The Federal Trade Commission staff have completed a new study evaluating its process for designing and implementing merger remedies and the success of the remedies it has imposed in the past. Its report—"The FTC's Merger Remedies 2006-2012: A Report of the Bureaus of Competition and Economics"—follows a similar retrospective study from 1999 and also follows a number of recent matters where the agency's remedies were seen to have failed. Consistent with the experience of merging parties in recent years, the findings of this report confirm that the government will continue closely to scrutinize divestitures and other relief offered to remedy competition issues in transactions between companies with horizontal (at the same level of the supply chain) and vertical (at different levels) relationships. Although this report was issued by just one of the two federal antitrust agencies, and on the last day of the Obama Administration, the analysis and identified best practices are likely to resonate with the new leadership at both federal antitrust agencies, when they are appointed and take office.
The two federal agencies—the FTC and U.S. Antitrust Division of the Department of Justice—share jurisdiction to review mergers and acquisitions and to take enforcement action if a transaction is likely substantially to lessen competition in a U.S. market. In some (but not all) cases, it may be possible to prevent the harmful effects of the merger (and to preserve the deal efficiencies/synergies) without fully blocking the transaction. DOJ or FTC and the transaction parties may seek to design a structural (divestiture) or conduct (behavioral) "remedy" for the anticompetitive effects. In transactions that involve competitors, the agencies prefer structural relief in the form a divestiture of the assets of one of the parties in a line of business where the parties compete. Conduct relief may be required to supplement divestitures, or they may be imposed on a standalone basis to remedy alleged anticompetitive effects in a vertical merger; these include supply agreements, confidentiality protections, and employee obligations.
Both agencies have in recent years focused on designing better remedies, that is, remedies that are more likely to be successful in maintaining or restoring market competition following the merger. This effort, of course, translates into a greater burden on the merging parties, which must propose and implement remedies that satisfy the agencies' demands while avoiding expense or delay that undercuts the value of the original deal. If the agency and the parties cannot agree during the investigation phase on a remedy, their alternative is to litigate the lawfulness of the parties' proposed merger without a remedy or with the remedy proposed by the parties (known as "litigating the fix").
The Commission voted to authorize the report on January 19, 2017—the day before President Trump's inauguration—and the study was released in early February. Similar to the 1999 study, the current analysis is limited to FTC actions; DOJ did not participate in the current study, and so the report does not formally account for the efficacy and any lessons learned from transactions reviewed by DOJ.
In the recent study, FTC staff reviewed 89 remedies that were imposed between 2006 and 2012, gathering information on their effectiveness through interviews, questionnaires, and data requests directed at the merging parties, buyers of divested assets, and other market participants. Out of 50 cases in which staff conducted interviews and reviewed detailed sales data, they concluded that 80% of the studied remedies were "successful," which they defined as maintaining or restoring competition in the relevant market "within a short time." However, staff found some remedies to be less than successful, and identified improvements that could be made in its process. These suggest "best practices" in which the FTC will be more demanding of merging parties in the future. Even before the report was issued, there was evidence that both federal antitrust agencies were implementing some of these more rigorous standards, and the report likely will lead to even more demands on merging parties.
Implications of FTC study
The findings of the FTC study, including staff's observations on where they perceive past remedies have fallen short, provide useful guidance on what merging parties should expect in response to future remedy proposals:
Ongoing businesses. The clearest signal from the report is that the FTC will continue to prefer divestiture packages comprised of ongoing businesses as opposed to selected assets. The study found that, of the remedies investigated, all the divestitures of ongoing businesses were successful. By contrast, remedies of narrower packages of assets were only 70% successful, even where the remedy required an "up front buyer" that had been identified and committed to buy the assets before the main transaction was allowed to close. In recent years, both agencies have moved towards more often demanding divestitures of ongoing businesses; given the study results, merging companies should expect this increasingly to be the preference. The agencies may consider a package that includes assets that do not constitute an entire ongoing business, but will be more skeptical it will be successful and therefore more demanding of the parties to convince the agency the narrower package will work.
