The proposed merger would make Sysco Corp too powerful, the FTC has alleged
The commission, which has long been wary of the merger, aims to protect the countless hospitality and service industries that rely on major food distributors.
On Thursday, February 19, the United States Federal Trade Commission filed a lawsuit to block the proposed merger between Sysco Corporation and US Foods, the nation’s largest food distributors, reports The Wall Street Journal.
As we've previously reported, the deal would leave the third largest competitor in the country, Performance Food Group, with less than 10 percent of the food distribution market, a multi-million dollar industry.
In a 3–2 vote, the FTC alleged that the merger would create a national company that was entirely too powerful, and that could simultaneously raise prices and reduce services for a number of dependent industries — including hospitals and medical centers, restaurants, schools, and the military — that require foodservice providers.
“Consumers across the country, and the businesses that serve them, benefit from the healthy competition between Sysco and US Foods, whether they eat at a restaurant, hotel, or a hospital,” Debbie Feinstein, head of the FTC’s bureau of competition, said in a written statement.
In response, Sysco’s chief executive Bill Delaney announced that the company planned to fight the lawsuit.
“The facts are strongly in our favor, and we look forward to making our case in court,” said Delaney.
The public wins a DOJ-AT&T court battle, no matter the result
Generally, heading to court is the path of last resort. It is something you do when everything else fails. Litigation is enormously expensive, time-consuming and unpredictable. Our legal system encourages parties to resolve their disputes through negotiation, and if the parties end up in court, it usually means something went horribly wrong.
The Justice Department (DOJ) just filed a lawsuit over AT&T’s proposed acquisition of Time Warner. For a number of reasons, I think this is a good thing. In fact, it could be a really good thing, and that is true regardless of who wins in the end. Here’s why:
Reason 1: The antitrust agencies and the courts have given businesses a pretty clear framework of how to think about mergers between direct competitors, but this is not true when it comes to vertical mergers.
The Horizontal Merger Guidelines are recent (2010) and reflect up-to-date legal and economic thinking about mergers between competitors.
In the last five years, a number of horizontal merger cases have been brought by the DOJ and Federal Trade Commission and have gone to trial, including Sysco/US Foods, Staples/Office Depot, Aetna/Humana and Anthem/Cigna. The courts have written well-reasoned decisions, and the rules of the road are reasonably clear.
But when it comes to vertical mergers, those like the proposed acquisition here, the situation is quite different. The Non-Horizontal Merger Guidelines have not been updated since the early 1980s. The last major vertical merger that the government litigated to a decision dates from 1979.
The last time the Supreme Court adjudicated a vertical merger was in 1972. So maybe it is time for the courts to take another look. While we are at it, how about dusting off and updating the Non-Horizontal Guidelines? Businesses thinking about vertical deals would benefit from having a newer road map.
Reason 2: An AT&T loss might actually be good for CNN.
A lot of ink has been spilled over President Trump’s criticisms of CNN and his comments as a presidential candidate in opposition to the AT&T deal. This has led some people who normally would oppose more media consolidation to become supporters of the merger.
The irony is that no one seems to be thinking about what is going to happen to CNN if it becomes part of a large and conservative telecom company like AT&T.
If the deal goes through, CNN’s management and operations would undoubtedly change under AT&T’s ownership and not necessarily in a way that its viewers and supporters would like. This is probably why AT&T when it first announced the deal made a big point of promising that CNN would remain editorially independent.
Promises like that are easy to make but also easy to ignore later on, so who knows what will happen? But one thing is sure: If the deal falls apart, CNN continues as is. If the deal goes through, it’s not clear what will happen to CNN.
Reason 3: A government loss might actually be good for the government.
Everybody who goes to court wants to win, and DOJ is no exception. But this time, the government may actually be in a win-win situation. If a judge blocks the merger, it’s a win for the DOJ and vindicates its current approach to vertical deals.
But if the DOJ loses, it is not the end of the world. If the DOJ’s approach is wrong or its evidence is weak, it would be good for a court to say so.
For most of its 100-plus years, antitrust law has changed and developed because of court decisions. Indeed, that is what Congress had in mind when it created the antitrust laws in the first place.
But more recently, the antitrust agencies have tended to pretty much do their own thing. Having a court occasionally tell the agency that it is right or wrong is not a bad idea. It is, after all, what Congress intended.
Reason 4: Behavioral remedies don’t work.
A lot of brouhaha has surrounded reports that DOJ was looking at divestitures here instead of the more usual remedies in vertical deals. After all, the argument goes, DOJ let Comcast buy NBCUniversal subject only to a bunch of conditions not to use its new toy as a weapon against its competitors.
In truth, problematic vertical mergers often have been saddled with conditions such as non-discrimination provisions, firewalls and arbitration procedures.
But there is increasing evidence that these conditions don’t work very well and may not in fact do much of anything. John Kwoka and Diana Moss have explained why, from an economic standpoint, these sorts of remedies tend to fail.
Additionally, people seem to have forgotten that although Comcast/NBCU was settled with behavioral conditions in 2011, DOJ did not take up Comcast’s offer to make Time Warner Cable subject to the same conditions. Indeed, Comcast/Time Warner Cable, which was also a vertical deal, fell apart in 2015 in the face of a likely government challenge.
Republicans in particular tend not to like regulation and regulatory interference in the market. Behavioral remedies are a form of regulation. Much better to quickly greenlight a merger if there are no serious competition concerns, or to block a merger or require divestitures if it is anticompetitive, and let the market move on.
Reason 5: Media mergers should get careful scrutiny.
Large corporate mergers affect us all. There has been discussion recently about some of the possible negative consequences of excessive industry consolidation, including effects on the middle class and on workers. Excessive consolidation was troubling to Americans for many years and, after a lull, has begun to trouble people again.
Big media mergers in particular deserve careful scrutiny, since they affect how news and information reach the public. The media landscape has been changing, but that does not diminish the importance of a vibrant and competitive media sector to the “marketplace of ideas.” If anything, we need to worry these days both about “old” gatekeepers and “new” gatekeepers.
Sysco abandons merger deal with US Foods
1 of 2 Mini-loader operator Mark Estrada loads and unloads tall stacked storage at the Sysco distribution center serving in Schertz. On Monday, Sysco announced it was terminating its $3.5 billion merger with US Foods following a ruling by a federal judge last week that granted the Federal Trade Commission a preliminary injunction to block it. Express-News file photo Show More Show Less
2 of 2 In the wake of terminating its merger plans, Sysco CEO Bill DeLaney said Sysco will refocus on its internal strategy and other growth opportunities. Katherine Feser /Houston Chronicle Show More Show Less
Moving on from its failed merger with US Foods, Houston-based Sysco on Monday outlined other plans for growth, acquisitions and internal improvements and said it would take on more debt to fund these initiatives.
Sysco&rsquos announcement Monday to terminate its $3.5 billion merger with US Foods was expected following a ruling by a federal judge last week that granted the Federal Trade Commission a preliminary injunction to block it. The combined company could have made more than $65 billion a year in sales.
The merger with US Foods broke down under antitrust scrutiny after Sysco spent a year and a half and $355 million preparing for it. The company will pay a $300 million breakup fee to US Foods, and $12.5 million to Performance Food Group. Sysco had planned to sell to the latter company 11 US Foods distribution centers to quell regulators&rsquo antitrust concerns. Without the US Foods deal, that sale also won&rsquot happen.
Sysco CEO Bill DeLaney said during a call with investors that the company aims to continue to grow faster than the market it serves by increasing customer service and focusing on promising segments. He estimated overall market growth in distributing food to restaurants, hospitals, schools and hotel at about 1 percent per year. Sysco will look for acquisitions domestically and internationally, he said.
