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US Merger Control

US Merger Control. April 2008. Impact of merger control. Terms, timing, cost . Merger control can impact deal valuation timing desirability of target (retained synergies) structure (potential hold-backs, divestitures) profile of auction bidders closing?. Latest in the States.

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US Merger Control

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  1. US Merger Control April 2008

  2. Impact of merger control • Terms, timing, cost. • Merger control can impact • deal valuation • timing • desirability of target (retained synergies) • structure (potential hold-backs, divestitures) • profile of auction bidders • closing?

  3. Latest in the States • Whole Foods Market/Wild Oats Market (FTC) • “Premium natural and organic supermarkets” • Unilateral effects – relevant market? • XM/Sirius (DOJ) • US satellite radio • Unilateral effects – relevant market? • Monsanto/Delta and Pine Land (DOJ) • Biotechnology traits for cottonseed • Divestment and licensing remedies

  4. Election 2008 • FTC: hand-over starting now • Significant shift in enforcement policy unlikely • DOJ: viewed as tough on cartels, soft on mergers • Democratic administration could lead to somewhat tougher merger reviews

  5. What’s ahead? • More global coordination • “The Department’s Antitrust Division and the European Commission cooperated throughout the course of their investigations … [an example of] effective cooperation in global competition enforcement.” DOJ Press Release Cookson/Foseco • What does this mean? • Outcome/Remedies – more efficient • Timing/Flexibility – less efficient • Coordination by parties across jurisdictions – crucial

  6. What are they looking for? Creation of market power • Horizontal product line overlaps • Oracle/PeopleSoft unilateral effects • combined market share over 40% • ArchCoal coordinated effects (oligopoly) • share of four (or fewer) firms >75% and combined share >15% • Pipeline overlaps • Vertical foreclosure (much less frequent) • Evidence • Bad documents and customer complaints

  7. How do they find you? • Most deals notified in HSR filings • Deals under the thresholds show up through press reports or customer complaints • Bad things do happen to small deals • Aloha Petroleum • Chicago Bridge & Iron • Aspentech/Hyprotech • Airgas/Puritan Bennett

  8. HSR Process “Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended” • If thresholds met: • mandatory notification (both parties) • observance of waiting period • filing fee ($45,000 - 280,000) • Waiting period • 30 days / 15 days for all cash offers • Can be extended by Second Request

  9. Who will review it? The two-headed beast. • Federal Trade Commission • Independent agency - antitrust and consumer protection • 5 Commissioners (with antitrust experience) • 1100 employees • Department of Justice, Antitrust Division • Civil and criminal antitrust laws • Assistant Attorney General • 360 lawyers, plus field offices

  10. Who will review it? • “Clearance.”

  11. When do I have to file? Acquisitions of . . . • A. 15% of outstanding voting securities • B. $50 million • C. $59.8 million • D. $63.1 million • E. none of the above

  12. $63.1 million

  13. HSR Thresholds • New: $63.1 million. • Acquisitions of assets or voting securities • Transaction value: more than $63.1 million • “Size of person” test applies for deals up to $252.3 million • Persons with sales or assets in excess of $12.6 million and $126.2 million

  14. HSR Thresholds • Overseas deals picked up if they have some potential to affect US commerce • Several exemptions available • Investment purpose • Acquisitions by underwriters • Intracompany acquisition • Most real estate

  15. What’s a person? • I own therefore I am. • UPE • Person • Issuer • Entity P P P GP LP LP 2% 50% 50% 100% 49% 49% S S S

  16. “Foreign to foreign” exemption • Foreign acquisition of foreign target is exempt unless • It confers control – 50% • Target has $63.1 million in US sales or assets • Not fair! • Yes, a non-US buyer can acquire up to 49.9% without filing • No, a US buyer cannot • A foreign person – UPE not US incorporated, no US HQ (subsidiaries in the US ok)

  17. What’s in an HSR Notification? • Key information: • Description of deal • Acquisition agreement(s) • Financial statements and SEC filings • US revenues for 2002 and current year • Item 4(c) documents

