Thursday, March 14, 2013
The antitrust action in the Federal district court in Massachusetts against the private equity industry is back in the headlines. We looked at this last after the New York Times successful motion to unseal the complaint against the industry. In response to a motion for summary judgment, Judge Edward Harrington permitted the lawsuit to survive the motion in part, but narrowed it in important ways. The case deals with two claims. First, there is a specific claim with respecet to the HCA transaction. In that allegation, the plaintiffs claim that there was an agreement for other PE firm to step down from competing for HCA. In the second claim, plaintiffs allege an industry-wide conspiracy not to compete in post-signing auctions for sellers.
In the 38 page_order (which includes more PE email excerpts), Judge Harrington made some useful observations about the use of deal protections and the private equity industry and the plaintiffs allegations. Judge Harrington summarized the plaintiff's allegations of clubbing in the following way:
Plaintiffs assert the rules to be as follows: First, Defendants formed bidding clubs or consortiums, whereby they would band together to put forth a single bid for a Target Company. The Plaintiffs assert that the purpose of these bidding clubs was to reduce the already limited number of private equity firms who could compete and to allow multiple Defendants to participate in one deal, thereby ensuring that every Defendant got a “piece of the action.” Second, Defendants monitored and enforced their conspiracy through “quid pro quos” (or the exchange of deals) and, in the instances where rules were broken, threatening retaliatory action such as mounting competition against the offending conspirator’s deals. Third, to the extent the Target Company set up an auction, Defendants did their best to manipulate the outcome by agreeing, for example, to give a piece of the company to the losing bidders. Fourth, Defendants refused to “jump” (or compete for) each other’s proprietary deals during the “go shop” period. This gave Defendants the comfort to know they could negotiate their acquisitions without the risk of competitive bidding.
For the most cynical observers in the pile, this is a pretty good description of the way private equity goes about its business and suggests a conspiracy or at least an industry custom of not competing in post-signing auctions. With respect to the HCA transaction, the plaintiffs allegations were enough to survive at this very early stage (which is deferential to the plaintiffs):
While some groups of transactions and Defendants can be connected by “quid pro quo” arrangements, correspondence, or prior working relationships, there is little evidence in the record suggesting that any single interaction was the result of a larger scheme. Furthermore, unlike other cases where an overarching conspiracy was found, here there is no single Defendant that was involved in every transaction or other indication that the transactions were interdependent.
When pressed at the second day of oral argument for the evidence supporting the “larger picture,” the Plaintiffs largely abandoned the above arguments to focus on the following statement by a TPG executive regarding the Freescale transaction, a proprietary deal: “KKR has agreed not to jump our deal since no one in private equity ever jumps an announced deal.” Plaintiffs contend that this statement, in combination with the fact that Defendants never “jumped” a deal during the “go-shop” period, as well other statements such as the Goldman Sachs executive’s observation that “club etiquette prevail[ed],” with respect to the Freescale transaction, provides a permissible inference of an overarching conspiracy.
The statement that “no one in private equity ever jumps an announced deal” and the fact that no announced deals for the propriety transactions at issue were ever “jumped,” tends to show that such conduct was the practice in the industry. On its own, these two pieces of evidence would be insufficient to provide a permissible inference of an overarching conspiracy. They do not tend to exclude the possibility that each Defendant independently decided not to pursue other Defendants’ proprietary deals because, for instance, a pursuit of such deals was generally futile due to matching rights.
When viewed in combination with the Goldman Sachs executive’s statement and in the light most favorable to the Plaintiffs, however, the evidence suggests that the practice was not the result of mere independent conduct. Rather, the term “club etiquette” denotes an accepted code of conduct between the Defendants. Taken together, this evidence suggests that, when KKR “stepped down” on the Freescale transaction, it was adhering to some code agreed to by the Defendants not to “jump” announced deals. The Court holds that this evidence tends to exclude the possibility of independent action. Count One may, therefore, proceed solely on an alleged overarching agreement between the Defendants to refrain from “jumping” each other’s announced proprietary deals.
