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Vertical Deals Move Forward

Antitrust regulators seem more receptive to mergers and joint ventures made along the supply chain, experts say.
Sarah Johnson, CFO.com | US
March 28, 2011

When the Department of Justice blessed the joint venture earlier this year between Comcast and General Electric — giving the cable company control over a major television station — the approval came with some caveats. Among them: Comcast cannot withhold NBC programming from online video-service providers, even if they compete with the cable giant's offerings.

The restrictions freed the two companies to complete their deal, more than a year after they announced the agreement in December 2009. Considered a vertical transaction (when companies along the same supply chain combine, such as a manufacturer acquiring a distributor), the Comcast-GE deal is evidence of the Obama Administration's apparent willingness to restructure rather than fight these types of partnerships, which raise antitrust concerns, according to antitrust lawyers.

"There is a greater openness to using creative and to some degree regulatory behavioral remedies to solve problems," says David Meyer, a partner at law firm Morrison Foerster who formerly worked in the DoJ's antitrust division. For example, the vertical merger of Live Nation and Ticketmaster Entertainment was approved in January 2010 after Ticketmaster agreed to divest some assets and license its ticketing software, allaying worries that the original merger terms would have resulted in higher ticket prices.

In general, federal agencies appear to be paying more attention to vertical transactions over anticompetitive concerns, says Meyer. In particular, antitrust enforcers see red flags when a merger between two companies along the same supply chain could possibly affect a competitor's ability to access a key product, he adds.

One way to track this increase is through so-called second requests, when the DoJ and Federal Trade Commission ask for more information about a transaction. The agencies issued 46 second requests between October 2009 and September 2010, according to their latest joint report, issued last month. That represents 4.1% of the 1,166 transactions submitted to the agencies during their 2010 fiscal year (all types of M&A deals, not just vertical ones). By contrast, less than 3% of transactions received second requests between 2004 and 2008.

Although the risk of incurring one is small, the probes are costly and can delay a deal by four to eight months, says Joel Grosberg, a partner at McDermott Will & Emery, who defends these deals before the FTC and DoJ.

Moreover, after all the negotiations and hand-wringing to get a merger to the announcement phase, companies want to avoid questioning by the government. "It's always desirable to anticipate the concerns and be prepared to address them up front," says Meyer.

New research suggests that companies look up and down their supply chain for possible acquisitions as a risk-management tool, not just as a way to expand the business. The study, conducted by finance professors Jon Garfinkel of the University of Iowa and Kristine Hankins of the University of Kentucky, looked at so-called merger waves between 1980 and 2006, when merger activity was high for certain industries following an economic shock. The researchers noticed that companies reduced their cash-flow volatility by making vertical integrations during these waves.

For that reason, Garfinkel believes, federal agencies should keep the advantages of vertical mergers in mind when raising concerns. The transactions can help a company "manage risk when cash flows are more volatile," he says. "If you don't [let companies] manage that risk well, you are making it difficult for firms to plan effectively, and you are potentially making it difficult for them to raise capital to invest and improve their productivity and perhaps even overall economic productivity."




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