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.
US 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. Antitrust officials are also in court this week to block a merger between Staples and Office Depot.
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.
At the Justice Department, the antitrust division led by Bill Baer is emphasising 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 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 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. 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.
Deals now facing review include tie-ups of some industries’ biggest rivals. There’s Anheuser-Busch InBev’s planned takeover of SABMiller Plc, and Walgreens Boots Alliance’s deal for Rite Aid Corp, a marriage of the No. 1 and No. 3 pharmacy chains in the US Also in the works are mergers that would turn five of the biggest US 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’ proposed takeover of Office Depot, which would leave just one national office-supply retailer. The question now is whether the judge will agree. A skeptical US 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.”
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 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 US industries are considered highly concentrated, up from about 25% 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.
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 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.