The company also announced a $3 billion share buyback plan, currently worth about 13 percent of outstanding stock. DeLaney said Sysco would continue to streamline work among its operating companies and update ordering technology for customers. It also plans to look for more cost savings in addition to the $750 million it has already cut.
&ldquoWe remain truly excited about Sysco&rsquos future,&rdquo DeLaney said. &ldquoWe are extremely well-positioned to move forward from this inflection point.&rdquo
In the wake of terminating its merger plans, DeLaney said Sysco will refocus on its internal strategy and other growth opportunities.
&ldquoOur supply-chain resources have been heavily devoted over the last 18 months to developing merger integration plans,&rdquo DeLaney said. &ldquoAlong the way, we have identified discrete savings opportunities that we believe we can leverage as a stand-alone company. We will continue to develop these plans over the coming weeks and month.&rdquo
Sysco has been piloting new technologies with customers, he said, and will begin to roll out companywide changes. Previously, Sysco&rsquos regional operating companies have worked more independently. Streamlining how the operating companies work together is part of a multiyear process Sysco initiated 15 months ago.
&ldquoWe&rsquore going to take a different approach going forward,&rdquo DeLaney said.
The company could benefit from bulk-ordering and predicting food trends. DeLaney said Sysco is using more data analytics to improve customer service based on feedback.
Better companywide systems also will help Sysco integrate future acquisitions, DeLaney said.
Morningstar analyst Erin Last called the announcement expected. She has predicted Sysco will pursue smaller acquisitions.
&ldquoWe expect Sysco to remain a consolidator in this highly fragmented space, seeking out smaller bolt-on deals to build out its footprint,&rdquo she wrote in a note to investors last week following the judge&rsquos ruling.
In the past three years, Sysco has acquired 26 companies, including several deals while the US Foods merger was pending.
To grow faster than the overall market, DeLaney said Sysco will focus on certain areas of growth.
&ldquoThe key is that it&rsquos going to come in different places,&rdquo he said. &ldquoIt&rsquos going to be segmented.&rdquo
Ethnic food and fresh, natural food are two growing categories, he said. Sysco started a push to gain share in the Hispanic food market earlier this year.
But DeLaney said he doesn&rsquot expect major shifts in the food-distribution market any time soon.
The CEO has said international growth will be an important part of Sysco&rsquos long-term plans.
&ldquoOver the last decade, we&rsquove pretty much established a footprint in Canada and in Ireland, and in the Bahamas now,&rdquo he said Monday. &ldquoWe&rsquove announced joint ventures, and recently over the last year in Costa Rica, and just recently in Mexico, we&rsquove grown our export company.&rdquo
Sysco stock dropped 2.16 percent following the news, to close at $37.54 per share.
Sysco files memorandum against FTC injunction on U.S. Foods merger
April 22 (Reuters) - Food distributor Sysco Corp said it had filed a memorandum opposing the U.S. Federal Trade Commission's efforts to block its proposed merger with smaller rival U.S. Foods Inc.
Sysco said it filed the memorandum on Tuesday in the U.S. Federal District Court for the District of Columbia, opposing the FTC's motion for preliminary injunction against the merger.
The U.S. government filed a lawsuit in February seeking to block Sysco's $3.5 billion takeover of US Foods, saying the deal would "eliminate significant competition" in the sector.
(Reporting by Yashaswini Swamynathan in Bengaluru Editing by Simon Jennings)
Vietnam's Pandemic Surge Trigger Supply Chain Concerns for Apple, Samsung: Reuters
The pandemic resurgence has compromised Vietnam’s factory production locations that house Apple Inc (NASDAQ: AAPL) and Samsung Electronics Co Ltd (OTC: SSNLF) suppliers, Reuters reports. Over 3,000 people have contracted the virus in 30 of its 63 cities and provinces since late April. Four business sources acknowledged operational hit following lockdown, which triggered supply chain disruption concerns. One Apple supplier had temporarily divided its workforce over two shifts. Vietnam had begun vaccinating workers in the two most affected provinces Bac Ninh and Bac Giang, based on the health ministry statement. Bac Ninh is responsible for significant Samsung operations and imposed a curfew and other travel restrictions. Vietnam accounts for 50% of Samsung’s global phone and tablet production. Last week, Vietnam’s government advised Bac Ninh and Bac Giang provinces to drive efforts to prevent an industrial production disruption. LG Electronics Inc (OTC: LGEIY), Foxconn Technology Co Ltd (OTC: FXCOF), and Luxshare have operations or supply chain companies in the area. A Xiaomi Corp (OTC: XIACF), Huawei Technologies Co., Ltd, Vivo Communication Technology Co. Ltd, and Guangdong Oppo Mobile Telecommunications Corp, Ltd supplier’s workers were living and working within the industrial zones in Bac Ninh. The government planned to gradually reopen four industrial parks closed a week earlier due to the pandemic. Some of the lower-tier South Korean suppliers were also struggling. Price action: AAPL shares traded lower by 0.19% at $125.04 on the last check Friday. See more from BenzingaClick here for options trades from BenzingaNew Bill To Impose Counterfeit Goods Sale Liability On Amazon, eBay: BloombergElastic's Osquery Host Management Integration Now Addresses Cyber Threats© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
US STOCKS-Wall Street shakes off inflation rise and closes higher
U.S. stocks climbed on Friday as investors brushed off a stronger-than-expected inflation reading, as both the Dow and S&P 500 indexes clinched their first weekly gain in the past three weeks. PCE is the Federal Reserve's preferred measure of inflation. In the 12 months through April, the core PCE price index surged 3.1%, smashing through the Fed's 2% target, as the reopening economy unleashed pent-up demand.
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IATA chief pours cold water on Airbus output increase
PARIS/LONDON (Reuters) -The airline industry's most senior representative on Friday cast doubt on plans by Europe's Airbus for sharp increases in jetliner production, saying they appeared overly optimistic. Willie Walsh, director general of the International Air Transport Association, voiced scepticism a day after Airbus published proposals to almost double single-aisle production to as high as 75 jets a month by 2025. "Let's wait and see, because obviously there is a huge disconnect between what the manufacturers say they're going to produce and what the airlines decide to buy," he told Reuters.
Goldman says China is no longer center of commodities pricing
While commodity prices fell after Chinese warnings over onshore speculation, "the fundamental path in key commodities such as oil, copper and soybeans remains orientated towards incremental tightness in H2, with scant evidence of a supply response sufficient to derail this bull market." The market is beginning to reflect this, as copper prices are increasingly driven by Western manufacturing data rather their Chinese counterparts, it said. "This is a role reversal from the bull market of the 2000's, with China now the incumbent consumer as the U.S. was when emerging Chinese demand squeezed out marginal U.S consumers," Goldman said.
Explainer: How will China's latest oil probe affect the world's biggest crude importer?
This year China's government has been gradually ramping up scrutiny of its sprawling oil industry, reinforcing its authority with new taxes on refined products while investigating crude imports by state energy giants and independent refiners. Last Tuesday, the country's top economic planning agency gave five state-owned companies just two days to report on their historic use of imported oil, part of a broader effort by the world's largest oil importer to control inbound shipments as domestic supplies swell. China is the world's largest crude oil importer and the No. 2 consumer after the United States.
