M & A Law Prof Blog

Comcast-NBC and the Various Premerger Approvals

Comcast’s deal to acquire NBC from GE announced yesterday doesn’t break a whole lot of new ground from a deal structuring point of view.  In general, GE contributes its NBC/Universal assets to the joint venture.  For its parts, Comcast pitches in cash plus cable assts like the E! Network and the Golf Channel (which suddenly have many more synergies than they used to).  Where this deal is likely to get interesting, though, is on the regulatory approval front. 

Of course, it will need antitrust clearance through the HSR premerger approval process.  Although this is a pretty well-trod path, the present Administration has already signaled on a number of occasions that the era of somnolent antitrust enforcement is over.  This is a big transaction, vertically integrating a large segment of the media industry (content generation to distribution).  Comcast already making its pitch that this deal will be good for consumers – “Universal movies could reach cable [subscribers] more quickly after showing in theaters.”  Somehow, the thought of Land of the Lost and Drag Me to Hell showing up my TV faster than they otherwise would does not make me feel better.

As I noted in a post a couple of months ago, in media deals, the FCC also has an independent premerger approval process of its own.  Although the FCC rarely stops deals from proceeding, it has a much broader charge than the FTC.  The HSR process is focused on assessing the potential anti-competitive effects of a proposed merger.  The FCC’s charge is to assess the proposed transaction on the basis of a “public interest” analysis. In assessing whether the Comcast/NBC deal is in the public interest, the FCC will determine whether the transaction will media diversity (“the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.”  Turner Broadcasting System, Inc. v. FCC), the quality of local services and the provision of new services, promote competition, and localism among others.  That’s a lot of ground to cover. I’m sure Comcast’s legal counsel have been studying the FCC’s 2003 order in the GM/Hughes and News Corp merger for hints how this review is going to go.  The structure of the transaction there was similar to this one.  Although the vertical integration in the NewsCorp/Hughes transaction was up the chain and not down, the arguments and the public interest analysis done there should look familiar to people.  This process, because it’s done on a case-by-case basis and because it’s not nearly has common as the HSR process, could take some time to accomplish.

Third, there’s Congress.  Although Congress doesn’t have a premerger approval process, every cable TV subscriber has a Congressman and they must be heard.  That fact no doubt generates what the Supreme Court has called “an independent interest in preserving a multiplicity of broadcasters.” Henry Waxman, Chairman of the House Committee on Energy and Commerce, released the following statement:

The proposed Comcast-NBC Universal joint venture agreement has the potential to reshape the media marketplace.  This proposal raises questions regarding diversity, competition, and the future of the production and distribution of video content across broadcasting, cable, online, and mobile platforms.  It is imperative that the FCC, the Justice Department, and the FTC rigorously assess whether this transaction is in the public interest.

I will work with Rep. Rick Boucher, Chairman of the Subcommittee on Communications, Technology, and the Internet, to schedule hearings on this matter at the earliest practicable date.

So, there will hearings in which assorted Congressmen ask questions and give their point of view on the usefulness of a Comcast/NBC link-up.  That ought to be fun.

-bjmq

Update:  Not to be outdone - Sen. Herb Kohl, Chairman of the Senate Subcommittee on Antitrust, Competition, and Consumer Rights has also released a statement of the proposed deal.  Surprise, surprise, he'll be holding hearings, too!

This acquisition will create waves throughout the media and entertainment marketplace and we don't know where the ripples will end.  Antitrust regulators must ensure that all content providers are treated fairly on the Comcast platform, and that Comcast does not get undue advantages in gaining access to programming.   We plan a public hearing so that consumers can get a better sense of how this deal could affect their access to diverse programming and information, especially as they more often look to the internet for such services.  It's critical that we preserve robust competition and promote innovative and emerging program delivery in this rapidly changing market.

