During the Reagan administration, regulators were fairly laissez faire about deals: They challenged about 1% of them from 1981 to 1989. Fast forward 30 years later to the regulatory rule of Barack Obama, and things have changed.
Democrat or Republican, you've probably noticed it, too: More big deals are being challenged by regulators than ever before. Using data from the Federal Trade Commission and The Deal, a subsidiary of TheStreet.com, TheStreet has discovered a pattern of increased regulatory actions challenging mergers that dates back to the Reagan administration. Under President Obama, the FTC, DOJ and other regulatory bodies have challenged and blocked a higher proportion of U.S. deals than ever before. At the same time, deals are getting bigger and more complicated. Call it "Big Business vs. Big Government."
On the "big government" side are the antitrust enforcers. Burned after a spate of losses during the Bush years, spurred by a rise in the size and complexity of deals, and emboldened by a president who wants to fight deals that threaten competition and consumers, regulators have gotten smarter, tougher and more aggressive.
Deborah Feinstein was named director of the Federal Trade Commission's Bureau of Competition in 2013 by the agency's chairwoman, Edith Ramirez. Feinstein joined the agency from law firm Arnold & Porter LLP, where she chaired the antitrust practice. This is her second stint at the commission: Beginning in 1989, she served as an assistant to former competition bureau director Kevin Arquit and later as an adviser to then-Commissioner Dennis Yao.
We recently sat down with Feinstein to discuss the wave of mergers that have precipitated government challenges to better understand what's really happening with antitrust enforcement, the FTC's game plan, and what might happen next.
TheStreet: FTC Chairwoman Edith Ramirez and the DOJ's Bill Baer testified recently that the antitrust agencies are dealing with a wave of big mergers. What do you think is driving the activity and what about today's environment is so alarming from an antitrust standpoint?
Deborah Feinstein: It's always a little hard attribute trends to a particular factor. There are a couple things. Today's economic situation is favorable to mergers; that's not always the case. We've seen times when it's just [private] equity. In private practice I saw a spate of vertical mergers. Those kinds of trends are contagious -- one company in an industry will do one deal and then another company will. Now we seem to be back to pretty straightforward horizontal mergers. Activists are definitely pushing for some of these mergers.
TST: The FTC has been pretty active challenging hospital mergers. Is the Affordable Care Act and the law's resulting need for healthcare providers to be more efficient a driving factor for deals in this area?
DF: We at FTC see lot of hospital mergers. There's no question that all that's going on in the healthcare environment is driving those deals. But people are missing we that we clear a significant number of those, but a handful raise real issues and those are the ones we challenge. Those tend go to court at a disproportionate rate compared to other mergers because there's often not a good settlement.
TST: Some high-profile mergers, especially in highly concentrated industries, have been instigated by activists rather than one of the companies -- Staples-Office Depot, Halliburton-Baker Hughes, and Dollar General's failed rival bid for Family Dollar, for instance. Do you think some firms have been pushed to attempt transactions that they otherwise wouldn't try absent the investor pressure?
DF: It's hard to say, but it does sometimes feel that way. In a lot of these cases we're talking about the number one and two players in industries merging. Most people would take a deep breath and ask, "Is this a good idea and is this one worth the risk?" You wonder who is counseling that these are going to be OK or whether there is such activist pressure that the [merger proposals] got out of boardroom when they shouldn't have. It is interesting that the more problematic ones are being driven by this activist push.
TST: Public advocates who oppose consolidation and others have asserted that a big reason for the litigation push now is that so many industries have become highly concentrated due to previous mergers and now there are too few buyers who can acquire divested properties without creating an antitrust problem themselves. Have you found that to be the case?
DF: It depends on what people are interested in divesting. We look at divestitures on a case by case basis and there may be times when it's not necessary that there be a strategic buyer. Certainly there are industries in which finding a strategic buyer is really difficult. But there are others in which it's not finding a buyer that's the issue. It's a question of the asset package and everything that goes with it.
In the dollar store combination [Dollar Tree's 2015 acquisition of Family Dollar] we were comfortable in with the divestiture buyer, which was a [private] equity concern but with very serious, experienced players and a package that looked good and a business plan that was robust. More than one interested buyer told us the same story about what they would do with the assets and that made us comfortable that such a divestiture would create viable competitor, even though was no obvious industry player you could sell to. But sometimes people won't put together a [divestiture] package that will allow a fringe or new player to have what they need to be competitive.
TST: Some merging parties have complained that the antitrust regulators are unfairly trying to stop deals in industries where new competitors are pressuring traditional businesses with high cost structures or in industries affected by economic downturns. The pressure online rivals are putting on brick and mortar retailers is an obvious example. Is there any justification for cutting parties some slack when they face these kinds of external pressures?
DF: I'm always amused when they call us regulators. We're not regulators. We're a law enforcement agency and have to go before a federal judge and make our case, so they get their day in court. I'm surprised people don't always appreciate that. The Blockbuster and Hollywood merger gets thrown up as the example of this. [Blockbuster abandoned its 2005 hostile bid for Hollywood Video after FTC opposition. Five years later competition from Netflix forced them into bankruptcy.] People forget it was at least five years before we saw them go away. That was at least five years of continued competition between them. The commission said in its court filings there was evidence that head-to-head competition between them still mattered. Even with Netflix in the market it was still a merger of three competitors down to two. There can still be lot of years of competition that matters between brick-and-mortar stores because it's not just nascent competition that matters.
TST: When it comes to settlements the agencies seem to be demanding an upfront buyer, which adds time to merger reviews. Why is that an increasingly preferred route to allowing parties to close a deal first and make the divestiture later?
DF: I'm not sure it is increasingly preferred. We've always had a strong interest in upfront buyers, particularly in specific industries.
In my time at the FTC we have seen an unbelievable number of supermarket and pharmaceutical deals. Those are both industries in which we always have and always will require upfront buyers. That's been ongoing for 20 years and is not a new phenomenon. Still, there are times when we don't need an upfront buyer but finding an upfront can actually speed the review.
In private practice there were times when figuring out terms for a hold separate agreement on the divested assets was going to take us so long it was easier to just go and find a buyer. With an upfront buyer you don't have to figure out in isolation what the entire asset package must be. We have the buyer figuring that out through due diligence.
The time it takes to approve a settlement is as much up to the merging parties as it is us. I've seen deals get done in four or five months. In most pharma deals they walk in and know what they have to do and it moves quite quickly. Then there are situations where the parties don't even want to raise the specter of a settlement until I tell them something is being forwarded to commission. That is going to slow down the process if it's not until the staff raises concerns that they say, "Let's start talking."
It's up to the parties how quickly they find a divestiture buyer. I respect that people sometimes want to run a very thorough sales processes with bankers to find a buyer, so they get the best value. But that's their decision. They have a lot of control over the timing of that. It's unfair to take an anecdotal example and say the agencies are taking longer. It's the parties who decide when to pull the trigger.
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