Bitcoin Slumps as Traders Brace for a Volatile Long Weekend
(Bloomberg) -- Bitcoin slumped 7% to near $35,500, recalling levels seen in the crypto meltdown last week as traders brace for fresh volatility over the long weekend.Prices across digital tokens took a hit as Bank of Japan Governor Haruhiko Kuroda joined a growing list of central bankers expressing skepticism about the industry’s usefulness in the real world.Now, retail players are set to dominate the coming trading sessions on typically thin exchange volumes.“Looking at the unrest across the crypto market, there is a chance that we see another hectic weekend trading in Bitcoin and other cryptocurrencies,” said Ipek Ozkardeskaya, a senior analyst at Swissquote.Prices spiked 10% last Saturday, only to plunge by 18% the next day.https://t.co/gR9ozw5TrP pic.twitter.com/xkelxqOZnu— Bloomberg TV (@BloombergTV) May 28, 2021 “Most of the trading is speculative and volatility is extraordinarily high,” Kuroda said in an interview Thursday. “It’s barely used as a means of settlement.”Kuroda Joins Chorus of Central Bankers Casting Doubt on BitcoinAll the same, Bitcoin was little changed for the week, after a 44% selloff from the April’s peak of $63,000.More broadly, the threat of tougher regulation continues to be a drag on crypto market sentiment. China and Iran have cracked down on Bitcoin mining operations for using too much electricity and there’s speculation that the U.S. policymakers may increase financial oversight given the market’s growing size and intense volatility.On a technical level, the key marker is $30,000, said Swissquote’s Ozkardeskaya. A break below that level would be “further affirmation of an extended bear market,” she said.“Volatility has eased this week, but that probably won’t last entering a long weekend,” Edward Moya, senior market analyst at Oanda Corp., wrote in a note. “Bitcoin’s consolidation phase should continue, but if the $37,000 level breached momentum, it could get ugly fast.”More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
Funds recommended cutting equity exposure in May to lowest level this year
Funds recommended the lowest equity exposure this year in May, citing risks from the expected pull-and-push between reflation trades and dovish central banks, but most respondents in Reuters polls said a near-term correction in stock markets was unlikely. While global shares have see-sawed in May, with technology-related stocks taking a hit, the MSCI world equity index breached an all-time high and European bourses were near record highs, helped by policymakers allaying inflation concerns. Still, Reuters polls of 35 fund managers and chief investment officers in the United States, Europe and Japan, taken May 10-27, showed the lowest recommended equity allocations since December - averaging 48.7% of the model global portfolio, down from over a three year high of 49.8% last month.
Costco is reopening its popular food courts and bringing back churros and free samples in bid to juice profits
Welcome back, Costco food courts.
Stock Splits Are Back. So Is the Debate Over Whether They Matter
(Bloomberg) -- Stock splits are back in vogue among big U.S. companies, reviving a debate about whether the practice that had fallen out of favor for years is worth the fuss.Last week, Nvidia Corp. became the eighth company in the S&P 500 Index to announce a split in the past year, joining big names like Apple Inc. and Tesla Inc. That’s the most over a comparable period in six years, according to data compiled by Bloomberg.The surge in splits comes amid a rally that’s pushed share prices of almost 600 stocks in the Russell 3000 Index above $100. Yet that has done little to settle the age-old-argument among investors about whether such stock-price engineering has any bearing on performance. In fact, recent developments such as soaring retail trading and fractional share ownership have only heated things up.“Arithmetically, there’s no merit to the notion that stock splits work,” said Mark Lehmann, chief executive officer of JMP Securities LLC. “But there is an optical hesitancy for certain stocks at certain prices and there is a segment of the investing public where that will never change.”The primary motivation cited by companies doing splits is simple: to make each share cheaper to buy. Nvidia, whose share price has more than quadrupled since the start of 2019 to reach almost $650, said in a statement announcing its 4-for-1 stock-split plan that its aim was to “make stock ownership more accessible to investors and employees.” A representative for the chipmaker declined to comment further.Once a reliable hallmark of bull-market exuberance, the practice had until recently fallen out of favor. In 2006 and 2007, when stocks were again setting records, there were 47 splits in the S&P 500. Three companies -- Nvidia, Paccar Inc. and Cummins Inc. -- even split twice. In 2019, there were only two.For Julian Emanuel, chief equity and derivatives strategist at BTIG, it’s harder to make the case for splitting a stock these days because of the rise of commission-free trading and brokerages offering fractional shares. Those developments “have largely rendered irrelevant the dollar value of a company’s share price,” he said in an interview.Brokerages like Robinhood now let investors buy a slice of a share for as little as $1 rather than forking over, say, more than $2,300 for a single share of Google-parent Alphabet Inc.Limited Benefits A look at the data backs up the case against splits providing long-term benefits to stock performance. The shares of companies that have split outperformed the S&P 500 on average in four of the last five years in the year the split was announced, according to Bloomberg data. The calendar year following the move, however, those same shares underperformed four of the five years.The recent rash of stock splits has sparked speculation that other large technology companies like Amazon.com Inc. that boast four-digit share prices may be next. Amazon split its stock three times in 1998 and 1999 and hasn’t done one since. Shares of the e-commerce giant trade around $3,200 and have gained more than 5,000% since its last split.Regardless of what the historical-performance record shows, the surge in retail trading over the past year may be altering the calculus for companies when it comes to evaluating splits.U.S. retail investors are now second in share trading only to market makers and independent high-frequency traders, according to Larry Tabb, director of market structure research at Bloomberg Intelligence. The retail segment is now larger than quantitative investors, hedge funds and traditional long-only participants, said Tabb.“A lot of investing is driven by psychology,” said Kevin Walkush, a portfolio manager with Jensen Investment Management. “Now, rather than a retail investor facing the challenge of buying a fractional share, a stock split means they can buy it outright. It just opens up the market that much more for retail investors.”More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
Betting against volatile stock market makes comeback as summer nears
Some investors are revisiting a popular trade that has largely been out of favor since last year’s market tumble: betting against stock market turbulence. Assets in the ProShares Short VIX Short-Term Futures ETF, a popular vehicle for betting against stock market gyrations, have nearly doubled over the last six months to $562 million. Investors have also reaped big gains betting against products designed to profit from volatile markets.
Elizabeth Holmes' lawyers want jurors untainted by intense media coverage of Theranos
Court documents filed Thursday in the federal criminal fraud case against former Theranos CEO Elizabeth Holmes reveal questions that her attorneys hope to pose in selecting the 12 jurors who will decide the fate of the embattled Silicon Valley entrepreneur.
Weekend reads: AMC and GameStop rocket again
Over the past week, shares of AMC Entertainment Holdings have more than doubled, while GameStop Corp’s stock has shot up 35%. Steve Goldstein explains why the action is different this time. The price of bitcoin in U.S. dollars is down 44% from its peak on April 21, in part because of a warning from the People’s Bank of China against using bitcoin to make payments and signals from China’s government that tighter regulations on the cryptocurrency are coming.
GBP/JPY Price Forecast – British Pound Quiet In The Week
The British pound pulled back ever so slightly during the trading session on Friday in order to consolidate some of the gains from the breakout on Thursday.
Globant Says It Bought Bitcoin in Q1
With the purchase, the Luxembourg-based company becomes the latest company to hold cryptocurrency on its balance sheet.