Horizontal Merger Guidelines Workshops

The FTC is hosting a series of workshops on horizontal merger guidelines as part of its process of rethinking such guidelines.  The first of the five workshops is today in DC.  You can catch the webcast here.  The schedule for the rest of the workshops and materials is here.

-bjmq

Oracle Fiddling While Sun Burns?

MySQL, an afterthought in Oracle's decision to buy Sun last April has turned into a major obstacle with the EU Competition Commission standing in the way over the fate of the technology.  According to PC World representatives from Oracle met with the commission yesterday and, well, it didn't go well. 

In a meeting with Oracle President Safra Catz in Brussels on Wednesday, Competition Commissioner Neelie Kroes "expressed her disappointment that Oracle had failed to produce, despite repeated requests, either hard evidence that there were no competition problems or, alternatively, proposals for a remedy to the competition problems identified by the Commission," a Commission spokesman said.

...

Meanwhile Sun's sales have been declining as rivals IBM and Hewlett-Packard take advantage of the uncertainty around Sun's business with aggressive migration plans. Oracle CEO Larry Ellison said last month that Sun is losing $100 million a month while it waits for the deal to close.

He has also asserted that Oracle's database competes with Microsoft's SQL Server and IBM's DB2 products, and not with MySQL.

Sun announced a big round of layoffs yesterday, citing the additional time it is taking to close the deal with Oracle. The company said it will lay off 3,000 workers around the world over the next 12 months. Oracle is widely expected to make deeper job cuts if the deal closes.

Although the delay is expensive, short of reaching a deal with the Commission, there's no real end in sight for Oracle.  The Merger Agreement (Sec. 8.01(b)) won't permit Oracle to walk for antitrust reasons until at least April of 2010.  That's six months, or $600 million in losses away. 

In Section 6.10 (below), the parties included what appears to be relatively modest antitrust language. 

(b) Without limiting the generality of the undertakings pursuant to this Section 6.10, the parties hereto shall (i) provide or cause to be provided as promptly as practicable to Governmental Authorities with regulatory jurisdiction over enforcement of any Antitrust Laws (each such Governmental Authority, a “Governmental Antitrust Authority”) information and documents requested by any Governmental Antitrust Authority or necessary, proper or advisable to permit consummation of the transactions contemplated by this Agreement, including preparing and filing any notification and report form and related material required under the HSR Act and any additional consents and filings under any Antitrust Laws as promptly as practicable following the date of this Agreement (but in no event more than fifteen (15) Business Days from the date hereof except by mutual consent confirmed in writing) and thereafter to respond as promptly as practicable to any request for additional information or documentary material that may be made under the HSR Act and any additional consents and filings under any Antitrust Laws; (ii) use their reasonable best efforts to take such actions as are necessary or advisable to obtain prompt approval of consummation of the transactions contemplated by this Agreement by any Governmental Authority; and (iii) use their reasonable best efforts to contest on the merits, through litigation in United States District Court and through administrative procedures in relation to other Government Authorities, any objections or opposition raised by any Governmental Authority;provided, however, that nothing in this Section 6.10 shall require Parent to appeal any Order from a Governmental Authority.

What are "reasonable best efforts" anyway?  The reaction we're hearing from the EU Competition commission suggests that Oracle could be doing something "reasonable" to assuage their concerns, but it's not. "Reasonable best efforts" is one of those ambiguous phrases, like materiality, that people think have meaning, but when one tries to give them meaning, they get harder to actually pin down. One would think that the mounting losses at Sun would be motivation enough for Oracle to give its dealings with the  EU its best effort, but apparently it's not.   I find it hard to believe that Oracle is unable (or unwilling) to respond to EU requests for a report on the marketplace and competition with respect to MySQL.  So, while Oracle digs in its heels over MySQL, Sun is left to suffer.

-bjmq

Pre-Merger Notification in Japan

Jones Day's overview of pre-merger notification rules in Japan.

