A recent article in the Antitrust Law Journal, “A Survey of Evidence Leading to Second Requests at the FTC,” by Darren S. Tucker, an attorney advisor to a FTC Commissioner who reviewed non-public information on the decisions to investigate proposed transactions for the period August 2008 to August 2012, gives insight on the types of evidence that the FTC staff uses to determine whether a transaction warrants a “second request” under the Hart-Scott-Rodino (“HSR”) Act.
The issuance of a “second request” is a significant event because it prevents the parties to a proposed transaction from closing until after they have substantially complied with the request for additional information and have observed a second waiting period. As the article rightly notes, the “decision whether to issue” a “second request” is “a critical stage of the HSR process.”
What evidence does the FTC staff consider when determining whether transactions warrant “second requests”? Based on the article, a number of observations can be made about energy and chemical transactions involving the merger or other combination of competing production, distribution, and retailing of energy sources, including petroleum and chemicals, that led to “second requests” (“energy and chemical transactions”).
First, according to the article, for those energy and chemical transactions receiving “second requests,” (1) the size and relative number of the “market” participants played a role 100% of the time, (2) the unlikelihood that competitive entry would deter or offset the anticompetitive effects of the proposed transaction played a role 88% of the time, (3) customer concerns that the proposed transaction would lead to anticompetitive effects played a role 75% of the time, and (4) internal “hot” documents from the combining providers themselves predicting that the proposed transaction will result in anticompetitive effects such as higher prices or a loss of competition played a role 13% of the time.
Second, according to the article, the change in the number of significant competitors also played a role for the energy and chemical transactions determined to warrant “second requests.” (The article identifies a significant competitor as a firm that either offers the products or services demanded by most customers in an area, or exceeds a share threshold, which was often 5%.) The table below reports the change in number of “significant competitors” for the energy and chemical transactions that received a “second request.”
Click here to view table.
Significantly, 33 of the 36 energy and chemical transactions that received “second requests” resulted in four or fewer “significant competitors” post-transaction. (In a few instances, according to the article, “the number of significant competitors did not change as a result of the transaction under review because one of the merging parties was a market participant but did not appear to be a significant competitor or because the transaction involved the acquisition of a limited set of assets from a company that remained in the market.”)
Finally, according to the article, energy and chemical transactions that received “second requests” resulted in a high concentration post-merger. Concentration is measured by calculating the Herfindahl-Hirschman Index (“HHI”), which is simply the sum of the squares of the shares of the competitors in the “market.” According to the antitrust agencies’ guidelines for horizontal mergers, mergers that result in an increase in the HHI of more than 100 points with a post-merger HHI of at least 1,500 “often warrant scrutiny,” whereas mergers resulting in an increase in the HHI of more than 200 with a post-merger HHI above 2,500 “will be presumed to be likely to enhance market power.” (A merger enhances market power “if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.”) As noted in the table below, all but three of the energy and chemical transactions that received “second requests” resulted in an increase in the HHI of more than 200 with a post-merger HHI above 2,500. In other words, the vast majority of energy and chemical transactions receiving “second requests” were “presumed to be likely to enhance market power,” based on high concentration after the proposed transaction and a large increase in the HHI.
Click here to view table.
So, what does this mean in terms of predicting whether the FTC will investigate your energy and chemical transactions? Antitrust counsel (and an economic expert) should be involved in your proposed transaction as soon as possible. Also, keep in mind that, although “second requests” can only be issued in connection with transactions that are large enough to require a premerger filing under the HSR Act, the same factors are likely to apply to potential investigations of transactions that are too small to require an HSR filing and may already have been completed. The FTC and the Department of Justice regularly investigate mergers even though no HSR filing was required.