So, the alleged industry etiquette against deal jumping in the specific case of the HCA transaction survives to go to trial. At the same time, the "overarching conspiracy" allegation falls:
Furthermore, the frequent communications, friendly relationships and the “quid pro quo” arrangements between Defendants can be thought of as nothing more than the natural consequences of these partnerships. Defendants that have previously worked together or are currently working together would be expected to communicate with each other and to exchange business opportunities. That is the very nature of a business relationship and a customary practice in any industry. Accordingly, the mere fact that Defendants are bidding together, working together, and communicating with respect to a specific transaction does not tend to exclude the possibility that they are acting independently across the relevant market.
Being friendly with your competitors does not a conspiracy make.
Although it's been narrowed quite a bit, I'm sure this case will continue to generate headlines and attention, especially if more emails come to light.
Update: Ronald Barusch at the WSJ Dealpolitik blog suggests the outcome of the summary judgment motion will push defendants to push hard for a settlement.
Wednesday, January 30, 2013
Today, the EU officially blocked the acquisition of TNT by UPS. Here's the press conference announcing the commission's decision:
UPS and the EU tried - unsuccessfully - to work through the issues:
To address the Commission's concerns, UPS proposed to divest TNT's subsidiaries in the 15 relevant Member States, plus – under certain conditions - TNT's subsidiaries in Spain and Portugal, to further increase the volume of small package express deliveries that would be transferred to the purchaser. UPS also offered access to its air network for 5 years, should the purchaser not be a so-called "integrator".
However, to provide intra-EEA express deliveries from the 17 countries covered by the remedy package, the purchaser would have needed suitable networks or partners in these other countries. This requirement alone severely limited the number of potentially suitable purchasers, casting doubt over the effectiveness of the remedies. To dispel this uncertainty, UPS would have needed to sign a binding agreement with a suitable purchaser before the concentration was implemented. However, UPS did not propose this to the Commission and its last minute attempt to sign such an agreement before the end of the Commission's investigation did not materialise.
Moreover, the Commission had serious doubts as to the ability of the very few potential purchasers that expressed their interest to exercise a sufficient competitive constraint on the merged entity in intra-EEA express delivery markets on the basis of the remedies offered. In particular, a buyer that is not already an integrator would need the ability and incentive to invest in its own air transport solution and to upgrade its ground network in order to become a sufficient competitive threat on the merged entity. Without sufficient volume in express deliveries it is doubtful that such an incentive would exist.
Without EU sign off, UPS had to walk away from the transaction. UPS will now pay TNT a 200 million euro reverse termination fee due to the fact that the transaction was terminated because of a failure of the antitrust condition.
Thursday, November 8, 2012
“Survival of the largest appears to be the message here,” said Scott Turow, Authors Guild president. “Penguin Random House, our first mega-publisher, would have additional negotiating leverage with the bookselling giants, but that leverage would come at a high cost for the literary market and therefore for readers. There are already far too few publishers willing to invest in nonfiction authors, who may require years to research and write histories, biographies, and other works, and in novelists, who may need the help of a substantial publisher to effectively market their books to readers.”
Penguin and Random House are controlled by Pearson and Bertelsmann, respectively. This combination is likely to raise antitrust concerns and that's the obvious target for the Authors Guild message. Of course, consolidation in the book publishing industry is going to happen. There's no standing against that wave. This transaction, though, will present a good test for those who like to define markets. On the one hand, the authors will argue that the market in question is the market for books. Pearson and Bertelsmann will counter that the prevalence of iPad, tablets and eBooks makes a broader market definition a requirement. They're likely to have the winning argument.
Thursday, August 30, 2012
You want to know why the HSR guy down the hall sighs and slumps his shoulders every time you burst into his office with the great news that you just signed a deal to acquire a company with big operations in Brazil? This is why:
Under the legislation, the [Brazilian] antitrust authority known as Cade has said it will take no more than 330 days to review a proposed merger. Previously, companies filed requests to review a deal after an accord had already been closed, allowing operations to be integrated before approval from Cade, which took as long as two years in some cases.
Brazil is proposing to revise its premerger notification system to speed up approvals from two years following closing to 330 days. I guess that's better, but still ... ugh. I don't know if this change is necessarily an improvement. Previously, you had to file post-closing and then let it sit for years -- with the risk that antitrust authorities might require you to 'unscramble the eggs' at some point. Now, you will be required to file within 15 days of signing, but then you have to sit for as long as 330 days (240 days, plus an additional 90 days in "complex" cases), not 30 days like in the US (The Economist).