-bjmq

  

UK Competition Commission Rules Against Ticketmaster-Live Nation Deal

Apparently, The Boss has fans in the UK.  According to the WSJ, the Competition Commission, the UK antitrust regulators, are moving to hold up the Ticketmaster-Live Nation transaction.  The Competition Commission issued a statement today ruling against the merger:

Ticketmaster Entertainment, Inc and Live Nation, Inc will limit the development of competition in the market for live music ticket retailing.

In its provisional findings published today, the CC has concluded that the merger could severely inhibit the entry of a major new competitor (CTS Eventim) into the UK ticketing market. Prior to the announcement of the merger, Live Nation had signed an agreement with CTS to provide ticketing services for its live music events and venues in the UK. The CC believes that this agreement with Live Nation would have provided CTS with a foothold in the UK market from which it would have grown, increasing significantly the degree of competition in a market which is currently dominated by Ticketmaster and one other large ticketing agent. 

The CC believes that, if the merger were to proceed, Live Nation would have the incentive to impede CTS’s entry into the UK ticketing market, in particular by minimizing the supply of its tickets to CTS, and thereby frustrate CTS from becoming an additional effective competitor to Ticketmaster. This could lead to higher net prices (eg due to lower rebates to promoters and venues) and/or lower service quality and/or less innovation in the market than would otherwise be the case.

The Commission is now considering possible remedies.  They include, among others, prohibition of the merger, prohibition of the merger of the UK operations, and divestment of the UK operations of either Ticketmaster or Live Nation.  No word, yet, whether Ticketmaster will cry "No Surrender". 

-bjmq

Federal Judge Reviewing Diebold Sale

Early last month Diebold announced that it had sold its Premier Election Solutions, Inc. sub to Election Systems & Software (links are to their respective press releases announcing that the transaction had closed).  The sale was small - $5 million plus 70% of receivables from sales as of August 31, 2009.  Given that the sale was well under the HSR filing thresholds, the parties likely did not seek pre-merger approval from the FTC.  Now comes word that ES&S's competitors are seeking an injunction from a federal judge in NJ to "unscramble the eggs" and order ES&S to undo the transaction.  McClatchy reports:

A federal judge in Camden, N.J., agreed late Friday to hear a request for an emergency injuction that could halt Election Systems & Software's announced acquisition of Diebold Inc.'s Premier Election Solutions.

The quietly arranged shotgun wedding between the two voting-machine giants would give ES&S control of election systems in use in almost 70 percent of the nation's voting precincts. Federal Judge Robert Kugler agreed to hear Tuesday the request for immediate injunction brought by a small competitorm, Hart InterCivic Inc. 

The basic contention is that ES&S did a "stealth" transaction - as if by not voluntarily making an HSR filing one might impute some sort of bad faith.  That's a tough bet.  I wouldn't take it.   In any event, it's worth noting that ES&S's competitors - and not local governments (customers) - are the ones seeking the injunction.  This might well color the outcome.  

-bjmq

Media Ownership Rules Pop Up as an Issue

With the current state of the economy, creditors are being forced to think about taking equity positions in debtors.  In most sectors that doesn't present a problem, but an article in today's WSJ points to the media sector where this is becoming a surprise issue for unwitting creditors who are taking equity.   The FCC must approve these sales.  While the 2006 ownership rules make cross-ownership and ownership of multiple platforms easier to accomplish, there's still an entire merge approval process at the FCC.  Phil Weiser (formerly of U. Colorado, now of the U.S. Department of Justice Antitrust Division as deputy assistant attorney general for international, policy and appellate matters) has a nice paper that appeared last year in the Federal Communications Law Review on the challenges of the dual merger review regime (DOJ/FTC/FCC).  

-bjmq

CVS Gets Another Look

A number of members of Congress and pressure groups have apparently started pushing the FTC to give the CVS/Caremark merger from two years ago another look.  This reminds me of a question a student raised in my M&A class last year:  does pre-merger clearance create some sort of safe harbor that removes all post-closing antitrust risk from a transaction?"   The CVS/Caremark deal is a good reminder that the proper answer to that question is no.  One should not mistake pre-merger clearance for an anti-trust "get out of jaill free" card.  Although they don't go there very often, the FTC reserves the right to come back and examine the competitive (or anti-competitive) effects of mergers at any point in the future.

