Even Small Deals May Face Antitrust Actions

Recently, a number of big-ticket mergers have collapsed in part due to regulatory concerns. Your M&A deal is unlikely to attract the same government and public scrutiny as Pfizer and Allergan’s union (which stumbled in part thanks to new Treasury regulations) or the Halliburton and Baker Hughes merger. But there’s no guarantee. Before you enter into serious negotiations with a seller, you need to ensure that your proposed transaction is unlikely to trigger antitrust enforcement actions from federal or state regulators.

Bust the myth

Many middle-market companies believe they’re immune from antitrust challenges if their deals fall below the Hart-Scott-Rodino (HSR) $78.2 million threshold (as of 2016). After all, a transaction under that threshold doesn’t involve making detailed filings with the Federal Trade Commission (FTC) and Department of Justice (DOJ) and then waiting for these agencies to determine whether the deal might adversely affect U.S. commerce.

The truth is, the FTC and DOJ have a history of challenging deals below HSR thresholds — even deals that have already closed. In 2014, the FTC won a court victory that allowed it to unravel a merger between a not-for-profit health care system (St. Luke’s) and a physicians’ group (Saltzer Medical Group). That $28 million deal fell well below then-current HSR thresholds and the organizations involved had been merged for two years at the time the transaction was challenged.

So it’s possible for mergers between smaller, privately owned companies to face antitrust issues. After all, the FTC and DOJ have even cracked down during the past decade on deals in the $3 million to $5.5 million range.

Watch your step

The failed St. Luke’s merger can prove instructive for participants in other smaller-scale M&As that want to avoid antitrust action. One objection to the St. Luke’s deal was that it resulted in one company owning massive market share. After the merger, the company enjoyed an 80% share in the state of Idaho. The court ruled that such a situation allowed no room for new entrants into the market.

Provocative language also got St. Luke’s in trouble. The merger parties used words such as “clout” and “dominance” in internal documents prepared for the transaction, and the companies projected that they could raise rates substantially after the merger. The FTC successfully argued that these documents suggested that the merging parties envisioned that their deal would result in vastly reduced competition.

Thwart potential threats

What can M&A dealmakers do to thwart potential regulatory threats to their deal? Consider the following:

Be clear about your deal’s business purpose. State in writing exactly why the merger is being conducted and how the postmerger company will fit into its competitive landscape. Be specific about the deal’s potential benefits, focusing on internal improvements. And avoid using overly expressive or subjective language about market dominance.

Stay within U.S. borders. One issue that contributed to the failure of the Pfizer/Allergan deal was that the merged company wanted to redomicile in a lower-tax country. If your company is considering a foreign buyer, or if your deal will relocate substantial parts of the business abroad, watch out.

Act to address presumptive challenges. If your merger will create a significant presence in a region or sector, consider selling off pieces of the combined operation to avoid regulatory scrutiny. This could mean selling particular stores or divisions as part of your M&A transaction.

Reach out to regulators — and legal counsel. Regulators at the state and federal levels offer business review procedures that could help you determine whether your deal is likely to attract attention. And if you believe your deal will meet antitrust challenges, consult an attorney who specializes in this area.

Be vigilant

Given the many moving parts that require your attention during a merger, you may be tempted to dismiss the potential for an antitrust challenge. But it’s far better to assume the possibility and take steps to prevent it.

© 2016