Wednesday, August 22, 2012
Wednesday, August 15, 2012
In a letter to the FTC, Senators Herb Kohl (D-WI) and Mike Lee (R-UT) come to the defense of audiophiles everywhere. Their letter summarized findings of a hearing by the Subcommittee on Antitrust, Competition Policy, and Consumer Rights on the proposed acquisition of EMI by Universal. They point to the rapid shift in the structure of the music distribution market from CDs to online distribution and caution that the acquisition could potentially be anticompetitive - a combined Universal/EMI controls over 40% of US market share by revenue (and 51 of the 2011 Billboard 100). Sens. Kohl and Lee argue that the strength of a combined Universal/EMI's catalogue could form a bottle-neck in any online distribution and create market power for the combined entity, stifling potential competition and efficiency.
For its part, Universal's CEO told the committee that it would be "insane not to license, develop, make available through as many platforms through as many retailers as possible." I don't know...I seem to remember a time not long ago when all the major record labels were "insane" in precisely that way.
In any event, here's the full text of the letter to the FTC. The ball is in the FTC's court.
Thursday, July 19, 2012
On this blog and elsewhere there was a palpable sense of change with respect to the vigor of antritrust enforcement and pre-merger review when the Obama administration came to power. Now, a new essay at the Stanford Law Review Online by Prof Daniel Crane calls "BS" to that idea:
The merger statistics do not evidence “reinvigoration” of merger enforcement under Obama. Focusing on the last two fiscal years under Bush and the first two fiscal years under Obama, the numbers are comparable. In those periods, the Bush Administration conducted more total merger investigations (Bush 185, Obama 154) and more Hart-Scott-Rodino investigations (Bush 152, Obama 127). The two administrations had almost exactly the same number of “second requests” for information under Hart-Scott (an investigatory mechanism that delays the closing of a merger and often forces the merging parties to either negotiate with the government or abandon the merger). From 2007 to 2008, Bush made 52 second requests, and from 2010 to 2011, Obama made 53. The Obama Administration challenged slightly more mergers (Bush 16, Obama 19), and challenges announced by the Obama Administration resulted in more transactions restructured or abandoned prior to filing a complaint (Bush 9, Obama 15), although the numbers are small under both metrics.
These raw comparisons may not be sufficiently informative because of the reduced numbers of mergers due to the effects of the financial crisis. But even adjusted for the number of Hart-Scott filings, the numbers remain comparable, although with a tick up in second requests under Obama. The Bush Administration conducted 0.04 investigations per Hart-Scott filing; Obama conducted 0.05 investigations per filing. The Bush Administration made 0.013 second requests for information per Hart-Scott filing; Obama’s made 0.020—a 50% increase on a per capita basis.
Well. How about that. Prof Crane notes that statistics don't tell the entire story and that there may have been a change in attitude that prevented otherwise antitrust sensitive deals from going forward, etc. Still, it's eye-opening.
Wednesday, June 27, 2012
The FTC and Department of Justice have just released their HSR report for 2011.
Mayer Brown has issued a client alert analyzing the report, which notes (among other things), that
- A significant increase in Hart-Scott-Rodino (HSR) filings, continuing a trend from the low point in 2009 after the economic downturn;
- The Obama administration continues to investigate a higher percentage of mergers than did the previous administration; and
- As has been the case since 2009, once a full investigation is opened, there is a high likelihood that the investigation will result in the government challenging the transaction.
Based on the report, Mayer Brown warns that parties considering mergers and acquisitions should expect continued aggressive antitrust enforcement by the Obama administration.
Tuesday, April 24, 2012
As Acting Assistant Attorney General for the Antitrust Division Sharis Pozen prepares to move on, she took some time this week to review the last three and half years at the DOJ's Antitrust Division. You're all aware that under the current administration, antitrust enforcement and pre-merger reviews are back. In this speech to an audience at Brookings, Pozen reflects on candidate Obama's committment to “to reinvigorate antitrust enforcement."
