Fair Play: Merger Lovers, Beware the New FTC


FAIR PLAY

Antitrust deciphered.

FTC Building Blog

There could soon be a new sheriff at the Federal Trade Commission. Early signals from Joseph Simons, President Donald Trump’s pick to head the agency, point to more rigorous merger review.

The White House’s package of four FTC nominees – Simons plus three commissioners – is proceeding at a healthy clip through the Senate. All the nominees have submitted their written responses to questions from the Senate Commerce Committee.

The four nominees – Simons (R), Noah Phillips (R), Christine Wilson (R), and Rohit Chopra (D) – will appear as a group for their confirmation hearing on Wednesday. If they move through the Senate as a block, there would still be one more opening for a Democratic commissioner.

M&A lawyers will be listening to learn just how serious Simons is about cracking down on merger proposals. If his written comments to the committee are any indication, they should be worried. He cited weak merger review – the FTC’s lack of retrospective studies and unsuccessful remedies – as the No. 1 and No. 2 problems facing the agency.

“The FTC needs to devote substantial resources to determine whether its merger enforcement is too lax,” he said. “If that’s the case, the agency needs to determine the reason for such failure and fix it.”

Simons decried the FTC’s own finding that the divestitures it imposed in 30 percent of mergers between direct competitors didn’t work. Those are deals in which the FTC ordered one or both merging parties to sell assets to a buyer that, in theory, would compete with the merged company. But the FTC found that didn’t happen in almost a third of the markets where it ordered divestitures, either because the buyer never produced a competing product or its product wasn’t able to compete as effectively as the pre-merger owner.

Simons said a 30 percent failure rate is “too high and needs to be lowered substantially, or, ideally, zeroed out altogether.”

The FTC’s 2017 study is based on older mergers, from 2006 to 2012, in part to give the post-merger markets time to adjust so the agency’s economists could accurately evaluate them. A more recent example of the kind of outcome that may trouble regulators happened last year when the FTC cleared Walgreens Boots Alliance to buy 1,932 Rite Aid stores. A month later, Walgreens announced it was closing 600 of them.

The commission had blocked Walgreens’ earlier bid to buy some 3,000 of Rite Aid’s stores, saying that deal would zero out competition in too many markets. But it took Walgreens no time after its smaller deal closed to find some overlapping areas and slate those 600 stores for closure. It will take several years to tell whether rivals can survive in the drug store market where Walgreens is the biggest player. If that doesn’t happen, it’s another sign of failure.

It’s worth noting that in the study, the FTC presented its finding on divesture outcomes the other way around, saying it “achieved a success rate of approximately 70 percent” in horizontal mergers. The success rate of remedies imposed on “vertical mergers” – i.e., between companies in different markets – was higher, around 80 percent, according to the FTC study. The commission’s researchers defined “success” as the relevant market retaining the same level of competitiveness post-merger or returning to that level shortly afterwards.

The point, however, is that even the regulators admit that their methods for evaluating and tweaking mergers don’t always achieve the underlying goal of maintaining a healthy market. There is also debate about whether the FTC’s own analysis of post-merger competitiveness is robust enough.

The Justice Department’s high-profile suit to stop AT&T Inc. from buying Time Warner Inc. is indicative of a new path forward in the DOJ’s antitrust division. Its chief, Makan Delrahim, has made it clear he’s not a fan of behavioral remedies – i.e., promises companies make about their post-merger actions in exchange for clearing their deal. He wants merging companies to sell overlapping businesses that could harm competition before the DOJ will clear a deal. Because AT&T and the DOJ couldn’t agree on what types of divestitures would maintain competition in the pay-TV market after their tie-up, they find themselves in court.

Is this where the FTC is headed? What little we know about Simons suggests that he may be skeptical of the idea that mergers, especially among large competitors in a narrow market, are always pro-consumer and pro-competitive.

Delrahim has already signaled that the DOJ isn’t going to let questionable mergers go through without structural changes like asset sales that will allow rivals to survive. Now Simons is suggesting that regulators should scrutinize those remedies too. It could make for a contentious seven years, which is how long Simons would serve if confirmed.

What’s Happening

On Monday, DOJ officials will hold a briefing on the president's FY 2019 budget proposal.

On Wednesday, four FTC commissioner nominees will appear before the Senate Commerce Committee for a confirmation hearing.

Also on Wednesday, the House Energy and Commerce Committee’s oversight subcommittee will hold a hearing on consolidation in the health care industry.

On Friday, Justice Department’s assistant attorney general for antitrust Roger Alford and Luke Froeb, the antitrust division’s deputy assistant attorney general for economics, will be among the speakers at the George Mason Law Review’s 21st Annual Antitrust Symposium.

Quote of the Week

“I look forward to using my position on the committee to actively address and check monopoly and monopsony power and shape an economy that is better for workers, better for innovation, and better for our democracy.”

--Sen. Cory Booker (D-N.J.), in a statement provided to Bloomberg Law on his new appointment on the Senate Judiciary Committee’s antitrust subcommittee.

Want to be alerted to the next post? Contact Fawn Johnson at fjohnson@bloomberglaw and you’ll be added to the list.