Antitrust laws can impact all potential M&A transactions, so it is important to understand the likelihood of a government challenge early on when considering a deal. In some cases, that antitrust review can be done in the blink of an eye, as it is clear that a transaction causes no concerns. In other cases, transactions that appear to create significant antitrust problems are actually doable deals. Each case needs to be evaluated, and experienced antitrust counsel should be consulted for any transaction that may raise antitrust issues.

Companies that have well-developed corporate development/M&A functions likely have people within both the legal department and corporate development organization who are familiar with the antitrust overlay for their transactions. However, personnel change over time makes it inevitable that some of the key players in transactions will have limited or no antitrust experience. This article is intended to provide some key introductory principles and concepts to assist the M&A team members who are less familiar with the antitrust process. People who could benefit from spending a few minutes reading this article include:

  • Experienced company counsel for whom M&A is not a core skill. A prime example of this group is business area counsel within a corporation whose business is contemplating an acquisition. Even if a company is a sophisticated player in the M&A world, the antitrust concerns in any individual transaction may involve a business area whose counsel does not have experience in the antitrust aspects of the M&A process.
  • In-house M&A counsel who lack significant antitrust M&A experience. Junior in-house M&A counsel often join a company after spending time as a corporate M&A associate at a major law firm. In their role as corporate associates, these attorneys generally had limited or no hands-on responsibility for addressing the antitrust issues in a transaction, other than documenting the antitrust efforts provisions in a merger agreement. The antitrust issues typically were handled by the competition law experts within their firms. In their new role as in-house M&A counsel, these attorneys may immediately take on responsibilities for managing the antitrust process for their transactions, and they need to know the landscape on which they are operating.
  • Corporate development personnel. Corporate development professionals are obviously key in the M&A process. Over time, if they are involved in transactions raising significant antitrust issues, these professionals likely become familiar with some of the key antitrust principles as they arise in the context of specific transactions. New members of the team do not come to the team with that understanding, yet what they do can be very important to the success of the antitrust campaign. Even experienced personnel may have had limited exposure, focusing on the issues key to the transactions they have handled rather than obtaining a broad exposure to antitrust principles.

This article provides some high level insights to key substantive issues in the antitrust clearance process.

What is the Antitrust M&A Playbook?

One way I think about an antitrust M&A campaign, and explain it to people unfamiliar with the process, is to analogize to a football team's game plan. A football team needs to have an offensive playbook. This playbook lays out the different plays that the offense can run to advance the ball down the field. This playbook will include running plays, passing plays, and trick plays designed to capitalize on the strengths of the team's players. The team will practice these plays over and over so they can run them if they need to in a game.

Having mastered these plays, the coaches then have to decide which plays to run in any given game, which can vary depending upon the strengths of the opposing team. One opponent may be very good at stopping the inside run, so our team's game plan will focus on passing. Another team may be strong in pass defense, so our team will rely heavily on the running plays in its playbook. The coaches are responsible for devising the offensive game plan most likely to win the game based upon an impartial assessment of the strengths and weaknesses of both their own squad and the opposing team.

We can think about the antitrust M&A process in similar terms. The antitrust M&A playbook is known. All companies use the same playbook, as do the government investigators. It is not a secret, and it is even on the internet. We are talking about the Horizontal Merger Guidelines. We have to use that playbook—the Horizontal Merger Guidelines—to develop the game plan to advance the transaction towards the ultimate goal of regulatory clearance.

We design the M&A game plan around the facts, which include those that are known and those that are reasonably anticipated to be provable in the course of an investigation. The lead antitrust lawyers act like the coaches in this game. As we size up a deal, we obtain high level facts that allow us to evaluate what "plays" are likely to succeed in this game, and we then devise the strategy that focuses on those plays that are likely to win the game. We may decide that the merging parties who appear to be in the same market really do not compete much against each other. In that case, we would design a game plan to show the companies' products are in different relevant markets. In another case, the parties may compete directly, but there are enough other firms to prevent any adverse competitive effects from a deal. We would then devise a game plan around proving up the existence of those other competitors.

Timing and advanced preparation are critical. The game plan needs to be developed before a company engages with the government regulators on a transaction. No football coach would enter a game without knowing before the first snap what the game plan is. Likewise, it is critically important to develop the antitrust M&A game plan at the outset, because it will guide everything we do during the course of our campaign. It could influence what the parties are willing to sign up to in the antitrust efforts provisions of their merger agreement. The game plan can generate themes that we will use in presenting the transaction to the regulators, and all of the advocacy that is submitted to the government should be consistent with those themes. It is very helpful if those themes are consistent with the way in which the transaction is presented during the approval process within the company.

Last, in some cases, after we size up the facts that are likely to be developed in an investigation, we may conclude that there is no good play to run given those facts. It is a game that cannot reasonably be won. In that case we have to advise the client that we are not likely to win, and there is a high probability that deal will be blocked (or a significant divestiture required).

