Successful executives understand that closing a merger deal in a concentrated market can be highly complex. The added complication in these deals is their potential to receive an additional antitrust inquiry for information, called a “second request.” In the United States, this kind of inquiry leads to an altered deal more than 80% of the time. What should CFOs and their fellow C-suite executives do in these situations, which occurred for more than 10% of deals valued at more than $1b in 2017? How do they prepare in case they arise?
Market consolidation is accelerating in several industries and executives are increasingly using mergers and acquisitions to drive growth while maintaining competitiveness in the age of digital disruption.
In this era of mega-deals, executives looking to increase market share through M&A can understand how a transaction may be viewed by the regulators. In the United States, transactions with a value exceeding $90 million must be reported to regulatory authorities for a 30-day review process.
If the initial review reveals that the deal could raise market concentration concerns, the agencies may extend the review through a second request, which can be challenging to navigate if business leaders are not prepared. In some cases, deals have been delayed or abandoned, while others proceeded with a changed deal perimeter and mandatory divestitures.
Once a deal is signed, parties must go through the Hart-Scott-Rodino (HSR) filing process with U.S. regulators. The review outcome can go a myriad of ways. In approximately 90% of deals, the transaction is cleared after the initial 30-day review. However, when a transaction is flagged for a second request, the buyer and seller may be faced with significant challenges.
The first is that addressing a regulator inquiry can delay the deal timeline by up to 18 months. Activities during this period include addressing the data request from the second request and follow-ups (data collection); assessing the affected countries; analyzing the government’s market definition; and, finally, certifying compliance.
Second, executing a mandated divestiture may lead to “cherry-picking” of assets or product lines, which can create various complexities for the new business. According to a Federal Trade Commission study, businesses partially divested in response to a regulator’s scrutiny significantly underperformed businesses divested as a whole, post-separation.
Third, potential buyers can see the mandated divestitures as “a fire sale,” so sellers may need to settle for a less-than-optimal bid to close the broader deal.
Fourth, there is significant stakeholder uncertainty. Key employees who are aware of the potential divestiture may leave or become disengaged. Customers and suppliers may be less willing to negotiate until they find out what happens with the deal.
What can business leaders do if they find themselves in a deal affected by antitrust scrutiny? A few key steps can help maintain the attractiveness of the deal.
Align with the antitrust regulator on the correct market definition and the scope of the second request. Business leaders should seek out an independent analysis of how the potential deal could impact competition. They may wish to then use that analysis to present an informed position to regulators. Working with experienced advisers to liaise with regulators can significantly decrease the amount of data and work needed to comply with the second request.
Initiate dynamic scenario planning at the operational execution stage. It is typically unclear which assets may be affected because of regulatory review and what kind of buyer (financial sponsor or corporate) could acquire those assets. It is important for an organization to plan the separation across multiple scenarios, factoring in the unique complexities of each asset and buyer pool, so that management is ready to execute as soon as it hears the remediation plan. This includes preparing or refining the value story for potential divestitures to increase sale proceeds.
Establish clear expectations and channels of communication with employees. Antitrust scrutiny can create uncertainty. Therefore it’s important to regularly communicate with employees. A variety of tools, including executive town halls, employee portals, and one-on-one discussions can be used to communicate with employees. Additionally, focus groups and employee surveys can be deployed to assess the impact. To the extent possible, employees may feel that they understand the review process and the plans for the organization’s future state. Key employees can be identified for a formal retention program, contingent on meeting important business objectives. Employee retention programs are often used in transactions to deal with uncertainty, and few transactions create as much uncertainty as one impacted by regulatory review.
Establish clear expectations and channels of communications with customers and suppliers. A drawn-out regulatory review also creates significant uncertainty with key customers and suppliers. As with employees, frequent communication can help to remove the perception of risk with customers and suppliers. A detailed communication strategy may be important for senior leadership involvement with frequent customer and supplier touchpoints. Customer and supplier risk models may determine particularly high-risk suppliers and customers. A risk reduction strategy can then include commercial and contractual protections to reduce risk.
Know the pain points, pick your battles, and prioritize accordingly. Preemptive efforts to minimize antitrust impact on deals and planning for possible downstream remediation processes resulting from regulatory reviews can become standard practice for M&A teams. The key to navigating through uncertainty is for steering committee members to recognize the importance of involving the right internal and external resources at the appropriate times to assess the benefits and risks of the contemplated transaction.
Jennifer Pitts is a principal in Ernst & Young’s transaction advisory services practice. Mark Crumrine is a manager in Ernst & Young’s transaction advisory services M&A strategy and operations practice. This article is adapted from the new EY Transactions Advisory Services report, Preserving Deal Objectives While Navigating an Antitrust Review, by Jennifer Pitts and Mark Crumrine with contributions from Giri Varadarajan, Sonal Bhatia, and Yas Imanishi.