Antitrust Management Of The Difficult Deal

For most mergers, acquisitions and joint ventures, antitrust/competition law is an important, but not deal-critical, element of the transaction. Apart from vetting the deal for antitrust issues, obtaining the necessary merger clearances, and ensuring that the parties do not "jump the gun" in the merger clearance process, the competition lawyer's role is a limited one. This all changes, however, where the transaction involves competitors – especially large competitors in a market with few rivals. In these situations, the competition lawyer's role becomes central – both in helping to negotiate the transaction and guiding the matter to consummation. This paper offers an outline of some of the key competition law considerations for general counsel, corporate counsel and deal managers to follow in negotiating and executing the competitively sensitive transaction – sometimes known as the "difficult deal".

1. THE BEGINNING – EARLY ANTITRUST/COMPETITION ANALYSIS OF THE TRANSACTION BEFORE IT IS NEGOTIATED

   Perhaps the most important thing to do in approaching a difficult deal is to engage competition counsel early in the process. Usually, competition law concerns can be identified and addressed early in the process before deal terms are negotiated, strategic analyses are prepared, and substantial commitments of time and money are made. The failure to engage competition experts early can result in missteps that may later complicate or derail the transaction. If possible, the following assignments should be completed by competition counsel before the deal documents are signed and the parties are committed.

   1. Is the Deal Doable, or do the Competition Issues Raise Serious Execution Risks?

      When direct competitors in concentrated markets merge or form joint ventures, there is a risk that antitrust/competition law authorities will seek to block the transaction. This is not a theoretical risk. In the last year US antitrust authorities have blocked or caused parties to abandon a number of prominent transactions such as ATT/T-Mobile, H&R Block/TaxACT, and NASDAQ-Intercontinental Exchange/NYSE Euronext. In Europe, deals involving Deutsche Börse/NYSE Euronext and Hutchison 3G Austria/Orange Austria have been blocked, abandoned or been the subject of extended review by competition authorities. In transactions that require clearance by competition authorities in multiple jurisdictions, the deal execution risk from competition law complications may increase materially because some, but not all, of the reviewing authorities may clear the transaction.

      Given these risks, competition counsel should be asked early in the process to analyse the transaction to determine in each pertinent jurisdiction whether it can clear the merger review process. A useful test to use in this review is whether counsel can identify a path to obtaining competition authority clearance that is supportable as a legal and factual matter and easy to articulate.

      In many cases, the transaction will not be easy or possible to defend and, in order to obtain competition authority clearance, it may be necessary to divest assets or agree to long-term restrictions on the activities of the merged entity. Counsel should identify these potential remedies early in the process and present them to management of the parties to determine if they are acceptable as a business matter. In this regard, it is important to note that competition law enforcers in different countries may insist on different remedies given the relevant facts and law in their jurisdictions. Accordingly, it should not be assumed that a "one size fits all" approach to remedies will work in obtaining clearance in all jurisdictions. A series of separate divestitures or other remedial measures may be required.

      It is also important to note that any material divestiture or conduct restraint will likely have an economic impact on the merged entity and may affect the purchase price or other consideration being paid as part of the transaction. Accordingly, the finance professionals and deal managers responsible for the transaction may wish to consider those financial implications in running their models for the merged entity. For obvious reasons, it is important that this be done before the parties agree on the consideration to be paid in the transaction.

   2. What Strategic Risks are Presented by the Merger Review?

      It can be the case that the intensity and excitement created during the negotiation of a large, strategic transaction make it difficult for the parties to analyse clinically and dispassionately the risks and rewards presented. This is especially the case when the negotiation is done under a tight deadline. In such an environment, where terms are being negotiated with lightning speed and due diligence is being conducted on an abbreviated and expedited basis, there may be little if any time for quiet reflection on the antitrust downside of the deal. These risks, however, can be quite real and need to be considered. They also may be very different for the acquiring and acquired parties.

      First, the time between signing and closing presents a risk to both parties to the transaction. A lengthy antitrust/competition review – especially if conducted in multiple jurisdictions – may result in a delay of many months, or even a year between signing and close. For both parties, such a lengthy review means far more than the expense of counsel, economists and other outside professionals. It means that for many members of senior and middle management, successfully navigating the merger review process and closing the transaction will become their number one priority. They are expected to rise to this challenge – which many have never faced before – while continuing to perform all of their routine duties in running the business. This is frequently impossible, and the reality for many firms is that they delay or lose their focus on strategic initiatives because their best and primary efforts are focused on transaction execution.

      Second, the pendency of the deal throws the staff of both companies into disarray. Mergers and acquisitions by competitors routinely result in reductions in the work force when "redundant" managers and other workers are terminated because their talents and services are no longer needed by the combined entity. Staffers and managers are acutely aware of their vulnerability and will frequently start looking for new positions immediately...