National Bank Declines After Earnings Underwhelm Investors
(Bloomberg) -- National Bank of Canada shares fell the most in four months after its fiscal second-quarter results underwhelmed investors following a week of blowout earnings from its peers.While National Bank’s profit topped analysts’ estimates, four of its Canadian banking peers also posted earnings that beat projections this week. National Bank, which generates a bigger portion of revenue from capital-markets activities than any of the country’s six biggest banks, also was hampered by a slowdown in that unit following a strong quarter for trading a year earlier.National Bank shares fell as much as 3% in Toronto on Friday, the biggest intraday decline since Jan. 29. The stock had climbed 35% this year through Thursday, the largest increase among Canada’s Big Six banks.“National ran up a lot into the quarter -- the bank has been the best performer year-to-date -- so the expectations were really high entering the quarter,” Scott Chan, an analyst at Canaccord Genuity Group Inc., said in an interview. “But, all in all, National had pretty strong results across the board.”While net income from National Bank’s financial-markets unit rose 50% to C$238 million ($197 million), the gain was driven by a lower provision for credit losses. Revenue in the unit slipped 5.2% from a year earlier, when pandemic-roiled markets fueled a surge in trading activity.Still, this year’s climbing equity markets helped the bank’s wealth division, with profit in that business rising 17% to C$165 million last quarter, the Montreal-based company said Friday.Overall net income more than doubled to C$801 million, or C$2.25 a share, in the three months through April. That compared with analysts’ C$1.94-a-share average estimate.Helping net income was a big decrease in provisions for credit losses. The lender set aside C$5 million for potential bad loans, down from C$504 million a year earlier and less than analysts’ C$81.9 million average projection.Profit in the personal and commercial banking business, which is focused on Quebec, increased more than fivefold to C$321 million in the second quarter. Revenue in the unit rose 6.6% last quarter, and the value of mortgages in the unit swelled 9.4% from a year earlier to C$72 billion.The bank’s balance of commercial loans also gained from both a year earlier and the previous quarter, helped by its strength in Quebec as well as an emphasis on specialized sectors outside the province, including creative industries, real estate, health care and technology, Chief Executive Officer Louis Vachon said.“In terms of customer acquisition, we’ve had pretty consistent growth,” Vachon said in an interview. “We’ve been a consistent player in the mortgage market, where we’ve had pretty steady growth over the last quite a few years, and same thing on the commercial side.”(Updates with CEO’s comments in last two paragraphs.)More stories like this are available on bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
AMC shares retreat but end week up 116% after 4-day rally
(Reuters) -Shares of movie theater chain AMC Entertainment closed lower on Friday, snapping a four-day rally that saw them gain 116% on the week. After vaulting to a record high during the session, AMC's shares finished down 1.5% at $26.12. The stock's weekly gain was its largest since January.
Bitcoin Remains in Corrective Phase Below $40K Further Downside Expected
BTC is down about 37% month to date and has experienced a series of sharp drawdowns similar to 2017 which preceded a bear market.
Obama Administration Most Aggressive Ever in Regulating Mergers and Acquisitions
On April 6, the Department of Justice filed a lawsuit to block Halliburton&aposs (HAL) - Get Report proposed $35 billion plan to acquire Baker Hughes (BHI) after a 17-month antitrust review.
Harsh words from Attorney General Loretta Lynch and her antitrust chief, Assistant Attorney General Bill Baer, against the merger that day were aimed not only at the two companies and investors pushing that merger, but dealmakers in general, too, many of whom the officials said are instigators of an ongoing a wave of mergers in already concentrated industries.
Lynch, before lawyers attending the American Bar Association&aposs spring antitrust meeting, warned of "an unprecedented swell of mergers coursing through the U.S. economy," adding, "It isn&apost just the number of proposed deals that makes this a unique moment in antitrust enforcement it&aposs their size and their complexity."
Not only are U.S. regulators grappling with a boom in mergers, many global in scope, but they are also engaging in some of the toughest merger enforcement in decades. 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."
In 2015 alone, the DOJ and its sibling antitrust agency the Federal Trade Commission challenged 47 mergers, which ultimately resulted in a lawsuit seeking to stop the deal, abandonment of the transaction by the companies or in a restructuring of the deal to address antitrust concerns. That&aposs an increase of more than 40% from the 33 deals challenged in 2014. A look at The Deal&aposs data on transaction over $3 billion show a similar aggressiveness. In 2015 alone, five of these mega deals were abandoned up from two in 2014.
During the Obama years, the DOJ and the FTC have tried to stop or successfully forced changes on 271 of the 9,551 mergers and acquisitions that have been filed with the government -- a challenge rate of 2.8% over the course of his administration. Since 2009, the annual challenge rate has fluctuated somewhat but has generally been around 3%. That&aposs an aggressive stance, even when accounting for the slow creep upwards engaged in during preceding White Houses: the George W. Bush administration challenged 2.1% of deals, and Bill Clinton&aposs White House opposed 1.7%. Under George H.W. Bush, the FTC and DOJ challenged about 1.3% of proposed transactions, and under Ronald Reagan, they challenged about 1%. Deep Dive: Top Antitrust Regulator Debbie Feinstein Q&A
Although merger challenges stepped up measurably after Obama moved into the White House, the 2015 increase was dramatic even by the Obama Administration&aposs track record. Lynch said the reason is because companies and their investors are pushing obviously anti-competitive deals in industries that are already highly concentrated. Often the deals can&apost be fixed with the most common antitrust remedy, which is to sell off assets in business units where the harm to competition is particularly acute.
"A number of the proposed mergers that we have recently reviewed plainly ran the risk of distorting markets and harming the public interest," she told the ABA crowd. "Some of these deals were so obviously anticompetitive that they were doomed from their inception."
Although the past year has seen a dramatic jump in merger reviews, The Street&aposs analysis of government data show the level of antitrust enforcement has been slowly rising since the end of Reagan administration, which ushered in monumental deregulation following The Gipper&aposs election in 1980. In subsequent administrations over the past 36 years, both Republican and Democratic presidents have overseen an ever-growing willingness on the part of the government to challenge merger transactions. Deep Dive: Will the Next President Be as Tough on Mergers and Acquisitions as Obama?
Deal Size, Complexity Growing, Too
When it comes to big mergers, the numbers are even more dramatic. In 2015 there were 67 proposed mergers were valued at more than $10 billion -- more than double the annual volume in 2014, according to numbers from testimony of the DOJ&aposs Baer before the Senate Antitrust Subcommittee in March. In 2015 there were 280 mergers valued larger than $1 billion, he said. According to The Street&aposs analysis that&aposs also more than double the level from 2010, when there were 124 deals over $1 billion.
It&aposs not just the sheer size of these transactions but the fact that many are taking place in highly concentrated industries and would require divestitures or other remedies across multiple product lines and geographic markets. Fixing many of these big deals, the regulators have said, would require complex consent agreements that would require years of monitoring to make sure they are complied with and work as they are intended, a type of commitment the government makes reluctantly. Deep Dive: Obamacare Has Big Government Fighting Itself Over Hospital Mergers -- And Winning
That&aposs a lesson Halliburton and Baker Hughes are having to face now. Sources familiar with the discussions said Halliburton attempted to reach a settlement with the DOJ by pushing sales of the various oil production lines that it would have to shed to multiple buyers. But sources outside the company had speculated that the DOJ would insist on a single primary buyer in order to create a competitor large enough to replace the competition lost with the elimination of Baker Hughes as a stand-alone company. Deep dive: Will the Halliburton-Baker Hughes Deal Survive Government Opposition?
"We have learned to be skeptical of settlement offers consisting of behavioral remedies or asset divestitures that only partially remedy the likely harm," according to Baer&aposs written testimony to the subcommittee. "We will not settle Clayton Act violations unless we have a high degree of confidence that a remedy will fully protect consumers from anticompetitive harm both today and tomorrow. "Where complex transactions pose antitrust risks in multiple markets, our confidence that Rube Goldberg settlements will preserve competition diminishes. Consumers should not have to bear the risks that a complex settlement may not succeed."
Why Big Government Is Getting Tough on Mergers
Antitrust lawyers say a number of factors have contributed to the aggressive stance the Obama administration is taking today. For starters, Obama himself pledged to be assertive on the merger front during the 2008 election campaign.
