Antitrust Issues

In some cases, the merger agreement must be approved by the antitrust authorities. This section reviews the basic rules for the receipt of such approvals.

Following are the main antitrust arrangements in the United States:

  • The Clayton Act authorizes the FTC (Federal Trade Commission) to bar or qualify share or asset purchase agreements which materially reduce competition or give rise to the fear that a monopoly will be created.

  • Section 1 of the Sherman Act prohibits any contract, combination, or conspiracy in restraint of trade or commerce which may reduce competition.

  • Section 2 of the Sherman Act prohibits attempts to abuse or become a monopoly by, among other things, acquiring competitors.

  • The Hart-Scott-Rodino Act imposes a reporting duty to the U.S. Department of Justice and to the FTC and a waiting period of 30 days in any acquisition of 15% or more of the voting shares or assets of a target with sales or assets exceeding $100 million. The waiting period is designed to enable the authorities to examine the effect which the merger or the acquisition will have on the competition in the relevant fields. The parties to the merger are required to notify the appropriate authorities of the intention of the transaction and to provide full economic disclosure of the proposed transaction. The government may object to the merger only during the first 30 days following the notice, unless it asks for additional information. The waiting period is reduced to 15 days in cash tender offers.

The authorities in charge of antitrust matters in the United States and Europe have been operating more actively in recent years, and a considerable part of their investigations revolve around mergers. However, examining the impact on competition is problematic. Let us assume, in the most simplistic manner, an industry in which one company controls around 40% of the market and none of whose competitors is profitable. Due to economies of scale in that industry, the dominant company wants to merge with one of its competitors. The impact of the merger will obviously reduce competition in the market. Should this plan, which is based on economic considerations other than monopolistic profits, be thwarted? Would it be better if the small companies went bankrupt?

In order to obtain approval for a transaction, the legislator requires, among other things, proof that the assets of the target will indeed exit the market without the merger and that a merger is preferable to an acquisition by other entities, even though the concentration index (see below) indicates a possible rise in market concentration.

Obviously, the element of reduction in competition is usually weighed together with other considerations which are regarded as legitimate by the legislators, and the relevant authorities take into account all of these parameters when examining deals that are brought before them.

The U.S. Department of Justice and the FTC publish detailed regulations which present various scenarios and the anticipated response of the competent authorities to different types of merger and acquisition proposals. For instance, the departments made a joint publication of regulations pertaining to horizontal mergers, which in practice concern M&A activities among competitors. The basic test is, as mentioned above, whether such a merger would create or enable a monopoly in the supply or demand in the market in question.

The directives break the analysis down into five main stages. The first stage defines the markets affected by the merger, such as the on-line ticket market only, or the entire ticket market. The second stage examines the degree of the merger's impact on the concentration in the market. One of the main tools for measuring market concentration, which U.S. authorities use as a preliminary test of concentration in horizontal mergers, is the HHI (Herfindahl-Hirschman) Index. In this simple test, the squared values of the market percentages held by each competitor in the market are added together, and a comparison is made between the values received before and after the merger between the companies.

Obviously, every merger increases the market concentration to a certain degree, which is also expressed in the HHI factor (since, in the case of positive numbers, the square of a sum of numbers is always greater than the sum of the squares of the same numbers). The real test, however, is the degree of change as a result of the merger. If the index changes dramatically, the authorities will examine whether the competition in the market is expected to actually change.

If the answer to this last question is affirmative, the authorities move on to the third stage in the analysis, examine the market reactions to the potential entry of new competitors into the market due to the merger, and assess the effect of such changes on the competition in the market. If no such changes are projected, the authorities examine, in the fourth stage of the analysis, whether the merger is justified for reasons of streamlining production and marketing processes and cost-saving, and whether a merger is the optimal method for achieving such benefits under the given market circumstances. Finally, in the fifth stage of the analysis, the authorities examine the impact of a cancellation of the merger on the parties to the merger. Their approach will clearly be different if, for example, one of the parties would go bankrupt without the transaction than if both companies are profitable.

Many argue that the market-share test, which is a central component in the decisions of antitrust supervisory entities, is no longer suitable for an examination of the absence of competition in the current dynamic business world. For instance, the fact that a company controls the computer market in a certain year is not a reliable test for the future, and acquiring its young competitors may still be its only way of staying in the game altogether for the long run.

Furthermore, an increasingly voiced argument is that the tests for market concentration should be conducted in global, rather than domestic, terms. The argument is that even if a company controls a considerable share of its domestic market, it might be still struggling in the global market and that it should be allowed to conduct acquisitions which would help it to strengthen its position in the global market.

Vertical mergers are usually not exposed to the same degree of scrutiny as are horizontal mergers. In addition, conglomerate mergers are usually not subjected to close scrutiny unless the following conditions are fulfilled: The industry in which the target operates is characterized by a high HHI factor (at least 1,800 prior to the transaction), the merger will reduce the likelihood of competitors entering the market (for example, since the target will now have the support of a larger company), and the target's market share is greater than 5%.

From Concept to Wall Street(c) A Complete Guide to Entrepreneurship and Venture Capital
From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital
ISBN: 0130348031
EAN: 2147483647
Year: 2005
Pages: 131

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