Buyers. Having identified that the success of a remedy often depends not just on the assets being divested but also on the strength of the buyer of the assets, going forward it should be expected that FTC will continue to review closely a buyer's financial strength, source of financing for the purchase, and track record of success in any prior acquisitions. FTC may also take steps to ensure the buyer can perform adequate due diligence on the assets it is purchasing and to encourage buyers to be forthcoming with their concerns if the asset package may be inadequate. And FTC will consider whether a proposed buyer has a "thoughtful" and credible business plan with realistic operational capabilities and financial wherewithal to compete in the near term and long term.
Support functions. Often the divested businesses or assets, having been part of a larger enterprise, relied on the enterprise's centralized backoffice functions, existing supply arrangements, or other support. FTC found that it sometimes was more difficult than expected for the new owner to transfer or replace these functions. This suggests that, going forward, FTC may seek longer and more well-defined transition agreements under which the merged company continues to support the business it has divested. As a practical matter, merging parties need to balance this interest against proposals that include "too many" ongoing entanglements between the merged company and its new competitor, the divestiture buyer. If a buyer requires significant backoffice and other support functions, and for an extended period of time (greater than 12-18 months), staff may question whether the buyer actually is capable of effectively operating the divested assets.
Although not detailed in the report, another important part of the agencies' evaluation of a proposed remedy is "market testing" the proposal in discussions with customers and other market participants to get a real world reaction. This is a critical step, as there almost always is some opportunity for the agency staff to find customers that oppose consolidation. This highlights the importance for the merging companies to consider their customers' likely reactions and to thoughtfully prepare a plan to communicate the procompetitive benefits of the deal.
Merging parties also should expect more oversight of this process, particularly for remedies involving complex industries and technical products (e.g., in the pharmaceutical and technology sectors), by independent monitors appointed by the agency to ensure successful transitions to the new owner.
Future remedy compliance
Within the FTC staff, preliminary approval of proposed remedies and oversight of a remedy's design and implementation is the responsibility of the Compliance Division of the Bureau of Competition, along with the staff that investigated the merger in the first place. The Compliance Division should be expected to take this new study as justification for continuing to ratchet upwards its insistence on detailed evidentiary support of proposed remedies.
Based on the findings of the FTC remedies study, it should be expected that FTC will continue to increase its remedy demands. Merging companies should anticipate:
- Skepticism that a divestiture package that does not include the entire ongoing business should be accepted.
- Requirement of better provisioning of backoffice functions, transition services, and supply agreements to support the divested business.
- Close monitoring of the adequacy of due diligence made available to the proposed divestiture buyer.
- Ensuring divestiture buyer access to customer and third party relationships.
- Greater scrutiny of divestiture buyer financing and viability.
- Increased use of up-front buyers.
- Monitoring the overall divestiture process, including with an appointed "monitor trustee."
- Encouragement that divestiture buyers reach out to FTC staff if they encounter difficulties.
- Greater demands by the Compliance Division for information with which to evaluate the likely success of proposed remedies.
- More delay in obtaining FTC approval of a divestiture package and proposed purchaser.
DOJ has no dedicated "Compliance" division or equivalent group whose focus is to help draft and negotiation remedies with merging parties. The DOJ staff that investigated the merger, along with their immediate supervisor (section chief), are responsible for negotiation of a potential remedy agreement. The proposed settlement is then vetted by DOJ management before being sent for final approval by the Assistant Attorney General for Antitrust. Although the DOJ did not participate in the FTC study, DOJ staff and the incoming leadership team are likely to consider similar best practices.
Although the report confirmed that the vast majority of remedies in FTC cases have been "successful," businesses and their counsel should focus on the remainder—the remedies that were deemed only a "qualified success" or a "failure," and the FTC staff's assessment of the reasons why. These cases, cautionary tales, are likely to drive the agencies' evaluations of all remedies; no staff lawyer or manager wants to be responsible for having signing off on a remedy that later proves flawed. Going forward, merging parties can expect enhanced scrutiny of proposed remedies at both agencies.
The full FTC study is available on the FTC's website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.