At the tail end of Bush&aposs second term, merger enforcers had developed a reputation for giving mergers an easy ride, largely because DOJ&aposs approvals of the Whirlpool-Maytag merger in 2006 and the combination of XM and Sirius in 2008 without any conditions.
But a more apt characterization would be of regulators struggling to wage successful litigation after a string of high-profile losses, including courts&apos rejection of the DOJ&aposs and FTC&aposs attempts to stop the 2001 acquisition of Comdisco by Sunguard Data, Arch Coal&aposs 2004 purchase of Triton Coal and Oracle&aposs acquisition of PeopleSoft that same year.
Even court victories could carry the whiff of defeat, as did the FTC&aposs challenge to Whole Foods Market&aposs 2007 purchase of Wild Oats Markets. The FTC ultimately won its court case against the deal when a federal appeals court ruled in its favor but the commission was able to force only a relatively insignificant divestiture package on Whole Foods because by then the grocery had already consummated the transaction. (A district court previously denied the commission&aposs request for a preliminary injunction, halting the deal while the merger case was underway.)
During the tail end of the Bush years, the agencies were examining how to improve their performance in court, and when Obama took office the career staffers who continued in their jobs were ready to act, bolstered by the White House&aposs decision to hire additional experienced litigators. And act they did.
The effort paid off in 2011 with the DOJ&aposs successful court complaints to stop H&R Block&aposs attempt to take over rival TaxACT, and AT&T&aposs bid to acquire T-Mobile USA. Those successes invigorated the agencies&apos willingness to fight mergers in court and led to fruitful challenges against US Airways Group&aposs purchase of American Airlines, which resulted in a divestiture of slots and gates at key airports Bazaarvoice&aposs acquisition of online ratings rival PowerReviews Anheuser-Busch InBev&aposs purchase of Grupo Model SAB de CV, leading to another major divestiture and the FTC&aposs forcing a settlement on Ardagh Group&aposs purchase of Cie. de Saint-Gobain&aposs North American glass-container business.
The government&aposs momentum continued into 2015, when the two agencies combined to stop roughly a half-dozen mergers by either filing lawsuits to stop them or telling the parties that a legal challenge was likely. The government victories included the FTC&aposs successful case against Sysco&aposs proposed acquisition of US Food Group. Then, General Electric terminated its agreement to sell its appliance division to Electrolux in the middle of a trial over the DOJ&aposs allegations that the deal would hurt buyers of cooking appliances in the U.S. Other deals killed last year under threat from antitrust regulators included Comcast&aposs $67 billion purchase of Time Warner Cable the purchase of Bumble Bee Foods by Thai Union Group, the owner of the rival Chicken of the Sea tuna brand Louisiana-Pacific&aposs planned acquisition of Ainsworth Lumber and Applied Material&aposs deal to buy Tokyo Electronਏor $9.4 billion. Deep Dive: For Banks, Era of &aposToo Big to Fail&apos Is Also Era of &aposToo Small to Succeed&apos
Aggressive Regulators With Attitude
The biggest change, was one of attitude: the agencies set aside their fear of losing in court and were willing to pursue novel theories of antitrust harm, including trying stop deals that eliminated new "maverick" competitors from a market and challenging deals that harmed competition in narrow submarkets. Deep Dive: Antitrust Regulators Are Getting Smarter and More Aggressive
The maverick theory had its first big success in 2012 when the DOJ convinced a federal judge to halt H&R Block&aposs proposed $287 million acquisition of TaxAct, an upstart, low-cost rival to the tax preparation company.
The FTC proved it could stop a merger by arguing that it harmed a sliver of a larger market in the Whole Foods case. There the commission showed the deal hurtompetition, even though there were plenty of traditional groceries, because it would diminish competition between grocers specializing in premium and organic foods.
The FTC next showed the narrow market argument when it persuaded a federal judge in 2011 to stop Ohio hospital operator ProMedica Health System from integrating Toledo&aposs St. Luke&aposs Hospital into its operations because the merger would create a duopoly on obstetrics services.
"There is greater risk tolerance [on the part of regulators] and that&aposs why there&aposs more litigation," said Sharis Pozen, who was a senior staffer at the beginning of the Obama White House and was elevated to acting antitrust chief after the departure of Christine Varney.
Strong stands against big mergers look to be continued further into 2016. The FTC just wrapped its case before a federal district judge in its attempt to stop Staples&aposs $6.3 billion bid to acquire Office Depot. Besides the now-pending Baker Hughes merger case, legal challenges are possible in other deals pending before the antitrust regulators, including Anthem&aposs $54 billion plan to acquire Cigna and Aetna&aposs purchase of Humanaਏor $37 billion Anheuser-Busch InBev&aposs plan to acquire SABMillerਏor $106 billion Dow Chemical&aposs decision to merge with E.I. du Pont de Nemours and Co.ਊnd Walgreens Boots Alliance&aposs planned $9.5 billion takeover of Rite Aid.
Pozen, now vice president, global competition and antitrust at GE, said the administration&aposs determination to revive the merger litigation was motivated in part because it wanted some of the new theories it wasਊpplying to merger reviews to gain the imprimatur of federal judges, which carries more legal weight than consent agreements reached solely between government agencies and companies. "People out there in the field we&aposre telling us they were tired of &apossoft law&apos and asking why aren&apost we seeing more litigation, why aren&apost we seeing our common law system working?"
The Future of Big Business vs. Big Government
Going forward, antitrust lawyers said the government&aposs aggressiveness isn&apost likely to dampen the corporate world&aposs thirst for mergers. Deal volume is largely driven by the need for growth and more efficient operations, they say, and the government&aposs policy is only one factor they consider.
"When I look at the landscape of the interaction between government and business, I often find big business pushing for regulations that, while ostensibly good for the consumer, can only be afforded by big business," said TheStreet&aposs Jim Cramer. "Large businesses, if they don&apost get their way, can move offshore rather easily. Smaller businesses? They just die. The government doesn&apost seem to be sensitive to that dichotomy at all."
Perhaps a Republican White House will appoint more amenable merger enforcers but even under a Hillary Clinton or Bernie Sanders administration, the demand to carry out mergers will remain. The trick for acquisitive companies and their lawyers is to gauge what types of transactions a new lineup of officials will tolerate.
"We have to be watchful and mindful of that and counsel clients as best as we can under the circumstances," Pozen said.
THE FEDERAL TRADE COMMISSION
The last twelve months have been a veritable high water mark for FTC merger enforcement activity. The agency scored two high-profile litigation wins by securing injunctions blocking Staples’ $6.8 billion bid for Office Depot and Sysco’s $8.2 billion proposed acquisition of rival US Foods. In addition to requiring remedies in over 15 matters during the last year, the FTC initiated litigation to block five transactions, roughly doubling the agency’s recent historical average of approximately two-to-three merger litigations per year.
Not all of the FTC’s merger litigation efforts have succeeded. In particular, as discussed below, the FTC lost a significant preliminary injunction proceeding in federal court involving a merger between alleged potential competitors, and another federal court denied the FTC’s efforts to enjoin a hospital merger in central Pennsylvania. Time will tell how this might influence the FTC’s willingness to challenge potential competition and hospital cases going forward, but statements from the FTC officials suggest that the agency will continue to bring lawsuits where it concludes that enforcement is warranted.
Notably, several large transactions that raise interesting antitrust issues are currently pending before the agency, including Walgreens’ proposed $17 billion purchase of Rite Aid, ‘Teva Pharmaceuticals’ $40.5 billion acquisition of Allergan’s generic drugs portfolio, and Sherwin-Williams $8.9 billion proposed acquisition of Valspar. The agency’s actions–or inactions–in these matters will provide further insights into the agency’s future direction.
