The transaction has been in the works for several months and it is the culmination of nearly a year’s worth of activity. The financing is in place, the boards have approved the transaction, the shareholder votes are scheduled and the deal team is working its way through their checklist. The deal checklist is now the manifesto by which all deal activity is generated. The latest task in hand is a checkmark line item entitled “Hart Scott Rodino” and below it another, subordinate checkmark line item entitled “Competition.” The first line item refers to the Hart-Scott-Rodino Act (HSR), 15 U.S.C. § 18 (a), which requires the filing of certain administrative forms describing a transaction that meets the dollar threshold amounts specified in the Act. These forms are filed with both the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ), and allows the agencies a specific amount of time to determine whether the transaction presents competitive issues as to which the agencies may need to act. Because this transaction does not exceed the current H.S.R. Act threshold of $78.2 M for the size of transaction, the line item gets a checkmark. Typically no further analysis is conducted of the subordinate line item of “Competition,” because the agencies will not be reviewing the transaction for competition issues. A natural but, unfortunately, erroneous conclusion reached by all too many deal teams.
Approximately one in five of all mergers recently investigated by the DOJ and the FTC were not HSR reportable, and had already been consummated at the time of the investigation. Between 2009 and 2013, the DOJ reported that it had opened investigations into 73 merger transactions which had not met H.S.R. Act reporting thresholds.
In a February 16, 2016 Press Release, the FTC announced an agreement by Hikma Pharmaceuticals PLC to divest its rights in certain injectable pharmaceuticals to resolve antitrust concerns by the FTC in connection with a $5.0 million acquisition of drug products from Ben Venue Laboratories, Inc. Other single digit recent transactions challenged by the antitrust agencies include:
- Solera Holdings, Inc./Actual Systems of America, Inc./ $8.7 million/2013/ FTC;
- Election Systems and Software, Inc./Premier Election Solutions, Inc./ $5.0 million/ 2010/ DOJ;
- Tyson’s, Inc./ George’s Food LLC/ $3.0 million/ 2011/DOJ.
In a widely reported challenge to a consummated merger, the FTC sued St. Luke’s Health System for its 2013 acquisition of Saltzer Medical Group, Inc., a $28 million non-reportable transaction. Federal District Judge B. Lynn Winmill of the District of Idaho found that the transaction resulted in an 80% market share, a post-transaction Herfindahl-Hirschman Index (HHI) of over 6,200 and no prospect for new entry to offset any efforts at price increases. Additional challenged transactions in this same size range include Heraeus Electro-Nite Co. LLC’s $42 million acquisition of Midwest Instrument Co. Inc., and New West Health Services Inc. $26 million transaction with Blue Cross and Blue Shield of Montana Inc.
If a transaction is not reportable under the H.S.R. Act, how then are the antitrust agencies finding out about the smaller transactions? The first sources are typically customers or competitors, particularly where there are significant price increases post-transaction. In an unfortunate internal document produced in the St. Luke’s FTC litigation, much was made of the opportunity to increase physician compensation by as much as 30 per cent. This level of price increase undoubtedly engendered customer and/or health insurer complaints. The FTC is particularly focused on the healthcare and pharmaceutical sectors as seen by the three complaints filed at year end 2015 challenging hospital mergers, all of which resulted in significant post-transaction HHI concentration levels with equally “bad” documents as with St. Luke’s, and FTC’s challenge of the Hikma Pharmaceutical/ Ben Venue transaction.
The antitrust agencies also closely monitor specialized trade presses and transactional press releases to keep abreast of smaller scale transactions that present competitive risk. Use of terms like “dominant,” “powerful,” “rationalizing,” and “strength” tend to get the attention of the regulators when used in reference to a completed transaction.
State antitrust agencies also can play a role in informing the federal agencies about potentially anticompetitive transactions that have slipped under the H.S.R. radar screen.
One thing that the companies that have consummated smaller transactions which present significant competitive risk have come to understand is that there is no statute of limitations on an antitrust agency’s ability to investigate and challenge. Even years after a transaction has been consummated the agencies can open investigations. And while historically the agencies were loath to “unscramble the eggs” of a closed transaction, the new wisdom is that the parties closed at their risk and will suffer the consequences if there transactions needs to be unwound. The BazaarVoice/Power Reviews transaction is a case in point. An H.S.R. exempt transaction ($168 million) was investigated post-closing by DOJ and the court-ordered divestiture resulted in sale proceeds to BazaarVoice of less than $30 million.
While an H.S.R. Act filing will result in a competition review, the absence of a filing will not guarantee the lack of review. Despite the current workload of the federal antitrust agencies they are still paying close attention to those transactions, regardless of size, which present competitive risk. The prudent tack to take is to move the “Competition” checkmark ahead of the “HSR” checkmark so as to understand the scope of any antitrust risk and accordingly to make informed investment decisions.