More than 37% of significant U.S. merger investigations resulted in an antitrust complaint or an abandoned transaction in the Biden administration's first year. That’s the highest observed since the Dechert law firm began tracking enforcement activity in 2011.
“These outcomes indicate that the vocal [Federal Trade Commission] and [Department of Justice] skepticism of merger remedies — which did not begin under the current administration — is reducing the number of deals that end in consent decrees,” according to Dechert’s report.
And if the policy signals emanating from the DOJ are any indication, some buyers and sellers in mega-mergers, as well as their deal teams and CFOs, will face snags in trying to close deals. They may also have proposed takeovers rejected.
“Merger remedies short of blocking a transaction too often miss the mark.” — Assistant U.S. Attorney General Jonathan Kanter
Comments by the DOJ’s antitrust chief suggest even fewer antitrust investigations than last year will be resolved through settlements rather than litigation.
"Merger remedies short of blocking a transaction too often miss the mark,” said Assistant Attorney General and Antitrust Chief Jonathan Kanter in a January speech to the New York State Bar. “Complex settlements, whether behavioral or structural, suffer from significant deficiencies."
Kanter has two problems with settlements.
One, settlements “do not move the law forward,” he said. Providing clarity to businesses “requires litigation that sets out the boundaries of the law as applied to current markets.”
Two, structural remedies like selling off assets, in Kanter’s thinking, have flaws.
Under existing guidelines, the DOJ favors structural remedies (divestitures of businesses or assets by the merging firms) over behavioral remedies (restraining the merged firm’s conduct or pricing authority).
In a November 2021 settlement, for example, S&P Global agreed to divest three of IHS Markit’s price reporting businesses to resolve concerns arising from their proposed $44 billion combination.
But those examples may get scarcer. Kanter doubts the utility of structural remedies, noting that “determining the contours of a remedy that carves up a business to maintain competition assumes we can capture with precision the contours of competition."
“We must give full weight to the benefits of preserving competition that already exists, rather than predicting whether a divestiture will actually … keep a market competitive,” he said. “That will often mean that we cannot accept anything less than an injunction blocking the merger — full stop.”
Kanter did allow for exceptions. For example, in some cases and in some markets, "disentangling" truly discrete and complete business units from a parent company can be a straightforward exercise, he said. But the circumstances where that remedy has a high degree of success are “... not the rule.”
Seeking Alpha reported on January 25 that investors were “keenly aware of Kanter's comments and his remarks might have contributed to weakness in shares of Change Healthcare,” whose $8 billion sale to UnitedHealth is being scrutinized by the DOJ.
How all this will translate into enforcement is unclear. “Antitrust professionals say [Kanter’s] desire to challenge more potentially anti-competitive mergers in court is likely to be tempered by limited government resources,” Law360 reported.
Kanter himself noted the antitrust division is experiencing a historic resource shortage. It has 350 fewer employees today than it had in 1979. “Even the exceptionally talented personnel at the antitrust division have their limits,” he said.
The other mitigating factor is the DOJ has to bring its request to block a merger to court; a federal judge ultimately decides whether evidence exists that the deal violates antitrust rules.
Attorneys at Paul, Weiss, Rifkind, Wharton & Garrison advise companies to conduct a thorough antitrust analysis of potential deals and structure the deals accordingly.
“In particular, companies should prepare to advocate for remedies where necessary, including demonstrating that a divestiture purchaser has the means and desire to make productive use” of the to-be-acquired assets, according to the law firm’s attorneys.
Even though the DOJ’s “apparent increased willingness to litigate may be tempered by practical considerations,” companies “should keep the prospect of litigation in mind and adjust deal timelines and terms accordingly,” wrote the attorneys.
Indeed, participants in large transactions could face a long delay between deal announcement and closing. Last year, the average length of a U.S. antitrust investigation was about 11 months. IHS Markit and S&P Global, for example, announced their deal in November 2020; they hope to close in the first quarter of 2022.