  18. 4(c) documents Defined . . . • Studies, surveys, analyses, reports • Prepared by or for an officer or director of the company (or any subsidiary) • For the purpose of analyzing the transaction with respect to markets, market shares, competition, competitors, potential for sales growth or expansion into new product or geographic markets • Bankers’ documents: • offering circulars, information memoranda • board papers • management presentations to bidder • vendor due diligence packages, reports

  19. 4(c) documents • Avoiding a documentary own-goal. • Agencies rely on 4(c) documents to • Provide indications of competitive overlap (e.g., parties’ market shares) • Reveal pro-competitive efficiencies • Identify possible anticompetitive effects • Higher prices forecasted • Create dominant position • Raise barriers to entry/expansion • Watch out for, manage privilege

  20. Confidentiality • Confidential • HSR filing, 4(c) documents • the fact of the filing • But . . . • if there are issues, the agencies will want to speak with customers soon after filing • “Good news” grants of early termination are published • And . . the global agencies like to talk

  21. Penalties Time and money. • HSR compliance enforcement increased • Fines up to $11,000 per day • Restart waiting period • Examples of HSR Fines: • ValueAct Capital Partners L.P. - $1.1 million • Iconix Brand Group Inc. - $550,000 (4(c)) • Blackstone Capital Futures - $3 million (4(c)) document) • Bill Gates - $800,000

  22. So when can we close? “30 days and out.” • Can’t close until all filings in and waiting periods observed • Most deals: • Initial waiting period expires in 30 calendar days • Carryover the end for weekends / holidays • Early termination in the 15 to 20 day range • Key is coordination of global merger review

  23. So when can we close? Long haul. • Second Request on 30th day • Deal suspended until substantial compliance with Second Request • Second Waiting Period expires 30 days from substantial compliance • Compliance with Second Request frequently takes 12 weeks or more • Second Request: delay, expense, risk

  24. So when can we close? Theoretically . . . Day N N+30 N+120 N+150 N+180 Calendar days (US) Second Request Compliance Second Request Issued File HSR Pre Notification Initial Waiting Period 30 c. days Second Request Compliance 3 months Final Waiting Period 30 c. days Voluntary Extensions US Pre Notification Phase I 25 w. days (Extended) 10 w. days Phase II 90 w. days (Extended) EU File CO Remedies Working days (EU) Day N N+20 N+25 N+35 N+115/125 N+130/140

  25. Fixing the deal Agencies want certainty. • Goal of merger remedies is to restore competition • Preference for structural remedies • divestiture of assets to a competent buyer • create an independent and viable competitor • stand-alone business unit • fully integrated - “global” fixes may be required • no supply links with buyer • Licenses and contract remedies occasionally used, but mainly in vertical cases, and typically not alone

  26. Fixing the deal Fire sale. • Promise to divest identified assets in a set time after closing • Purchaser must be approved by agency • If you don’t sell it, the “trustee” will • Trend is “buyer up front” - a buyer and contract approved before the main deal can close (strong FTC preference)

  27. Gun Jumping • Until closing, parties must continue to compete independently • If competitors share competitively sensitive information or coordinate customer bids pre-closing, they violate §1 of the Sherman Act (even if no HSR required at all) • Any integration or control before clearance violates the HSR Act, and maybe the Sherman Act

  28. Managing the risk • Global assessment • Major filing requirements • Assess substantive issues, global arguments • Consider potential timeline - best / worst • Potential fixes / buyers - net impact on value • Fix it first? • Negotiating the contract - who bears the risk? • Which clearances are closing conditions? • How much effort to defend? Who’s in charge? • What obligation to divest? Cap? • Share the value loss? • Drop dead date? • Break-up fees?

  29. CFIUS Review What we do • Deal planning / structuring advice • Working to build a capability to prepare basic CFIUS submissions as one stop shop for non-US client base • Controversial deals will require specialist counsel Preliminary

  30. Any questions?

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