-bjmq

China Pre-merger Clearance paper

Mitnick, Yang and Emch have a recent paper assessing China's pre-merger clearance regime, The Dragon Rises: China's Merger Control Regime One Year On.  

Abstract: During the first year of existence of China’s Anti-Monopoly Law, much has been accomplished but much remains to be developed. In particular, draft regulations in the merger clearance field remain to be finalized, and draft regulations implementing non-merger aspects of the AML have only recently been proposed or have not yet been proposed at all. Moreover, early merger clearance decisions appear to rest on familiar antitrust principles, yet the application of those principles by the Ministry of Commerce (MOFCOM) may be out of step with some merger control regimes around the world. For example, MOFCOM relied in part on the theory of 'monopoly leveraging' to block the proposed Coca-Cola/Huiyuan transaction. In contrast, the U.S. Supreme Court has largely repudiated that theory in the Sherman Act context, and it has not been the used to block transactions under the Clayton Act. Nevertheless, in both substance and procedure, the Chinese antitrust regime continues to mature and, in most respects, to converge with the mainstream of worldwide antitrust enforcement programs.

-bjmq

China's Premerger Review Statistics

On July 21, 2009, the Antimonopoly Bureau of China's Ministry of Commerce (MOFCOM) released statistics on their premerger approval work.   The Gerson Lerhman Group has an English language summary with links to the Chinese report is available here.  

Since August 2008 when China's Antimonopoly Law (AML) took effect and through the end of 2009, MOCFOM received 58 merger filings, among them the review of 46 cases had been completed. MOFCOM approved 43 cases without conditions, approved 2 cases with conditions, and rejected 1 case. Pursuant to Article 30 of the AML, MOFCOM had published earlier its decisions on the three cases that were either rejected or approved with conditions. These decisions provide a peek into MOFCOM's thinking in reviewing mergers and acquisitions that might cause anticompetitive concerns in China.

While we're on the topic of China's AML, here's a recent article in China Law Vision on the extraterritoriality of China's AML.  The author suggests that the AML would not reach the Rio Tinto - BHP Biliton transaction.

-bjmq

DOJ Wakes Up to Antitrust

In a previous post, Mike noted that US antitrust authorities have a adopted a more aggressive enforcement stance following the change of administrations.  There's another example of the more vigorous enforcement attitude this morning.  According to the WSJ, the DOJ has filed comments with the Department of Transportation objecting to a grant of blanket antitrust immunity with respect to United and Continental's plan to share pricing and scheduling information as part of the "Star Alliance." (Continental is leaving "SkyTeam" to join "Star Alliance."   The 58 page comment letter outlining the DOJ's objections is summarized below:  

Antitrust enforcement has played a vital role in bringing increased competition and consumer benefits to the deregulated airline industry. Accordingly, any exemptions from the antitrust laws should be strongly disfavored. To overcome the presumption against antitrust immunity, applicants must demonstrate that their collaboration will generate significant public benefits that outweigh any harm to competition, that they cannot achieve those benefits without immunity, and that they have narrowly tailored the requested immunity to achieve the benefits claimed.

For many past applications, the principal public interest benefit furthered by DOT's grant of immunity has been the negotiation of open skies agreements with the home country of the U.S. carriers' alliance partners. In the present matter, open skies agreements have been signed with the home countries of all the foreign applicants, and those foreign carriers will continue to be members of the immunized alliances whatever DOT decides here. Granting immunity for  Continental to coordinate with Star ATI Alliance' members on U.S. to Latin American or Pacific routes is not likely to result in further liberalization discussions between the U.S. and countries with which we have not yet negotiated open skies, such as China or Brazil. Therefore, an expansion of immunity offers no open skies benefits for U.S. consumers.