Thursday, April 5, 2012
Just because you received clearance to close from the FTC/DOJ through the Hart-Scott-Rodino process, don't think you're necessarily in the clear if your transaction is antitrust sensitive. Take the current case Express Scripts/Medco as an example. Express Scripts/Medco was cleared by the FTC with no conditions earlier this week, but it still faces the hurdle of a possible injunction in a private action brought by the National Association of Chain Drug Stores and the National Community Pharmacists Association under Section 16 of the Clayton Antitrust Act. The plaintiffs are seeking to hold up the transaction from closing, or in the event it closes to force the parties to hold separate all the merged assets until the case has been resolved. Here's their complaint.
The big lesson from the Express Script/Medco? Don't think that since the FTC passes on the deal that there are no more antitrust risks out there.
Tuesday, January 24, 2012
I suppose the DOJ's new more active approach is more taxing on its chief. That might be why, as the division's head according to various news reports, the DOJ's Antitrust Division is looking forward to new leadership as Sharis Pozen prepares to leave her position .
Friday, October 28, 2011
Antitrust regulators in the U.S. and the European Union have long cooperated on antitrust matters (see the Antitrust & Competition Policy Blog for excerpts from several recent speeches on Transatlantic cooperation, here and here). Recently, regulators issued an updated set of best practices for coordinating merger review. According to the press release:
"The best practices, originally issued in 2002, provide an advisory framework for interagency cooperation when one of the U.S. agencies and the European Commission’s Competition Directorate review the same merger. The revised U.S.-E.U. best practices:
- Provide more guidance to firms about how to work with the agencies to coordinate and facilitate the reviews of their proposed transactions;
- Recognize that transactions that authorities in the U.S. and Europe review may also be subject to antitrust review in other countries; and
- Place greater emphasis on coordination among the agencies at key stages of their investigations, including the final stage in which agencies consider potential remedies to preserve competition."
For those interested in a summary of the revised best practices, Davis Polk has a useful memorandum setting out the key points.
Tuesday, September 20, 2011
Chinese firm King & Wood - there's actually no Mr. King or Mr. Wood, but in the Chinese King & Wood are good names ... - anyway they have the run-down on the Provisional Rules of Assessment of Competitive Effects of Concentration of Business Operators (MOFCOM 2011/55). This is another in a series of new rules and regs the Chinese have been rolling out to implement their Anti-Monopoly Law.
Thursday, August 11, 2011
Gibson Dunn has posted a useful update on merger enforcement trends in the US and Europe since the beginning of 2011. The update notes that "As was the case in 2010, antitrust enforcers in the United States and Europe have continued to make headlines by intervening in major merger cases and launching new policy initiatives. While M&A activity on both sides of the Atlantic continues to recover from the global financial crisis, it appears that antitrust enforcers are placing a higher priority on merger enforcement, a pattern that is likely to continue for the foreseeable future." The update also discusses the DOJ's recently released Policy Guide to Merger Remedies and conduct remedies imposed in recent merger transactions.
Friday, August 5, 2011
In this client alert, Clifford Chance notes that the European Commission recently targeted a PE firm for potential fines for antitrust breaches allegedly committed by one of its portfolio companies even though there is no allegation that the firm or any of its personnel participated in, or were aware of, the alleged cartel. Thus, if a fine is imposed on the PE firm, it would be solely on the basis of parental liability for the activities of the portfolio company.
According to the alert "this is one of the first instances - and certainly the most high profile - in which a private equity firm has been targeted in this way."
Tuesday, June 21, 2011
Monday, June 20, 2011
So late last week, the FTC granted early termination to Microsoft and Skype for their announced deal. Early termination of the HSR waiting period means that Microsoft and Skype can move towards closing that deal. Now, comes the news from Bloomberg that Skype has fired a number of executives prior to closing:
Skype Technologies SA, the Internet- calling service being bought by Microsoft Corp. (MSFT), is firing senior executives before the deal closes, a move that reduces the value of their payout, according to three people familiar with the matter.
The reasons for the letting go this group of 8 high level Skype execs prior to closing aren't known, but the Skype Journal blog reinforces what is hinted at in the Bloomberg report - that the firings were done in order to reduce the number of stock options that are vested at closing and thus raises the payout to venture investors.
Now, I have no way of knowing if increasing the payout for investors is in fact true or if the execs that were let go didn't get an equivalent cash payout on their way out the door. My guess is that they did, but I don't know. If on the other hand it's true, then it's pretty cheesy.
