2 Antitrust M&A Highlights The government doesn’t always win Watch the deals that are not challenged Relevant market allegations continue to be very narrow Unilateral effects cases require closest substitutes, not just close substitutes Customer testimony has its limits Flexibility with remedies may increase, but parties must honor their commitments
3 Antitrust M&A Highlights Ninth Circuit flashes warning light for joint ventures Fines for Hart-Scott-Rodino violations are rising but so are reporting thresholds Policymaking continues into the second term; more changes ahead Senior personnel have changed and others may soon change. Will enforcement change?
4 The Government Doesn’t Always Win In three significant decisions, the government lost merger challenges: –United States, et al. v. Oracle Corporation, 331 F. Supp. 2d 1098 (N.D. Cal. 2004) (rejecting DOJ’s market definition, competitive effects analysis and reliance on customer testimony) –FTC v. Arch Coal, Inc., 2004 U.S. Dist. Lexis 15996 (D.D.C. Aug. 16, 2004) (rejecting FTC’s “novel” theory of “tacit coordination” to restrict output) –United States, et al. v. Dairy Farmers of America and Southern Belle Dairy, Civ. No. 03-206 (E.D. KY Aug. 31, 2004) (ownership of 50% non-voting interest alone is insufficient to conclude that a reduction in competition is likely) (appeal pending)
5 But Overall, the Government Wins More Than They Lose To start 2005, the government did win one, albeit in an administrative action with the Federal Trade Commission sitting in review of its own case –In the matter of Chicago Bridge & Iron CompanyIn the matter of Chicago Bridge & Iron Company In the aggregate, the federal agencies are batting better than.500 in federal litigated merger cases since 2000 (5 years) –DOJ prevailed in two of four litigated merger cases –FTC prevailed in three of four litigated merger cases
6 Watch the Deals that are Not Challenged DOJ announced a new policy of attempting to explain the decision not to challenge certain dealspolicy The DOJ policy tracks the FTC practice begun in 2001 with the AmeriSource/Bergen transactionAmeriSource/Bergen These statements provide valuable insight into the Agencies’ thought processes
7 Agency Explanations of Decisions Not to Challenge Transactions in 2004 DOJ Explanations Anthem/Wellpoint Health Movielink (VOD JV) UnitedHealth Group/Oxford Arch Wireless/Metrocall FTC Explanations Genzyme/Novazyme (with dissent and statement)dissent statement Caremark/Advance PCS RJR/Brown & Williamson RJR/Brown & Williamson * (with concurrence)concurrence Bertelsmann/Sony JV Bertelsmann/Sony JV (concurrence)concurrence Victory Memorial/Provena (with dissent)dissent *Notable for its detailed application of coordinated and unilateral effects analysis
8 Relevant Market Allegations Continue To Be Very Narrow Arch Coal – 8800 Btu SPRB coal, excluding 8400 Btu SPRB coal, is a relevant market Southern Belle – school milk in each school district is a relevant market Evanston Hospital Northwestern Healthcare Evanston Hospital Northwestern Healthcare – northeast Cook County and southeast Lake County comprise a geographic market for hospital merger analysis Connor Bros. Connor Bros. – Sardine snacks, as distinguished from premium sardines and ethnic sardines, constitute a relevant product market
9 Unilateral Effects Cases Require Closest, Not Just Close Substitutes Chicago Bridge – “This case involves the acquisition of a company by its closest rival in four relevant markets;” emphasis on closest competitor repeated throughout the opinion.Chicago Bridge Oracle - “Plaintiff [in unilateral effects case] must demonstrate that merging parties would enjoy a post-merger monopoly or dominant position, at least in a ‘localized competition’ space;” must be a gap to competing products in the chain of substitution.
10 Unilateral Effects Cases Require Closest, Not Just Close Substitutes RJR/B&W - Unilateral effects requires “uniquely close competitors.” “There is no market in which, and no brands for which, [B&W] and RJR are each other’s closest competitors.”RJR/B&W Cingular/AT&T Wireless – parties “are likely closer substitutes for each other than the other... providers in the relevant geographic markets.”Cingular/AT&T Wireless Connor Bros. – acquired company described as “main competitor” to acquiring company; other competitors describes as “fringe” players.Connor Bros.