And Then There Were Three
Although the Commission’s Democratic majority will very likely persist through the election cycle, Commissioner Wright resigned on August 17, 2015, to return to the faculty of the George Mason law school and Commissioner Brill announced her resignation on March 22, 2016, to enter private practice. The President has not nominated a candidate for either position and, given the current acrimony between the President and Congress regarding appointments, both seats may remain empty for some time.
Other staffing changes at the Commission include the departure of the Commission’s General Counsel, Jonathan Nuechterlein, to private practice the addition of Professor Ginger Zhe of the University of Maryland to the Bureau of Economics as the Bureau’s Director and the addition of Lorrie Faith Cranor, a Professor of Computer Science and Engineering and Public Policy at Carnegie Mellon University, to replace Ashkan Soltani as Chief Technologist. While notable, these staffing changes are unlikely to materially alter the agency’s enforcement decisions.
Déjà Vu – FTC Blocks Staples’s Proposed Acquisition of Office Depot (Again)
On May 10, 2016, following a year-long investigation and two weeks of trial, the FTC secured an injunction in federal court blocking Staples’s proposed acquisition of rival Office Depot. This is the third time the FTC has weighed in on a major office supply superstore transaction, and marks the second time it has prevented Staples from acquiring Office Depot. Nearly two decades ago, in 1997, the Commission obtained an injunction from the same court blocking this very same deal. In the 1997 case, the Commission’s focus was on sales of disposable office supplies (e.g., Post-it notes, paper, and pens) to retail store consumers. Sixteen years later, in November 2013, the FTC cleared a merger of Office Depot and OfficeMax, which was then the third-largest operator of retail office supply stores in the United States. In clearing that transaction, the FTC issued a closing statement noting that the “current competitive dynamics are very different” than they were in 1997. In addition to concluding that office supply chains face “significant competition” for retail customers, the Commission explained that “[a] substantial body of evidence indicates that the merger is unlikely to substantially lessen competition or harm large [business] contract customers.”
Notwithstanding its 2013 closing statement, the Commission elected to challenge the Staples/Office Depot transaction after rejecting the parties’ offers to divest assets and customer contracts to a third party. Unlike its 1997 challenge, the agency’s case focused not on retail sales of office supplies to individual consumers, but rather on sales to large corporations. Specifically, the agency alleged that the relevant market “is the sale and distribution of consumable office supplies to large business-to-business [“B-to-B”] customers in the United States.” The agency’s economist, Dr. Carl Shapiro, estimated that Staples and Office Depot combined accounted for nearly 80% of consumable office supply sales to Fortune 100 companies.
In a 75-page opinion, Judge Sullivan explained that the FTC had met its burden of “showing that the merger would result in ‘undue concentration’ in the relevant market of the sale and distribution of consumable office supplies to large B-to-B customers in the United States.” In addition to accepting the FTC’s relevant market definition, Judge Sullivan noted that “Amazon Business’ lack of demonstrated ability to compete for [B-to-B contracts] and the structural and institutional challenges of its marketplace model” mean that it “will not be in a position to compete . . . on par with the proposed merged entity within three years,” and “it would be sheer speculation . . . for the Court to conclude otherwise.”
The outcome of this case was far from preordained, given the FTC’s 2013 Office Depot/OfficeMax closing statement, but reflects several emerging trends in U.S. merger enforcement. First, as discussed above, the agencies are increasingly skeptical of remedy proposals, particularly in large transactions where there is extensive pre-merger competition and overlap between the parties. Staples is yet another high-profile instance where the agency chose to litigate rather than agree to a substantial divestiture package. Second, the agencies are gaining confidence in defining national markets in which large players vie for business from customers that require services across multiple distribution facilities throughout the country. The DOJ relied on a similar market definition theory in its 2010 challenge of AT&T’s proposed acquisition of T-Mobile, and the FTC used it in its litigation against Sysco/US Foods (discussed below). Finally, the agencies are increasingly relying on evidence of head-to-head competition to support not only competitive effects, but also their proposed market definition. The Commission’s expert argued that evidence of competitive rivalry between Staples and Office Depot for large corporate customers supported the contention that these customers formed a distinct relevant market.
FTC Obtains Injunction Blocking Sysco’s Proposed Acquisition of US Foods
In June 2015, Sysco and US Foods abandoned their proposed merger after the FTC won a preliminary injunction enjoining the transaction in federal district court. The case was the FTC’s signature victory of 2015, and is noteworthy because it came outside of the healthcare sector, the focus of virtually all recent FTC competition-law litigation successes, merger or otherwise. Another impressive aspect of this win was that the FTC prevailed by alleging the merger would lessen competition in a market where the merging parties faced many (albeit differentiated) competitors.
In the litigation, the FTC contended–and the court agreed–that the relevant product market was broadline food product distribution, a market that excluded distributors who focused only on certain categories of food (or food-related products) or served only narrow geographic areas. The court found that the product market must be defined in a way that grasps the reality that large government agencies, healthcare systems, industrial catering companies, and restaurant chains conduct a very substantial portion of their business with the broadliners, who offer special services unavailable from others. The court also concluded that the sheer scale of certain national customers means they are categorically different from regional customers who only receive goods from a small set of distribution centers.
FTC Loses Preliminary Injunction Case Premised on a Potential Competition Theory
But the FTC’s fortunes changed several months later in September 2015, when the Northern District of Ohio denied the FTC’s motion for a preliminary injunction to block Steris Corporation’s (“Steris”) proposed acquisition of Synergy Health plc (“Synergy”). The $1.9 billion merger combined the second- and third-largest medical product sterilization companies in the world.
The FTC’s Complaint asserted an actual potential competition theory, under which the agency claimed that the merger would eliminate future rivalry between the two companies. Both Steris and Synergy provide contract sterilization services for companies that need to ensure their products (e.g., medical devices) are free of unwanted microorganisms before they reach customers. According to the FTC, gamma radiation is currently considered the only feasible method of sterilizing large volumes of dense and heterogeneously packaged products, and Steris is one of only two companies providing such services in the United States. The FTC further alleged that, prior to the proposed merger, Synergy was implementing a strategy to open new plants in the United States that would offer X-ray sterilization services, which would provide a competitive alternative to Steris’s dominant gamma radiation offering.
In evaluating its actual potential competition claim, the court accepted the FTC’s underlying legal theory – i.e., that a merger could be blocked on the ground that one party would enter and compete against the other absent the transaction. But at the preliminary injunction hearing the court focused on the evidence the FTC proffered in support of its claim that Synergy was likely to enter the US market by building one or more X-ray facilities within a reasonable period of time. The court concluded that the FTC failed to meet its evidentiary burden on this point. It concluded that, absent the deal, Synergy was unlikely to enter the market in any reasonable timeframe because the evidence demonstrated that it had failed to obtain customer commitments for its X-ray sterilization services, and that Synergy had failed to lower its capital costs to levels that would enable it to compete effectively. Following the court’s decision to deny the injunction, the Commission announced that it did not intend to appeal and was dropping the suit.
We do not expect the loss to portend the end of the Commission’s interest in pursuing cases premised on “potential competition” theories. Bureau of Competition Director Feinstein delivered a major policy speech outlining the FTC’s commitment to potential competition cases in September 2014 and the agency has an established history of pursuing remedies premised on competition that will occur only in the future, some of which were successful (e.g., the Commission’s successful defense of its Polypore decision in the Eleventh Circuit). However, Steris reflects the reality that potential competition cases inherently place a high evidentiary burden on the agency because it must prove future, rather than current, rivalry. Commissioner Ohlhausen recently commented that the Steris decision may reflect that the courts have a “different appetite than does the Commission” when it comes to forecasting future competitive dynamics.
