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A Matter of Trust

A look at the deals of 2002 suggests that regulators are listening to acquirers.
Roy Harris, CFO Magazine
January 1, 2003

As two straight years of dramatically lower deal-making threaten to stretch into three, silver linings are in short supply. Megadeals all but evaporated in 2002, with only 1 transaction topping $10 billion, compared with 8 the prior year. And 4 of last year's top 10 deals were really spin-offs of business lines.

Here's one bright spot to consider, though: for deals that are proposed, fewer run into the kind of antitrust obstacles that derail them completely.

The Department of Justice knocked out just two deals in 2002, including Hughes Electronics-EchoStar. And indeed, since June 2001, only five combinations have been squelched entirely by the DoJ, although two were biggies: UAL-US Airways and General Dynamics-Newport News. (Of course, GE-Honeywell fell victim to a European ruling that year— a rejection that was recalled uneasily in November when Pfizer's $58 billion purchase of Pharmacia was stalled by an EU request for more information.)

Perhaps more telling, the DoJ's tally of canceled deals came in September congressional testimony by outgoing antitrust chief Charles A. James, who spent more time discussing how the division's challenges often lead to remedies that allow deals to go through. Of 20 successful challenges during James's 15-month term, he said, 9 were resolved with "fix-it-first" restructurings and 6 with consent decrees.

While no one thinks the feds have gone soft on merger regulation, the dearth of deals actually scotched by America's antitrust cops does create speculation about why certain transactions make it through the gauntlet these days. Many merger-and-acquisition experts suggest that, for one thing, DoJ and Federal Trade Commission (FTC) staffers pay much more attention to the economic issues being faced by the industries that are involved in regulatory reviews. And the regulators' increased understanding may be improving the chances of deals being completed — if perhaps contingent on significant divestitures or other remedies to protect consumer interests.

Bill Sippel, a former government antitrust official in the Carter and Reagan Administrations, is one who sees "a greater willingness of the government to view the dynamics of particular industries." Specifically in cases where there is an excess capacity in the industry, "there's greater room for arguing that you have efficiencies from the merger of two firms," suggests Sippel, now with the Minneapolis law firm Oppenheimer, Wolff, & Donnelly.

Government staffers certainly weren't impressed with the UAL-US Airways overcapacity arguments, too, which were overridden by anticompetition concerns. The airlines' plight, of course, worsened after that particular deal was blocked — two months before the 9/11 terrorist attacks. Now, after more than a year of airline-industry depression, both carriers are operating under bankruptcy-court protection.

Were antitrust regulators to give economically challenged industries more of a break in 2003, it certainly wouldn't be the first time the bar was lowered to reflect special needs, says Sippel, pointing especially to "the steel industry in the 1980s, when deals went through that wouldn't have been permitted in earlier years."

While it is tempting to tie more-agreeable regulatory reviews to George W. Bush, the nation's first MBA President, experts see a trend evolving through both Democratic and Republican administrations during the past 25 years. And CFOs? They tend to give less credit to regulators for the improved regulatory environment — and more to corporate efforts to avert antitrust challenges.

Eliminating the "Horror"
The $2.7 billion combination of Chicago-based Dean Foods and Dallas-based Suiza Foods — actually completed at the tail end of 2001 — stands as a model of anticipating and preparing for regulatory challenges.

Wall Street expected trouble from the DoJ when the Suiza-Dean deal was announced. And indeed, says Dean executive vice president and CFO Barry A. Fromberg with a laugh, some antitrust staffers "probably were horrified" when they first heard the deal described as involving "the nation's two largest dairy processors."

Both companies did a tremendous amount of advance work on "the certainty of closing," says Fromberg, determining likely antitrust issues and the significance of each to the regulators. "You've got to start with the facts, and you go through the same analysis that the regulators are going to go through, so you can reach the same conclusions," he says. From previous acquisition experience, both Dean and Suiza knew the main government concern in their industry was reduced competition in local markets. Internally, the two companies forecasted that divestitures of six plants might be needed to ease regulators' concerns. In the end, the DoJ required the sale of nine plants in its fix-it-first approval of the deal.

Fromberg says it was key to "acknowledge up front that there were areas that were not going to work" and let the government know that the companies would make concessions. Anticipating antitrust concerns also "helped us get a jump on the information that was eventually requested," he notes. "These deals can drag on for years."

From the DoJ side, too, the Suiza-Dean merger was exemplary — though, not surprisingly, antitrust officials praised their own efforts for its success. In a talk last June, deputy assistant attorney general William J. Kolasky called the deal a good example "of how the division's lawyers and economists work together to protect the public interest."


Could UAL-US Airways Still Fly?
FTC commissioner Thomas B. Leary, in a speech titled "Efficiencies and Antitrust: A Story of Ongoing Evolution," recently described how industry economics now play a bigger part in the review of potential deals. There's "near-universal agreement that efficiencies are important" — a change in regulators' minds he described as "primarily driven by scholarship." And James's successor as antitrust chief, R. Hewitt Pate, said in a press interview that efficiencies are a "valid consideration in support of a merger," although he was skeptical about some improvements companies claim. "Particularly persuasive," said Pate, "are efficiencies that are likely to be passed through" to consumers.

Efficiency-based reviews, of course, require government antitrust staffers to develop expertise in individual sectors. Ben Buettell, managing director in the Chicago office of Houlihan Lokey Howard and Zukin, says this has happened in the food industry. Regulators still are tough on deals with anticompetitive elements, but they tend to attach "more conditions and requirements before passing on the deal," rather than simply oppose it.

In the defense industry, the DoJ raised 11th-hour questions in a proposed consent decree covering Northrop Grumman's purchase of TRW — the largest 2002 deal after Pfizer-Pharmacia. The concerns over a concentration of military sensors in the new company aren't likely to defeat the deal, though, just result in another remedy.

One test of how far regulators could conceivably go involves UAL and US Airways. Were they to propose a new combination as part of their bankruptcy plans, how could regulators permit a deal in 2003 that they blocked in 2001?

Boeing Co. CEO Philip Condit, whose company has a definite interest in the airline industry, has one idea: change some definitions. "I had a professor in business school who said the key to antitrust was defining the market," he says. While United and US Airways account for 23 percent of domestic traffic, the picture changes if competition is viewed globally, in a far-more-fragmented market, Condit notes. "I believe it is a global market."

Roy Harris is a senior editor at CFO.

M&A's Top 10 for 2000

In another U.S. off-year, a drug deal dominates. (Pfizer's announced purchase of Pharmacia is awaiting a November EU request for more information.)

*$ billions base equity price

Source: Mergerstat

Buyer
Seller
Unit Sold
Value*
Pfizer
Pharmacia
---
58.29
Northrop Grumman
TRW
---
7.65
Carlyle/ Welsh Carson Anderson
Qwest
QwestDex Publishing
7.10
Citigroup
Golden State
---
4.98
Blackstone Group
Northrop Grumman
TRW Auto
4.73
Anthem
Trigon Healthcare
---
3.61
AOL Time Warner
Comcast/ AT&T
Time Warner Entertainment
3.60
IBM
PwC
PwC Consulting
3.50
Guidant
Cook Group
---
3.00
Univision
Hispanic Broadcasting
---
2.96



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