The Hart-Scott-Rodino Annual Report (2014 Report) recently issued by the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) concerning activity under the Hart-Scott-Rodino (HSR) Act during fiscal year 2014 provides valuable insights into current merger enforcement trends. As detailed in the 2014 Report,1 which compares fiscal year 2013 to 2014,2 HSR filings have increased, the average dollar value of deals is up, and, most importantly, the agencies continue aggressive enforcement, particularly in relation to larger deals.
The HSR Act requires that most acquisitions valued above a certain dollar amount in 2015 and not otherwise exempt must be reported to the agencies. The parties must honor a waiting period (typically 30 days) before they may close their acquisition. HSR filings contain certain basic data used to assess potential competitive impact, including revenue data by product code, and documents that discuss competition, markets and the potential for growth, synergies and efficiencies. If either agency has concerns, it requests “clearance” to conduct a preliminary investigation. A subset of cleared transactions then results in a “request for additional information,” commonly referred to as a “Second Request,” an extensive discovery exercise that can be both expensive (potentially costing millions of dollars) and timeconsuming (often taking three to six months or more). A further subset of Second Request investigations results in a formal challenge to block a deal.
Three Key Trends
The first trend revealed by the 2014 Report is an increase in the number of deals filed last year under HSR. This increase suggests strength in deal flow. In fact, the number of adjusted transactions3 in 2014 was at its highest level since 2008, before the economy felt the full effect of the Great Recession. There were 1,618 adjusted transactions in 2014, nearly the same as there were in 2008 (1,656) and almost a thousand more than there were in 2009 (684). In intervening years, the number of adjusted transactions recovered to 1,128 in 2010 and appeared to have leveled off at 1,414 in 2011 and 1,400 in 2012. However, the number dropped sharply in 2013 to 1,286, making the 25.4 percent increase in 2014 all the more noteworthy. Although the 2014 number suggests strong deal flow, the 2014 Report does not analyze the significance of the increase and it remains to be seen whether this indicates a trend or a blip on the radar, especially given the recent turmoil in the public markets.
The second trend is an increase in the size of transactions filed. In 2014, 225 transactions valued at more than $1 billion were filed, a 58 percent increase from the 142 filed in 2013. Moreover, transactions valued at more than $1 billion comprised a larger percentage of total transactions in 2014 (13.9 percent) than in 2013 (11 percent). In addition, 300 transactions valued at $500 million to $1 billion were filed in 2014, a 19.5 percent increase from the 251 filed in 2013. Almost one-third (32.4 percent) of all transactions filed in 2014 were valued at $500 million or more. Of the other categories tracked, only the smallest category ($50 million to $100 million) declined; all others ($100 million to $150 million, $150 million to $200 million, $200 million to $300 million and $300 million to $500 million) increased.
The third trend is continued vigorous enforcement, including increased scrutiny on larger deals. This trend is more subtle. At first glance, the numbers appear to indicate that enforcement subsided somewhat in 2014. In a year with 370 more adjusted transactions filed than the year before, the number of formal merger challenges declined from 38 in 2013 to 33 in 2014. Moreover, the number and percentage of Second Request investigations remained essentially flat. Finally, the agencies only initiated one contested litigation challenge—the FTC opposed the combination of two class ring manufacturers—which quickly resulted in the abandonment of the deal.
That apparent decrease in enforcement activity does not paint the whole picture. A closer look at the data reveals a continued trend of vigorous enforcement. The number of transactions for which an agency requested and obtained clearance to conduct a preliminary investigation – considered by many to be the first stage of U.S. antitrust enforcement – rose to 274 in 2014, up from 217 such requests in 2013 (a 26.3 percent increase) and just 206 such requests in 2012. Also, the percentage of transactions requiring clearance remained steady at 16.9 percent, the same as 2013, which was a significant increase over the 14.7 percent requiring clearance in 2012. In addition, larger deals appear to have attracted more scrutiny than smaller deals in 2014. Nearly half (49 percent) of the Second Requests in 2014 involved transactions valued at more than $1 billion, and one-fifth (20 percent) involved transactions valued between $500 million and $1 billion. In other words, more than two-thirds (68.6 percent) of transactions garnering Second Requests were valued at more than $500 million.
Other related agency actions also suggest continued aggressive enforcement. During 2014, the agencies successfully completed litigation, either through trial or on appeal, in six cases (which are not included in the 2014 analysis as the matters began before 2014). During this same period, neither agency lost a pre-existing case – suggesting that neither agency will be greatly disciplined by the prospect of litigating a merger case. In addition, while nonreportable deals are by definition not included in the 2014 Report, it is notable that in 2014 a DOJ official touted that agency’s enforcement focus and efforts in looking at and challenging nonreportable deals.4 Finally, DOJ continued its pattern of enforcing the procedural aspects of HSR by resolving a complaint via a consent decree in a “gun-jumping” matter.5
Faced with more and bigger deals in 2014 than in 2013, the agencies continued their trend of heightened antitrust scrutiny, especially on larger transactions. Although formal challenges declined, the number of transactions requiring clearance demonstrates a continued emphasis on antitrust enforcement and makes careful pre-deal review of competitively sensitive deals particularly important.