FTC Enforcement in the Healthcare Provider Sector Reaches Unprecedented Levels
After pressing “pause” on merger enforcement in the healthcare provider sector after suffering a string of eight FTC and DOJ losses in hospital merger cases in the late 1990s, the FTC has now fully rebooted its efforts in this large and important sector. After successfully challenging the consummated acquisition of Highland Park Hospital by Evanston Northwestern Hospital in 2008, an action that resulted in relatively limited behavioral remedies, the FTC has aggressively policed hospital mergers on a prospective basis.
Indeed, since the FTC issued its decision in Evanston eight years ago, the agency is five-for-six, posting an impressive .833 batting average, in litigating hospital merger challenges. During the final two months of 2015, the FTC initiated three additional hospital merger challenges, two of which are currently pending in the courts. On May 10, 2016, the court in the third case involving two hospitals in Pennsylvania, denied the FTC’s motion for an injunction—the agency’s lone hospital-matter loss since the agency issued its decision in the Evanston case. This unprecedented level of enforcement reflects the agency’s commitment to policing combinations among healthcare providers.
- : The FTC moved to block the merger of two hospital systems located approximately three miles apart in Huntington, West Virginia. According to the FTC’s complaint, the combination would create a near monopoly for general acute care inpatient hospital services and outpatient surgical services in the surrounding four-county area, with a market share above 75%. The FTC also stated that the procompetitive benefits of the merger were speculative, not merger-specific, and insufficient to outweigh the likely competitive harm resulting from the acquisition. However, on March 20, 2016, West Virginia governor Earl Ray Tomblin signed into law a bill that ostensibly exempts hospitals and other healthcare providers subject to state regulation from antitrust scrutiny. How the law will alter the course of the FTC’s challenge remains to be seen. : Moving in cooperation with the Pennsylvania Attorney General, the FTC filed a complaint in federal district court to stop the proposed merger of two nonprofit hospital systems serving Harrisburg, Pennsylvania, and the surrounding area. The FTC alleged that the combined entity would have nearly 64% market share, and that the merger would likely lead to increased healthcare costs and diminished quality of care for more than 500,000 residents in the area. However, the court denied the FTC’s injunction, finding that the FTC’s purported four-county “Harrisburg Area” market was too narrow and improperly excluded 19 competing hospitals located within a 65 minute drive of Harrisburg. Moreover, the two largest insurers in Harrisburg, accounting for nearly 80% of the hospitals’ commercial patients, had executed contracts that would prevent the merging hospitals from raising prices for at least the next five years. The court was also persuaded by the parties’ claim that the merger would allow them to utilize capacity more efficiently and to avoid unnecessary capital expenditures. The FTC has appealed the decision to the Third Circuit, and briefing regarding a stay of the district court’s opinion is ongoing. : The FTC challenged the proposed merger of NorthShore University HealthSystem and Advocate Health Care Network, which would create the largest hospital system in the North Shore area of Chicago. According to the FTC, the combined entity would operate a majority of hospitals in the area, and control more than 50% of the general acute care inpatient hospital services.
In both Hershey and Cabell Huntington, the merging hospitals contracted with their largest payors to freeze rates at pre-merger levels for five and ten years, respectively. The court in Hershey concluded that the hospitals’ long-term agreements foreclosed the possibility of anticompetitive post-merger price increases. The FTC, according to the court, was “essentially asking the Court [to] prevent this merger based on a prediction of what might happen to . . . rates in 5 years.” In response, Chairwoman Ramirez voiced her “very serious” concerns with using such agreements as a means of deflecting antitrust attack. She described such strategies as “akin to conduct remedies” that fail to address the longer-term anticompetitive effects of horizontal mergers, including future reductions in innovation and quality. It remains to be seen whether long term price contracts will be more broadly accepted as a safeguard against the anticompetitive effects of mergers as the FTC pursues its appeal of the Hershey decision and awaits the outcome of Cabell Huntington. If this practice gains favor in the courts, it will have significant implications for merger remedies both in and outside the health care context.
Of these three challenges, the Advocate/NorthShore matter may turn out to be the most significant precedent. Unlike the FTC’s other recent hospital merger challenges, the area served by Advocate and NorthShore is not an isolated city (or town) surrounded by a rural area. Rather, the hospitals serve the suburbs north of downtown Chicago. The FTC alleged that the relevant market excluded hospitals located in downtown Chicago and to the west of the city. The court’s reaction to the FTC’s alleged geographic market may create an important benchmark for geographic market definition in healthcare provider markets in large metropolitan areas. In addition, unlike other recent FTC hospital challenges, the combined shares of Advocate and NorthShore (and market concentration) are relatively close to the thresholds specified in the Horizontal Merger Guidelines needed to establish a presumption of anticompetitive harm (i.e., a post-merger HHI greater than 2,500 and an increase in HHI of 200 or more). Thus, even if the court accepts the FTC’s geographic market, the court may give less weight to the presumption of harm associated with concentration thresholds, and correspondingly more weight to other evidence, including the parties’ efficiency justifications.
A notable trend in the FTC’s enforcement program in the healthcare provider sector is the extension of its enforcement beyond hospitals to include ambulatory surgery centers (ASCs), physician groups, and other low-acuity healthcare providers. Although the FTC had previously pursued merger enforcement cases involving dialysis clinics and laboratory services (and continues to do so, as evidenced by the remedy it required in approving U.S. Renal Care, Inc.’s acquisition of DSI Renal), the agency had not previously targeted low-acuity medical services offered by local providers. The FTC’s current position, however, appears to be that any transaction involving healthcare providers–no matter how small or “local”–that results in concentration levels in excess of the thresholds specified in the Horizontal Merger Guidelines merits scrutiny.
The FTC Continues to Resolve Competitive Issues Raised by Pharmaceutical and Medical Device Transactions Through Negotiated Remedies
During the last year, which witnessed a number of very large pharmaceutical transactions, the FTC has stayed the course in the pharmaceutical and medical device sector. In particular, the FTC maintained its approach to analyzing deals involving drugs and medical devices based on whether the transactions involve therapies that are substitute treatments for patient conditions.
Most notably, the FTC’s investigations of several blockbuster pharma deals–including Shire PLC’s $32 billion proposed merger with Baxalta’ and Teva Pharmaceuticals’ $40.5 billion acquisition of Allergan’s generic drugs portfolio–remain ongoing. Commentators anticipate the FTC requiring as much as $600 million in divestitures to clear the Teva/Allergan deal.
In November 2015, the FTC cleared Pfizer’s $16 billion acquisition of Hospira, Inc. after the parties agreed to divest assets related to four generic drugs. The FTC’s required divestitures related to two alleged product markets where the parties were two of three (acetylcysteine inhalation solution) or two of four (clindamycin phosphate injection) current sellers. The FTC also required divestitures of two products based on concerns that future (i.e., potential) competition would be harmed. Specifically, with regard to injectable voriconazole, Pfizer currently marketed a branded version and was expected to obtain and launch FDA approval for a generic version in May 2016. With regard to injectable melphalan hydrochloride, a drug used in conjunction with various chemotherapy treatments, the parties were the only companies with generic versions in late-stage development.
The FTC also required Endo International and Par Pharmaceuticals to divest generic drugs for treating ulcers and thyroid ailments as part of their $8 billion merger. Endo and Par were the two foremost producers of the generic ulcer medication and the merger would have reduced the number of competitors from four to three for the thyroid medication in question.