Where an application does not directly promote open skies with its attendant consumer benefits, applicants bear a heavy burden to prove benefits specific to their alliance agreements that justify immunity. Where an application involves the presence of two major domestic competitors, the request for immunity warrants particularly close scrutiny.

The DOJ's stance on the United/Continental joint venture suggests that deal planners might have to be more wary of crossing paths with antitrust authorities in this new enforcement environment.

-bjmq

CSL-Talecris Agreement Terminated

CSL Limited announced this morning that it was pulling its HSR filing and is terminating its merger agreement with Talecris following a challenge by US antitrust authorities. The CSL-Talecris deal was one of the very first transactions to be challenged by a more assertive, post-Bush Administration, FTC.  

CSL will pay Talecris a $75 million break fee.  The prospect of a lengthy delay and an indeterminate outcome led the parties to decide to walk away.  The FTC was to hear arguments in October 2009, well past the July 2009 drop-dead date in the merger agreement.   Simultaneously, CSL announced a share buyback.  Earlier, CSL's CEO hinted they might make a move like that -- essentially returning to shareholders the money they raised to do the Talecris transaction. 

CSL disucssed their decision to terminate the agreement on an analyst call, which you can listen to here. 

-bjmq

“Vigorous Antitrust Enforcement” Begins

A couple of days ago, Michael posted about the renewed interest in “vigorous antitrust enforcement” by the Obama Administration.  Over the last couple of days there has been some movement on this front.  The WSJ reports today that the FTC just recently filed a complaint against CSL Ltd and Cerberus-Plasma Holdings to prevent CSL’s $3.1 billion acquisition of Talecris Biotherapeutics.   Why Cerberus?  Well, Cerberus has a 74% stake in Talecris. The redacted version of the FTC’s administrative law complaint is here.

The essence of the FTC’s complaint is that the acquisition of Talecris will leave the plasma therapies market too concentrated to ensure adequate levels of competition resulting in higher prices for consumers.  As evidence, the FTC notes that following the proposed acquisition, the combined entity will comprise over 80% of “alpha-1” market. In other plasma products, the post-merger entity would control between 40-80% of market in which it participates.

The deal documents are not easily available as Talecris is a private company and CSL is traded in Australia.  But the FTC”s complaint provides us some details about the merger, including that it has a $75 million break-up fee (2.4% of transaction value).  The deal's drop dead date is August 12, 2009 providing either party the right to walk if the regulatory hurdles prevent the deal from closing with the termination fee payable at that point.  The parties also entered into a separate agreement that commits CSL to supply plasma to Talecris for 5 years even if the transaction does not go forward.

CSL has indicated that they will fight this suit.  Here’s their statement, released to the Australian Stock Exchange.  CSL also had a conference call in which they provided their view of the FTC’s suit.

According to the complaint, the administrative hearing will be held in October.  Expect a motion for a preliminary injunction to prevent the deal from closing to be filed in a federal district court to be filed soon.

-   - bjmq

Rubinovitz on Fixed Costs

Robert Rubinovitz's paper, "The Role of Fixed Cost Savings in Merger Analysis" is now appearing in the Journal of Competition Law & Econ.  Here's the abstract:  

Among the many motivations for mergers, clearly one of the more important considerations is the extent to which the merger will generate cost savings for the firms involved. Standard economic models demonstrate that a decrease in marginal cost leads to a lower price, whereas a decrease in fixed costs does not necessarily have this effect. Thus, from the Antitrust Agencies' perspective, in a merger analysis, emphasis should be placed on marginal cost savings because these efficiencies will create short-run benefits for consumers, in terms of lower price and higher output, and should be given the most weight. Of late, increasing attention has been given to how fixed cost savings can improve consumer welfare. One key insight is that demonstrating the direct effects of fixed cost savings on consumer welfare may require a longer time horizon than marginal cost savings or may require embedding these savings in a dynamic context. This paper exhibits an approach that provides straightforward predictions on the relationship between fixed costs, prices, and consumer welfare. When the fixed cost of producing quality decreases, it is shown that consumer welfare increases. The clear implication of this model is that fixed cost savings should be given weight in the analysis of the potential effects of a merger on consumer welfare.