Once the antitrust coaches have devised that game plan, then it becomes a "simple" exercise of doing the work. One football idiom is that once the plays are run, then it is all about blocking and tackling. In football, that can be the seemingly simple, but hard and unglamorous job of an offensive lineman blocking his defender in the right direction to open the hole that allows the back to run for a score.

In the antitrust M&A campaign, the "blocking and tackling" is the hard work of developing the evidence—the facts—that allow the play you decided to run to succeed. This can involve having your team members do the hard work needed to execute the game plan, such as: obtaining, analyzing, selecting and presenting documents to support your arguments; making sure customers understand the benefits of a deal so they will not have concerns if contacted by the government; developing customer declarations or affidavits; having the economists analyze pricing and other transactional data to support the arguments; having company personnel thoroughly prepared to present the facts to the regulators in interviews or meetings; making sure witnesses are prepared if they are deposed. All of that work is critically important and cannot be overlooked, but it is beyond the scope of this paper, which is focused on developing the game plan itself.

This work of developing the game plan should be done by experienced antitrust counsel, who will work collaboratively with the in-house team and the corporate development team in that process. I hope that through this article those team members will have a solid baseline understanding of some of the key plays we run in evaluating and defending antitrust cases.

The Offensive Game Plan: Deciding Which Plays to Run

Experienced antitrust counsel who has handled dozens, scores or even hundreds of deals can very quickly size up which plays are likely to work in a given case. Some of the most important plays in the book are summarized in the sections that follow. A few preliminary notes are in order, though.

First, sometimes plays can be run in combination, so you can run multiple plays in a given case. That said, the arguments cannot be inconsistent with each other, or rely on facts that point in opposite directions. Credibility goes along way with the agency, and inconsistent or unsupported arguments can damage credibility. Second, sometimes "audibles" are needed, just like in football. In some cases the facts will develop differently than what was anticipated at the outset, and that may lead us to change the plays that we planned to run. That is fine, and we need to maintain that flexibility of assessing strategy in light of the facts as the case develops.

Key Plays to Consider in the Game Plan

  • The parties' products are in different markets and do not compete against each other. This can be the simplest and most fruitful play to run if the facts will support it. Experienced antitrust counsel can evaluate product and geographic markets in the way the regulators are likely to evaluate them. Antitrust market definition does not necessarily equate to how a particular business defines markets in its business documents. Materials that have been prepared in the ordinary course already exist, and cannot be altered. However, the corporate development teams developing materials for the purpose of evaluating a deal can consider a more nuanced approach, and do not need to simply adopt the language or conventions of business analyses prepared for a different purpose.
  • The parties' products compete, but there are a lot of competitors and the parties have low market shares. This is another easy play to run provided the facts support it. Frequently the business team's view of the competitive landscape is different from how the regulators are likely to view the situation. Thus, it is important that the in-house and corporate teams have a basic understanding of some of the factors that can lead the regulators to conclude that there is too much concentration (i.e., few competitors).For example, if there are many competitors but the two merging firms have high combined shares, or if they are particularly close competitors even for a given class of customers, the regulators may well have concerns.

    This latter point is particularly important. The regulators are very focused on "price discrimination" markets which can be defined around specific classes of customers who have more limited supply options. For example, in a merger of cement companies, Company A and Company B may have plants near Philadelphia, where there is one other supplier, Company C. Those plants may compete against plants located near New York for sales throughout much of New Jersey. Company A and Company B have market shares of 15% each in an area that includes Philadelphia and New Jersey, which would not appear to create a competitive concern.

    However, if customers in Philadelphia cannot realistically turn to suppliers near New York, then the regulators will view the sales of cement to customers in the Philadelphia area to be the relevant market. Since Company A and Company B have only one competitor in the Philadelphia area, the regulators are likely to challenge that transaction. This may not be an intuitive result, and may not comport with how the business defines its markets, but it is the job of the antitrust coach to identify these situations as early as possible so the game plan can take the unique facts into consideration.
  • The parties are not close substitutes, even if they are in the same "market". Sometimes the market definition questions can be very close calls, but are not determinative of the outcome in any event. Many companies sell differentiated products rather than commodities. If a transaction will combine two products that may be in the same market, the transaction still is unlikely to create a competitive concern if the products each compete most directly against products other than those of the merger partner. Thus, even if there is some level of competition between the merging parties products, it may be possible to prevail by demonstrating a lack of close competition between the products.
  • The parties' high market shares are not reflective of current competitive dynamics. In some cases, market share data can be highly misleading and not reflect the likely competitive impact of a transaction. In one case on which I worked, we were brought in to evaluate the combination of two companies that had what appeared to be a combined ninety percent market share. At first blush, it appeared to be a transaction that would be challenged. When we looked more closely, though, that market share was based upon ongoing revenues from an installed base of customers that paid annual subscription fees to the companies.

