

– Two private equity groups, Carlyle Group and its affiliate Riverstone Holdings LLC, were subject to an FTC enforcement action after a 6 month investigation in connection with their participation in an investment in Kinder Morgan

– Carlyle and Riverstone held investments in a Kinder Morgan competitor

– The FTC resolved this problem through a consent decree that required them to eliminate overlapping board memberships and to set up firewalls so that non-public information would not be shared between the two competing entities

– The case confirms that investments by private equity firms and other financial buyers will not escape antitrust scrutiny when their holdings involve competitive overlaps. Other private equity deals have also been investigated and restructured.

• Comcast / Time Warner / Adelphia Communications (2006)

– Comcast and Time Warner sought to acquire the cable assets of Adelphia, which was on the verge of bankruptcy, and to swap various cable systems

– The transactions would bring adjacent cable distribution systems in major metropolitan areas under common ownership

– Three FTC Commissioners did not oppose the transaction, finding that the consolidation was part of a “clustering” trend in the industry and that there was no evidence to suggest they would harm competition

– Two Commissioners dissented, arguing that despite the efficiencies of clustering, the transactions would harm consumers’ access to regional sports networks


Notable DOJ Merger Investigations• Monsanto – Delta & Pine Lands (2007)

– Monsanto, a powerhouse in the chemical and agriculture industry, sought to acquire DPL, a cottonseed grower

– DPL competed with Monsanto in cottonseed and had been a leading licensor of genetically modified traits from rivals of Monsanto in the upstream biotech market

– DOJ challenged the merger because it identified horizontal issues in the cottonseed market and vertical issues involving development of new cottonseed traits

– DOJ approved the merger after the parties entered into a consent decree that required divestures and that Monsanto revise its licenses to permit continued innovation

• Whirlpool – Maytag (2006)– Whirlpool, with a 51% share of the residential washer and dryer market, sought to

acquire Maytag, which had 20% of the market

– DOJ did not challenge the merger despite the high market concentration

– DOJ concluded that Whirlpool was unlikely to exercise market power because other brands like Kenmore, GE and Frigidaire had established themselves in the market and major retailers like Sears and Home Depot had the ability to shift between suppliers

– DOJ also found substantial cost savings and other efficiencies would benefit consumers

• Many critics point to this decision as an example of recent merger enforcement leniency

• There are reports that prices increased post-merger


Notable DOJ Merger Investigations

• Verizon – MCI and SBC – AT&T (2005)

– Verizon and SBC proposed to acquire their most significant competitors

– DOJ required narrow, targeted remedies because the merging companies were the only two firms that owned or controlled direct wireline connections to hundreds of buildings in large metro areas

– DOJ concluded that, apart from the few affected buildings, the mergers would benefit consumers due to exceptionally large, merger-specific efficiencies

– DOJ also believed that sufficient competition remained and that emerging technologies precluded any exercise of market power

• Many commentators have been critical of the adequacy of the remedy

• Oracle – PeopleSoft (2004)

– DOJ challenged the merger of two leading producers of enterprise resource planning software

– At trial, the court found DOJ failed to prove the narrow market it had alleged—high-function, integrated human resource management and financial management services software for large, complex enterprises—and subsequently refused to enjoin the merger


Criticism of Recent Merger Review

• Many commentators—most recently Professors Jonathan Baker and Carl Shapiro—have criticized recent merger enforcement

• Baker and Shapiro identified several recent trends in horizontal merger analyses by the federal antitrust enforcement agencies and the courts:

– Less emphasis placed on market concentration, the traditional foundation of merger analysis

– Greater willing to accept defenses often asserted by merging companies: the ease of entry into the market by new competitors, the likelihood of output expansion by non-merging firms, and efficiencies flowing from the merger

• They claim that there has been a sizeable decline in agency enforcement

– For example, merger enforcement challenges as a percentage of adjusted HSR filings were at 1.2% in President Bush’s first term, their lowest point since President Reagan’s second term, when only 1.1% of HSR filings were challenged


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© Hogan & Hartson LLP. All rights reserved. Janet L. McDavid November 28, 2007 Brussels Recent U.S. Developments In Merger Review