VideoIn the months after fiber-optics giant JDS Uniphase Corp. agreed to acquire E-Tek Dynamics Inc. in a $15 billion merger last January, executives at the two companies had lengthy discussions with another interested party: lawyers from the antitrust division of the Department of Justice.
"Much of the time initially was taken up educating the Department of Justice in great detail about our markets and technologies," says Tony Muller, executive vice president and CFO at JDS Uniphase, based in San Jose, California. "They spoke with competitors, they learned very quickly, and then they formed their own judgments."
In the end, the Justice Department learned enough to conclude that the merger would create competitive problems in a pretty arcane area: the thin film filters that are crucial components of so-called wavelength division multiplexers. The combined company would control 80 percent of the world's production of such filters.
So the parties agreed to divest E-Tek's rights of first refusal to purchase thin film filters from certain vendors.
The episode is indicative of how U.S. antitrust regulators are plumbing every nook and cranny of proposed mergers in search of possible anticompetitive outcomes. The latest example: America Online Inc. could be forced to open its instant- messaging service to rivals as a condition for approval of its merger with Time Warner Inc. But more often than not, the remedy is a divestiture. Indeed, the number and size of divestitures have expanded notably since the Federal Trade Commission (FTC) issued a groundbreaking report in August 1999 that suggested companies were sabotaging the future prospects of agreed-to divestitures. In 2000 alone, more than a dozen major divestitures have been ironed out.
Amid all the antitrust clamor surrounding the marketing practices of Microsoft, the new tack on divestitures has gone largely unnoticed. But companies may have far more to learn from the consent decrees agreed to by such companies as JDS Uniphase, Fleet/BankBoston, and BP Amoco than they do from the ongoing Microsoft saga. Combined with the increasing activism of the European Union regulators, the new thinking on divestitures is affecting the way mergers, acquisitions, and other crucial transactions receive approval.
Meaningless Divestitures
To be sure, the new policies haven't stopped companies' rush down the wedding aisle. According to Thomson Financial Securities Data, in 1999 mergers worth $1.6 trillion were consummated, up from $625.4 billion in 1996. The number of Hart-Scott- Rodino premerger filings rose to 4,342 in 1999, from 2,617 in 1995. But many deals are now subject to a tough-minded posture that is a direct result of a study commissioned in the late 1990s by Bill Baer, then head of the FTC's Bureau of Competition. The study covered some 35 divestitures agreed to between 1990 and 1994. As the regulators sifted the data, it became clear that something was awry with the current approach to divestitures. "The divested assets didn't survive in the markets," says Baer, now a partner at Washington, D.C., law firm Arnold & Porter.
The FTC found that companies employed a variety of strategies that undermined the stated goal of divestitures. Firms sold off nonviable businesses or impaired assets. In some cases, the buyers that companies found were either not qualified or lacked industry experience. In a few instances, companies simply launched or started rival products after the divestiture. Worse still, in the FTC's eyes, the buyers of divested assets were frequently bound to the former owners as customers or suppliers. "There was a very strong correlation between failure and divestitures, where the buyer of the assets was somehow dependent on the company for know-how, intellectual property, and ongoing supply," says Baer.
Even as the study was being compiled, further evidence was emerging that divestitures didn't always work. When MCI Communication Corp. and WorldCom Inc. merged in 1997, they agreed to spin off some of their Internet backbone assets to Britain's Cable & Wireless. But in the months that followed, that business suffered. Cable & Wireless charged that MCI WorldCom had failed to transmit key employees and contracts in the deal. "They [the regulators] think they got their pocket picked on that one," says William Kovacic, professor of antitrust law at George Washington University Law School, in Washington, D.C.
Tougher Stance
After the study was released, both the FTC and the Justice Department began enforcing a tougher set of guidelines. (The two agencies divide antitrust matters between them, based on precedent and the strength of in-house expertise. The Justice Department takes cases involving airlines, aluminum, and radio, for example, while the FTC handles oil and pharmaceuticals.) In some instances, regulators have blocked deals, and in others they have placed the onus on companies to propose divestitures that meet their concerns.
The months since then have seen significant divestitures. In order to gain approval for their $16 billion merger, for example, Fleet Financial and BankBoston agreed to the largest divestiture in banking history--306 branch offices, with $13.2 billion in deposits in Massachusetts, New Hampshire, Rhode Island, and Connecticut. And when waste-
collection giants Allied Waste Industries Inc. and Republic Services got together last spring, they were required to sell off operations in 15 locations and change existing contracts in 14.
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