    In most cases, the competition to win those contracts had taken place many years earlier, and most customers had not considered their competitive options since that contract award. When we looked at the competitive bids that had taken place for the two years prior to the planned combination, we were able to show that the merging firms' shares of wins were much lower than that ninety percent "installed base" market share. The merging parties most often lost to companies other than each other on these recent competitive bids. The ninety percent installed base share was not relevant to evaluating the competitive strengths of companies competing for the current and future contract awards, which was the relevant competition issue. The DOJ ultimately cleared that combination which looked impossible at the outset.
  • A party's past success overstates its competitive position going forward because of limited resources. This is the General Dynamics defense, named after a Supreme Court case. In some cases a company will have a strong position, but it has limited ability to compete going forward because it lacks capacity to compete. In General Dynamics, for example, a company had a high share of coal sales, but all of its coal reserves were committed under existing contracts so it could not compete for any new coal supply bids. The transaction was allowed to proceed even though it resulted in a company with a very high share of current sales because one of the companies would have no competitive significance looking forward.
  • Entry is easy. Even if a transaction combines two of few suppliers of a product or service, the combination will not adversely impact competition if there are other firms that could readily provide that service if the companies combined and tried to raise prices. The agencies have a high standard for evaluating entry arguments and will not credit entry unless it is timely, likely and sufficient in scale to prevent any anticompetitive effects. The most important source of facts on this issue will be the potential entrants, and the outcome of the entry analysis likely will rise or fall on the facts provided by those companies.

    Thus, broad statements offered by the merging parties to show that certain companies have the capability to enter or have entered in other geographies or closely related products likely is not sufficient. An entry defense cannot be abstract, but instead needs to be factually supported, in effect demonstrating which company (or companies) would enter if prices rose by a very small amount, that it could do so quickly and would be accepted by customers, and that the new supplier's presence would quickly restore prices to pre-merger competitive levels. The lack of prior entry into a market can also undermine an entry defense if that shows that firms offered up as being poised to enter have not done so even though the market in question has been concentrated.

The "Hail Mary" Plays That Seldom Work

In a football game, sometimes a team faces a desperate situation and has to run a high risk play that is not likely to succeed, but is its best option. At the end of the game with time running out, a team may simply have its receivers run to the end zone and lob the ball down hoping one of the receivers will catch it among a gang of defenders. This "hail mary" play is seldom successful, and a team will very infrequently run the play. However, it is in the playbook to be called upon in special circumstances. There are some "hail mary" plays in the antitrust playbook as well.

  • Failing firm / failing division. This is a legal defense to an otherwise anticompetitive merger or acquisition, but it is a very difficult test to meet and very seldom succeeds. The agencies require that the failing firm or assets would be unable to meet its financial obligations in the near future and could not be reorganized in bankruptcy. In addition, prior to crediting the defense, the agency requires that the failing business be "shopped" to alternative buyers who would not raise competitive problems, and that the seller not receive reasonable alternative offers from other buyers who would keep the business operating in the marketplace.
  • Power buyers will prevent competitive harm. The agencies will not assume that just because a buyer is large that it can protect itself from an anticompetitive price increase resulting from a merger or acquisition. There may be room for arguments based on power buyers, but those are more likely to be secondary arguments or tertiary arguments.
  • Efficiencies. It is important for merging companies to have a procompetitive angle to their transaction, and showing that the transaction is motivated by a desire to achieve efficiencies supports those arguments. However, efficiencies are more likely to be a story or theme for a transaction rather than being a likely defense to an otherwise anticompetitive transaction. The agencies impose a very high burden of showing that any claimed efficiencies are not achievable without the transaction, and are specific and verifiable, rather than vague or speculative claims.

    • The efficiencies can save an otherwise problematic transaction only if the claimed efficiencies meet those thresholds and if those efficiencies can be shown to offset any potential anticompetitive effects. Here, the agencies will look for the efficiencies to be passed through to, and benefit, customers. Given these high burdens, efficiencies are likely to be more important in framing a transaction for the regulators and customers than they are in defending what would be an otherwise anticompetitive transaction. Nevertheless, they are an important element of the overall process.

Special Teams: Remedies

While the vast majority of the plays in a football game involve one team's offense running plays against the other's defense, there are a handful of plays each game involving the kicking or punting of the football—a "special teams" play. These plays, while few in number, can be pivotal to the outcome of the contest, like the last second field goal to win the game. Likewise, in the antitrust M&A process, there are some ancillary aspects of the substantive review process that are important to keep in mind.

