The corporate deal-making boom last year was one for the record books. The harder part: Winning the blessing of emboldened antitrust officials in the Obama administration’s last year.
U.S. enforcers have turned increasingly aggressive in their mission to protect competition between companies — the latest example being the Justice Department’s expected move to block Halliburton Co.’s takeover of rival oil-services company Baker Hughes Inc. Antitrust officials are also in court this week to block a merger between Staples Inc. and Office Depot Inc.
Top enforcers are rethinking how they assess consumer harm in response to increasing consolidation across industries as new research finds fault in previous attempts to fix problematic mergers. The change in thinking comes as dealmakers pursue tie-ups that would leave industries including health insurance, airlines, chemicals and beer even more consolidated with just a handful or less of major players.
“We’re being tested,” said Julie Brill, who stepped down last month after six years as a commissioner at the Federal Trade Commission, which shares antitrust jurisdiction with the Justice Department. “We are seeing some mergers being proposed that I don’t think would have been proposed before,” Brill said in an interview before she resigned.
Stepped-Up Enforcement
At the Justice Department, the antitrust division led by Bill Baer is emphasizing a more flexible approach in merger investigations, resulting in a stepped-up enforcement agenda that has surprised some observers. The stance has been underscored in a number of merger challenges, including Comcast Corp.’s proposed takeover of Time Warner Cable Inc. and American Airlines’s combination with US Airways.
“We’re less concerned about fitting things into particular boxes and more thinking about is harm happening and is this harm we should be concerned about, and if so, we’ll find ways to address it,” said Renata Hesse, a senior attorney who helps lead the division.
That shift has surprised some companies and their advisers who had been successfully pushing the boundaries of what was allowed, said Jonathan Kanter, an antitrust lawyer at Cadwalader, Wickersham & Taft LLP in Washington. Getting deals approved often meant turning to the same old playbook — offering to sell off assets here and there in certain markets — even as industries grew more consolidated, he said.
Suit to Block
The latest example is Halliburton’s plan to buy Baker Hughes — which if executed would turn an industry dominated by three companies into a duopoly. After months of meetings and a series of offers to sell assets, antitrust officials still weren’t persuaded the transaction should go through. The Justice Department is preparing to sue to block the merger as soon as this week, according to a person familiar with the matter.
Enforcers realize that the tools they were using to evaluate mergers were too narrow, said Kanter. That’s raising the bar for deals in the pipeline and forcing companies to pay more attention to antitrust risk in deal negotiations, he said. It’s also spurring buyers and sellers to put a greater focus on breakup fees, asset sales and litigation obligations in the event of a government challenge, according to Kanter.
“If you’re in a situation that’s less predictable, you want to make sure you protect yourself if the deal breaks up,” he said.
Biggest Rivals
Deals now facing review include tie-ups of some industries’ biggest rivals. There’s Anheuser-Busch InBev SA’s planned takeover of SABMiller Plc, and Walgreens Boots Alliance Inc.’s deal for Rite Aid Corp., a marriage of the No. 1 and No. 3 pharmacy chains in the U.S. Also in the works are mergers that would turn five of the biggest U.S. health insurers into three.
An antitrust lawsuit doesn’t automatically kill a deal, however, and there are risks for antitrust officials too. In December, the FTC challenged Staples Inc.’s proposed takeover of Office Depot Inc., which would leave just one national office-supply retailer. The question now is whether the judge will agree. A skeptical U.S. District Judge Emmet Sullivan in Washington urged attorneys for both sides to “sit down and talk” after Staples asked him to reject the government’s request to block the deal, calling the case an “utter failure.”
Impose Remedies
Antitrust officials can also settle a lawsuit by reaching an agreement with the companies to sell assets or impose other remedies that address their concerns. Baer ultimately approved AB InBev’s purchase of Grupo Modelo SAB and American Airline’s merger with US Airways through settlements in 2013.
Over the past two decades, more industries have come under the control of a few big players. Under current antitrust standards, nearly one-third of U.S. industries are considered highly concentrated, up from about 25 percent in 1996, according to research by professors Gerard Hoberg at the University of Southern California and Gordon Phillips at Dartmouth College.
The spate of deals between direct competitors in such markets require a more pragmatic stance by antitrust enforcers to assess competitive harm, said Baer, the Justice Department’s antitrust chief.
“Antitrust has gotten better about being commonsensical, not simply calculating how much an industry is concentrated or letting someone come in and argue some artificial market definition without taking a look at the actual competitive dynamics, what really pressures competition,” he said.
Stopped Deals
The Justice Department and the FTC have stopped a run of deals they say threatened to undercut competition. The FTC blocked Sysco Corp.’s bid for US Foods Inc. last year. Comcast’s proposed tie-up with Time Warner Cable fell apart last April when the Justice Department raised objections to the combination. The department also challenged Electrolux AB’s proposed takeover of General Electric Co.’s appliance business, prompting GE to abandon the deal midway through a trial.
“The last year-plus has actually been pretty good in terms of enforcement, and that clearly has restored the agencies’ beliefs that they can go to court and prevail,” said John Kwoka, an economics professor at Northeastern University who studies the effectiveness of merger policy. “Many of us in the antitrust community have been reassured and maybe even surprised by how successful they’ve been.”
Kwoka has found that enforcement actions against deals in markets with just a handful of players have indeed risen over the last 20 years. Challenges against mergers that reduced a market to four or fewer players rose to 94 percent between 2008 and 2011, from 83 percent in the period from 1996 to 2003. The calculations, based on government data, classify a merger challenge as a lawsuit against a deal, a settlement requiring asset sales, or a deal that was abandoned due to government opposition.
But overall, enforcement actions are actually less likely today than they were 20 years ago, Kwoka says. Mergers that would have left five or more competitors in a market were challenged by officials 39 percent of the time between 1996 and 2003, a proportion that dropped to zero in the period between 2008 and 2011.
Brill, the former FTC commissioner, and fellow Commissioner Terrell McSweeny said in interviews that they’re concerned about the risks of under-enforcement.
“There have been times in cases where I feel like we didn’t have the will to go forward because we were too exacting in our demands for evidence or we were too willing to listen to the arguments of parties that didn’t withstand scrutiny,” said Brill, who dissented when the commission approved the merger of cigarette makers Reynolds American Inc. and Lorillard Inc. in May 2015.
FTC Chairwoman Edith Ramirez said she doesn’t share those concerns.
“I certainly would take issue with anyone characterizing what the FTC has been doing as being cautious,” she said. “When we see a problem we’re absolutely going to make sure we take action and that we do our best to ensure that we’re maintaining competition.”
But antitrust challenges to deals aren’t always protecting consumers, according to Kwoka, who found that approved mergers have frequently resulted in price increases afterward, even when enforcers required remedies to preserve competition. A review of dozens of transactions that were approved over the last 25 years found prices rose 81 percent of the time and that those increases averaged 10 percent, he said.
Kwoka argues the failure of merger remedies to prevent price increase should encourage the FTC and the Justice Department to be more aggressive in enforcement going forward. The agencies should sue to block more mergers and be more selective about the use of remedies, he said.
“All the data we have paints a pretty disturbing, even damning, picture, and should be a wake-up call to the agencies,” he said.