This one goes out to the investment bankers. The ones we all want to love, but sometimes wish we’d left behind. (Okay, that was strained. It worked a lot better when I was thinking about it on the couch last night.)
I’ve started and stopped writing this post several times, looking for a way to make it more interesting (and make me more interested in writing it). It’s one of those topics that anyone who writes about antitrust feels compelled to cover every so often. Maybe you recently looked at a deal where the Offering Memo created some antitrust heartburn. Or maybe you recently had a pleasant experience where the bankers actually sought antitrust input before sending anything. Whatever the reason, it seems like every few years or so, I just have to write something about bad documents. They hurt.
But let’s start from the very beginning. If you’re reading this, you probably don’t need to be told, but nonetheless, when a transaction requires an HSR notification, certain documents need to be submitted to the Antitrust Division of the Department of Justice and the Federal Trade Commission. The documents that must be submitted include any analysis of competition in the industry that was prepared by or for an officer or director and, since the most recent revision to the HSR form, explicitly any Confidential Information Memorandum or document serving the same purpose. That means you, Ms. Investment Banker, are writing a document that will get a careful look from the antitrust authorities.
These documents are often the first substantive introduction to competition in the industry that the investigating government lawyer will see. If the impression they get is one of limited competition, high barriers to entry and the ability to impose price increases on customers, the transaction will at minimum get some preliminary investigation, and the antitrust lawyers will have to work to dispel that impression.
Bummer, eh? What could be more appealing to a potential purchaser of a business than a sustainably profitable monopoly?
And that’s really the issue. The job of the investment banker is to help sell the business for as much as possible. Telling buyers that they won’t have to worry about competition is a pretty obvious way to help do that. The problem is that telling buyers that also makes it less probable that they will be able to complete the transaction. And nobody wants that.
So what to do? Well, ideally, get the antitrust lawyer to comment on any deal books before they go out. But even before you do that, it might help to ask yourself two questions about what you want to say: (1) is that really true?, and (2) do I need to say that?
Sure, your client might say that its proprietary process for widget manufacturing is so efficient that it functions as a barrier to entry, but even if that’s true (seems unlikely) do you need to put it that way? How about we just describe how wonderful, sustainable and low cost the proprietary system is and let the reader draw his own conclusions? If there is IP that protects it, do you really need to say that the IP prevents competition, and does it really (surely there are other methods for manufacturing those widgets)?
A subtler point, and the main one for which you might need help, is in trying to avoid closing off potential arguments we might want to make to the antitrust regulators. I sometime facetiously sum this one up as, “do not use the word ‘market’ as a noun.” But the general notion is that we don’t want these documents to create presumptions that we may have to overcome. We will want to argue that there is robust competition from as many firms as possible. We will want to argue that entry by new competitors or expansion by existing or fringe players is possible. We will want to be able to argue that the relevant product market is broader (e.g., it’s not “the market for the sale of specialty retro spinning neon widgets to distributors with fewer than 12 end use customers in the pharmaceutical industry”) or narrower, so it helps not to have labelled different segments of the client’s business as “markets.”
Obviously, being careful about the language you use in your Offering Memorandum isn’t going to make a true substantive antitrust issue go away. If the transaction is combining two significant competitors in an already concentrated industry, there’s going to be plenty of antitrust work to do anyway. But for transactions where there may not be much of an issue, or any issues are harder to spot, being careful not to create documents that the government would be tempted to quote in the complaint seeking to block the transaction helps.