The prospect of getting a large cash payout from valuable options after an IPO or a when unvested options are automatically vested coincident with sale is a huge part of the incentive package that keeps talented people working at start-ups. If it's true, and I guess everyone in the Valley will know the truth soon enough, then it means that executives with unvested options will be spending more time than one might like ensuring their positions in the event of a sale rather than risk getting let go just before their big payout.
Tuesday, May 24, 2011
The DOJ's Antitrust Division filed a suit to block H&R Block's proposed acquisition of TaxAct yesterday. H&R Block is in the process of learning a lesson (likely expensive) about what not to say in the run up to a deal. For example, internal documents from H&R Block noted that the primary benefit of the acquisition would be “elimination of competitor.” That's never good a good document to hand over when the antitrust authorities come knocking. Another goodie - internal documents note that “acquir[ing] TaxACT and [will] eliminate the brand to regain control of industry pricing and further price erosion.”
Here's the DOJ's complaint.
Friday, May 13, 2011
This week the Competition Commission of India (CCI) released the new M&A regulations. These rules are somewhat softened from the stringent guidelines issued earlier this year (for various commentary see here). For example, deals entered into prior to June 1st have been exempted, and filing fees have been significantly decreased (see this useful Mayer Brown summary).
The rules exempt a host of transactions from the scrutiny of the CCI. For example, if an acquirer has a 50% stake in a firm then further acquisition will not trigger the competition law except where the acquisition leads to transfer from joint control to single control. Moreover a combination taking place entirely outside India with insignificant local nexus and effect on markets in India “need not normally be filed.”
With respect to timing, the regulations provide that within 30 days of submission of the notification form the CCI is to form a prima facie opinion as to whether the combination is likely to cause or has caused an appreciable adverse effect on competition within the relevant market in India. The proposed transaction will then be cleared or subject to a second phase investigation. The regulations provide that the CCI “shall endeavour to pass an order” in a second phase investigation within 180 days from the date of submission of the notification form.
The new regulations still leave some grey areas, such as failing to address pre-merger consultation, although the CCI has indicated that it will issue regulations on consultations. There is also concern about potential conflict between the new rules and the proposed overhaul of the Takeover Code by SEBI.
Monday, May 9, 2011
Hertz announced this morning that it was giving the acquisition of Dollar Thrifty another go. You'll remember that last year, Dollar terminated its agreement with Hertz after Dollar shareholders voted no on its $50/share offer. The sharehodler vote followed sharehiolder litigation in Delaware to try to get the deal protections in the Hertz-Dollar deal invalidated (In re Dollar Thrifty), resulting in a termination of the merger agreement. Following which Dollar and Avis entered into protracted - and so far unsuccessful = talks amongst themselves and the antitrust authorities about getting a deal done.
Apparently, Hertz has decided enough is enough and has decided to jump back in - hoping that Dollar shareholders will think differently this time around. Here's a summary of the new offer from the Hertz press release:
You may wonder why we are moving forward now after the unsuccessful Dollar Thrifty shareholder vote last fall. First, the vote did not prevent Hertz from re-engaging at any time of our choosing. Additionally, economic conditions continue to improve, creating revenue growth opportunities over the next several years. Moreover, Avis has been trying unsuccessfully for the past 12 months to secure government approval to buy Dollar Thrifty and all they have to show for their year-long efforts are “constructive discussions” with U.S. regulators. We don’t believe Avis can get a deal done and the time is right to resolve this matter once and for all to our and Dollar Thrifty’s satisfaction.
In contrast with Avis, we’ve picked up where we left off with the government last fall and we are confident we can secure its consent to proceed. Unfortunately, that will mean divesting Advantage Rent-a-Car in the U.S., which is not our preference, but it’s clear that a merger with Dollar Thrifty becomes far more difficult if the government opposes the transaction.
For its part, Hertz appears to be taking an aggressive stance towards offering Dollar's shareholders a deal they can't refuse. It's offering an improved bid and is committing to sell its Advantage rental brand (e-mail to Advantage employees)- to help clear the way for regulators to provide clearance to the proposed transaction. We'll see how Doolar II proceeds and whether shareholders have a different view on the transaction given what they've seen over the past few months.
Update: Reuters has a timeline for this deal here.