- bjmq

Bioenvision and DGCL 231(c)

When I posted on Bioenvision last week, the Bioenvision board had adjourned its shareholder meeting to approve a merger with Genzyme by one day; a meeting which had just been held.  Bioenvision did so because only 47% of the Bioenvision shareholders had voted in favor of the transaction.  I remarked at the time that:

The additional day adjournment was a pure Board maneuver to buy time for stockholders to vote in favor or change their votes in favor of the deal. . . . . The next day the Bioenvision stockholder meeting was again adjourned a second time to Oct 10 at the Friday meeting for the proxy tabulator to calculate the exact shareholder vote.  I'm a bit puzzled by this maneuver and find it suspect, even bizarre, given the situation.  But time will tell.

Things got a bit odder from there.  On Tuesday, Bioenvision filed a petition under DGCL 231(c) with the Delaware Chancery Court to reopen the shareholder voting.  Bioenvision claimed this was necessary because:

[M]ultiple errors resulted in the potential disenfranchisement of Bioenvision shareholders. First, the parties received a report that mistakenly stated that Bioenvision was approximately 935,635 votes short of the majority. Second, the parties fully expected SG to vote 1.3 million shares in favor of the Merger and were unaware at the time SG submitted its ballot that it was able to only vote 916,000 shares in favor of the Merger – again, far fewer than expected. Third, the proxy from the JPMorgan Client voting in favor of the Merger was intended to be submitted prior to the closing of the polls. In fact, the JPMorgan Client communicated to Bioenvision that it would be voting its entire position in favor of the Merger and instructed JPMorgan to do so. As already noted, at 11:15 am on October 5, JPMorgan called Broadridge with this voting instruction, which Broadridge asked JPMorgan to confirm in writing via facsimile. At some point between 11:15 am and 11:30 am, JPMorgan faxed written confirmation to Broadridge. AST did not receive a transmission of the JPMorgan Client’s vote from Broadridge until 12:12 pm. Fourth, having mistakenly believed that the vote was secured, based on inaccurate information, the polls were prematurely closed.

The result of these errors was that instead of passing by 55% of the shareholder vote, Bioenvision came up short by 0.43%.  I'm pretty sure most of you never learned of DGCL 231(c) in corporations class.  It states:

No ballot, proxies or votes nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.

One day after the petition was filed Chancellor Chandler issued an order without opinion granting Bioenvision's request.  Under the Chancery Court's order, Bioenvision will reconvene the special meeting of stockholders on October 22, 2007 for all Bioenvision stockholders as of the record date of September 5, 2007 to again vote on the transaction. 

I'm not sure what to make of all this.  I think the decision of the Chancery Court was the right one, but given Bioenvision's previous postponements, the prior tender offer by Genzyme which only yielded 15.3% of the common stock, and the opposition to the deal by a number of shareholders and proxy services, I am still a little unsettled by it.  Nonetheless, if the merger would actually have been approved I do still think it is the right decision. 

Whole Foods/Wild Oats Opinion

The redacted opinion in the Whole Foods/Wild Oats transaction has been released (access it here).   I haven't analyzed it thoroughly but at first glance Judge Friedman rests much of his decision on a rejection of the FTC's market definition.  Judge Friedman defines the market more broadly than the organic supermarket sector;  instead, he groups Whole Foods and Wild Oats together with the many other supermarkets selling natural and organic groceries.  On this basis, he finds that  "[t]he evidence shows that there are many alternatives to which customers could readily take their business if Whole Foods and Wild Oats merged and Whole Foods imposed," price increases.  The case now goes before the D.C. Circuit.