11 Customer Testimony Has Its Limits Oracle – rejecting opinion testimony of customers relating to product market definition and competitive effects as “largely their preferences;” finds that “unsubstantiated customer apprehensions do not substitute for hard evidence” regarding the costs of alternatives Arch Coal – rejecting testimony regarding customer preferences in favor of testimony regarding the ability of customers to substitute and historical patterns of substitution
12 Flexibility With Remedies May Increase, But Parties Must Honor Their Commitments Most merger enforcement is still by consent decree Government expects you to follow through on your commitment; failure may result in fines including reimbursement to the government of the cost of investigating the violation –Republic Services $1.5 million fineRepublic Services
13 Flexibility With Remedies May Increase, But Parties Must Honor Their Commitments. Agencies will consider modification of relief where necessary –Alcan/Pechiney (DOJ)Alcan/Pechiney –Time Warner/Liberty (FTC)Time Warner/Liberty But range of relief acceptable to the agencies is constrained by FTC and DOJ policy statementsFTCDOJ
14 Ninth Circuit Flashes Warning Light For Joint Ventures Pricing by joint venture may be deemed per se unlawful price fixing by venture’s parents when parents “fail to demonstrate a sufficient relationship between the price fixing scheme and furthering the legitimate aims of the venture.” –Appearance of holding out the parents as independent entities post formation appears to have been a factor Dagher v. Saudi Refining Inc., 369 F. 3d 1100 (9 th Cir. 2004) (motion for rehearing pending)
15 Fines for Hart-Scott-Rodino Violations are Rising But So are Reporting Thresholds Misuse of the investment exemption remains the focus of enforcement actions –Smithfield Foods - $2 million civil penalty for twice violating HSR in connection with purchases of IBP stockSmithfield Foods –John Hancock - $1 million civil penalty for violating HSR in connection with purchases of ManulifeJohn Hancock –Bill Gates - $800,000 civil penalty for violating HSR in connection with purchases of ICOS, a company for which he was a directorBill Gates Good news for filing parties is that statutory thresholds are now indexed to inflation and have been raised 6.2% for 2005
16 Policymaking Continues; More Changes Ahead DOJ released new policy of explaining, in certain cases, its decision not to challenge a mergerpolicy DOJ released the Antitrust Division Policy Guide to Merger Remedies, which was largely consistent with the 2003 Statement of the FTC’s Bureau of Competition on Negotiating Merger RemediesAntitrust Division Policy Guide to Merger RemediesNegotiating Merger Remedies
17 Policymaking Continues; More Changes Ahead FTC announced new rules that harmonize (but not equalize) the treatment of corporate and non- corporate entities under Hart-Scott-Rodinonew rules The Antitrust Modernization Commission announced 25 issues for study, including eight related to mergersAntitrust Modernization Commissionissues for study The EC issued new Horizontal Merger Guidelines indicating greater convergence with U.S. guidelinesHorizontal Merger Guidelines
18 Policymaking Continues; More Changes Ahead DOJ and FTC announced intention to create a commentary on the Horizontal Merger Guidelines commentary Horizontal Merger Guidelines FTC modified its model second request to create a special version for retail industry mergers; suggesting that additional industry-specific models would be forthcoming but none yetmodel second requestretail industry mergers suggest
19 New Personnel, New Direction? DOJ Antitrust Division Tom Barnett, formerly of Covington & Burling, replaces Deborah Majoras as Deputy Assistant Attorney General David Higbee is added as Chief of Staff and Deputy Assistant Attorney General Ken Heyer is named on an acting basis to replace David Sibley as Deputy Assistant Attorney General for Economics Hew Pate has now held the AAG job for over 2 years; how long will he stay?
20 New Personnel, New Direction? National Association of Attorneys General Mark Bennett (R-HI) takes over as Chair of NAAG’s Antitrust Committee Elliott Spitzer (D-NY) becomes Vice Chair Trish Connor from the Florida Attorney General’s Office remains chair of NAAG’s Multistate Task Force
21 New Personnel, New Direction? Federal Trade Commission Tim Muris has stepped down as FTC Chairman and has been replaced by Deborah Majoras –Muris was a large force on the Commission and on Commission action; explanations of decisions to not challenge mergers clearly bear his mark –Majoras has promised continuity and appears ideologically compatible with Muris Jon Leibowitz replaces Mozelle Thompson Commission remains majority controlled by Republican appointees
22 New Personnel, New Direction? Federal Trade Commission But Chicago Bridge strikes a very different toneChicago Bridge –104 page opinion by Commissioner Swindle, long regarded as a conservative –Heavy emphasis on the structural presumption; strength of the presumption regarded as a function of concentration –Minimal discussion of competitive effects and market circumstances that give rise to adverse competitive effects; closer to a 1984 Merger Guidelines analysis
23 New Personnel, New Direction? Federal Trade Commission Is Chicago Bridge a new direction or simply a very careful effort to avoid creating precedent that could be used against the Commission in future deals?Chicago Bridge –We will be watching this closely and will let you know!
24 For more information, please contact: Paul T. Denis Dechert LLP Washington, DC (202) 261-3430 Paul.Denis@Dechert.com Michael D. Farber Dechert LLP Washington, DC (202) 261-3438 Michael.Farber@Dechert.com www.dechert.com 282110