In many transactions the competitive concerns can be isolated to a single product area, or a few product areas. When the parties are willing to remedy the competitive concern through an isolated divestiture or other remedy, the overall transaction can proceed while the area of concern is fixed through the remedy. There are a few principles to keep in mind as in-house counsel and corporate developers consider transactions where some form of remedy may be required.

  • One small competitive problem will hold up a large transaction. If the government determines there is a competitive problem in one product market, that issue will generally prevent the entire transaction from closing. There is no concept of proportionality here. Parties should assume that any area deemed to be a problem will required a remedy, such as a divestiture, to allow the transaction to proceed.
  • Conduct remedies are unlikely to be successful to resolve a competition issue from a combination of competitors. In general, the agencies prefer to preserve competition through structural remedies that divest one party's products to an independent competitor. Conduct remedies, by which a merging company commits to alter its behavior going forward, are unlikely to satisfy the regulators. For example, a party may be willing to agree not to raise its prices for several years after completing a transaction in order to get the deal through the agency review process. The government is not likely to accept such an offer, which will require ongoing monitoring, and also may not preserve all facets of competition, such as innovation or marketing competition.
  • The agencies like clean, structural remedies without ongoing entanglements. Parties will sometimes argue for creative solutions to resolve a competitive concern. For example, rather than divesting production assets, parties might prefer to divest the brand or product line, and enter into a commercial arrangement such as a supply agreement requiring them to support the divestiture buyer. That type of arrangement may be perfectly reasonable commercially, but it is not likely to work in the context of a divestiture required by an antitrust agency. The agencies generally insist on clean divestitures so the buyer has all of the assets needed for it to compete in the market independently of the merging parties, except perhaps for a very short transition period.
  • The fundamental question is whether the divestiture buyer will use the assets to compete as effectively as their pre-transaction owner did. The government will require the buyer to provide and support its business plan for the operation of the acquired assets. Since the assets will generally be acquired at a low price, a divestiture buyer may have a business case that "closes" even if the divested business operates on a smaller scale, or less effectively, than it did premerger. While that may make economic sense for the buyer, it does not accomplish the remedial goal of the divestiture, and will not satisfy the regulators. It is critically important to bring a strong buyer to the government who can demonstrate its ability to operate the assets as or more effectively than were prior to the merger. Of course, it is also important that a divestiture to a buyer will not create its own competitive problem. Divesting assets to a buyer that is already a competitor in a concentrated market is not likely to satisfy the regulators.
  • "Buyer up front" is increasingly required. The government wants to be sure that a divestiture will be effective. A "failed divestiture" that does not protect competition is embarrassing for the government, and so the regulators are cautious in evaluating divestitures to minimize the chances of failure. One way to increase the likelihood of success is to require the divesting party to reach an agreement with a buyer that the government can vet prior to allowing a transaction to proceed—a so-called "buyer up front."

    That buyer is then specified in the consent order resolving the antitrust review of the primary transaction, and the order will generally require the merging parties to divest the specified business to the divestiture buyer within a few days of closing the primary transaction. Having a buyer up front allows the government to be sure that the package of assets that the seller proposes to divest is sufficient to maintain competition. If the potential buyer indicates that additional assets need to be included in the group of divestiture assets in order for the business to continue without interruption, the government can ensure that the consent order includes those assets.

    This process also allows the government to ensure that there are strong, credible buyers who are eager to operate the divested business before the main transaction is completed. If there are no such buyers, then this may alter the government's willingness to allow the main transaction to close. A buyer up front is not always required, as some consent orders will allow a period of time (such as 60 or 90 days) post-closing in order for a buyer to be identified and the divestiture to be completed. However, increasingly, those post-closing divestiture scenarios are limited to situations in which the government has had significant experience in similar divestitures so it is confident it can identify the appropriate package of assets and that acceptable buyers will be available.

    For example, the government has overseen many divestitures of construction aggregate (crushed stone) assets, and therefore has allowed transactions to close with "hold separate " agreements that identify the assets to be divested and specify a several month period in which to complete the divestiture. From a planning perspective, however, a business generally should assume that the government will require a buyer up front. Timing to find an appropriate buyer, negotiate an agreement and vet the buyer and the divestiture agreement through the government regulators needs to be built in to the transaction planning process.

Conclusion

There is a lot of room for creative advocacy by companies and their counsel in the antitrust M&A process, but that creativity generally involves refining and proving up arguments that are based on a fairly standard playbook—the Horizontal Merger Guidelines. Every transaction should start with a candid assessment of the known and reasonably anticipated facts to shape the game plan that will be used to achieve victory. The work on these projects should be directed by counsel to maintain any applicable privileges, so in most companies in-house counsel will be a key resource and bridge between outside counsel and the business. The Corporate Development personnel also will be key players in this process.

Originally published by Deal Lawyers.

M&A Antitrust Playbook for In-House Counsel

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.