The FTC cleared Mylan N.V.’s acquisition of Perrigo Company plc in November 2015 after the parties agreed to divest four generic pharmaceuticals in which they already competed, as well as three other generic medications for which the Commission deemed the parties future competitors.
In keeping with the potential-competition theme in this space, the Commission required a remedy in Impax Laboratories Inc.’s $700 million deal for CorePharma, LLC: the parties agreed to divest assets related to two different generic pharmaceuticals. In one, pilocarpine, the Commission alleged that the parties were the only two likely new entrants absent the proposed merger. Impax currently produces the other generic medication in question, ursodiol, and CorePharma is one of relatively few likely future entrants in a market that has suffered from supply shortages recently.
In June 2015, the FTC required Zimmer Holdings to divest overlapping products as a condition of clearing its $13 billion acquisition of Biomet Inc. First, the parties divested knee implant and elbow implant products. In these markets, the FTC alleged that the transaction would have reduced the number of current competitors from three to two. Second, the Commission required divestiture of bone cement assets, after finding that the deal would have reduced the number of competitors in the relevant market from four to three.
Most recently, in February of this year the Commission required divestitures in two other mergers of marketers of generic drugs. Lupin Ltd. will be allowed to close its $850 million acquisition of Gavis Pharmaceuticals LLC after agreeing to divest a pair of generic pharmaceuticals. The FTC alleged that the deal would have reduced the number of generic options from four to three for antibacterial drug doxycycline monohydrate, and that the parties were likely future competitors in the market for a generic ulcerative colitis medication called mesalamine. The Commission showed that no merger is too small to attract antitrust scrutiny when it mandated that Hikma Pharmaceuticals PLC divest five generic drugs to remedy allegations its $5 million acquisition of Ben Venue Laboratories would be anticompetitive. The five drugs in question treat a range of maladies, such as infections, hypertension, ulcers, and psychiatric and neurological disorders.
Notably, the Commission voted unanimously in each of these cases, reflecting the consensus within the agency regarding market definition and competition effects analysis in the pharmaceutical and medical device sectors.
The FTC Continues Vigorous Enforcement in Energy, Infrastructure, and Other Industries
Oil & Gas – In March 2015, the FTC announced that it had obtained a settlement in its challenge to the proposed $107 million acquisition of Mid Pac Petroleum, LLC by Texas-based energy company Par Petroleum Corporation. In its Administrative Complaint, the FTC alleged that the proposed merger would reduce competition and lead to higher prices for bulk supply of Hawaii-grade gasoline blendstock. Under the final consent order, Par Petroleum was required to terminate its storage and throughput rights at a key gasoline terminal in Hawaii.
Just before the New Year, the FTC announced that ArcLight Energy agreed to divest its stake in four petroleum product terminals in Pennsylvania. ArcLight had purchased the Gulf Oil Limited Partnership from Cumberland Farms, which the FTC deemed anticompetitive.
In addition, the FTC’s investigation of the proposed acquisition of Williams Companies, Inc. by Energy Transfer Equity, L.P. (“ETE”) remains ongoing. According to ETE, the combined company will be one of the five largest global energy companies. The FTC issued a Second Request in December 2015.
Infrastructure: In May 2015, the FTC announced that cement manufacturers Holcim Ltd. and Lafarge S.A. agreed to divest plants, terminals, and a quarry to settle FTC charges that their proposed $25 billion merger creating the world’s largest cement manufacturer would likely harm competition in the United States. According to the FTC’s Complaint, the merger would have harmed competition in 12 markets where the two companies either were the only significant suppliers of cement or were two of, at most, four significant suppliers in the market.
Automotive:Also in May 2015, the FTC reached a settlement requiring two of the world’s largest auto parts suppliers, ZF Friedrichshafen AG and TRW Automotive Holdings Corp., to divest TRW’s linkage and suspension business in North America and Europe as part of their proposed $12.4 billion merger. The merging companies were two of only three North American suppliers of heavy vehicle tie rods.
Tobacco: To resolve a closely watched transaction, tobacco companies Reynolds American Inc. and Lorillard Inc., the second- and third-largest US cigarette makers, agreed to divest four brands of cigarettes as part of their $27.4 billion merger. The May 2015 order required Reynolds to divest the four brands to Imperial Tobacco Group, a tobacco manufacturer with a significant international presence but a comparatively smaller presence in the United States. Significantly, the parties had proposed the divestiture to the FTC very early in its investigation, and negotiated with Imperial prior to announcing their deal. This strategy proved to be effective, although the FTC’s prolonged investigation underscores the reality that early remedy proposals do not necessarily result in expedited clearance.
Retail: Following up on what we reported on the dollar store industry last year, in January 2015, Family Dollar shareholders approved Dollar Tree’s $8.5 billion takeover bid and rejected a $9.1 billion bid from Dollar General, reasoning that the FTC would require divestiture of thousands of stores in a merger with Dollar General but only around 300 stores in a merger with Dollar Tree. Following shareholder approval, the FTC identified 330 stores in local markets across 35 states where competition would be lost if the acquisition went forward as proposed. On July 2, 2015, Dollar Tree agreed to sell the 330 Family Dollar stores to a private equity firm.
The Commission is also currently reviewing Walgreens’ proposed $17 billion purchase of Rite Aid. Walgreens and Rite Aid are the largest and third-largest retail pharmacy operators, respectively, in the United States. There are a variety of product markets the Commission will examine during its review, including local retail pharmacy markets, the market for the distribution of drugs billed by insurance companies, and other markets that may exist on a regional or national scale.
Electronics: In November, NXP Semiconductors N.V. agreed to sell its RF power amplifier assets to settle FTC charges that its proposed $11.8 billion acquisition of Freescale Semiconductor Ltd. is anticompetitive. The companies were two of only three major worldwide suppliers of RF power amplifiers–semiconductors that amplify radio signals used to transmit information between electronic devices such as cellular base stations and mobile phones.
Packaging: The FTC issued Second Requests to fully evaluate Ball Corporation’s proposed $7.8 billion acquisition of Rexam PLC in April 2015. Rexam and Ball Corp. are two of only three major aluminum can manufacturers in the US market. The merger was recently approved by the Administrative Council for Economic Defense, Brazil’s competition authority, with limited conditions and divestitures. Recent reports indicate that the EU is also likely to approve the deal following some additional recent concessions from Ball Corp. Neither Ball nor the FTC has issued a public statement regarding resolution of the FTC’s investigation.
Industrial Gases: In the FTC’s most recent merger remedy in May 2016, Air Liquide and Airgas obtained clearance for their $13.4 billion merger after agreeing to divest commercial gas production and distribution facilities that pertain to seven different commodities in numerous geographic markets. The FTC emphasized that the markets for these particular products – such as oxygen gas and dry ice – are already concentrated and that the barriers to new entry are high. In sum, the parties agreed to divest 18 Air Liquide facilities and seven Airgas facilities across the country.
Both the DOJ and the FTC Require Increasingly Demanding Remedies
The leadership at both the DOJ and FTC have made it clear that they will require robust remedies to resolve any competitive concerns from mergers and acquisitions. In a speech in February 2015, Assistant Attorney General Bill Baer explained that the Division had filed complaints against the AB InBev/Grupo Model and the USAir/American Airlines mergers because the parties had failed to put forward remedies that the DOJ believed would preserve competition in the industries at issue. Baer explained that in both cases, the DOJ was only willing to settle the cases after the parties had offered substantially greater remedies than they had prior to DOJ’s initiating the lawsuits.
Both agencies have continued to reject remedy packages that they view as inadequate, even when it means litigation. In each of the major litigations discussed above – Sysco, Staples, and Halliburton – the merging parties offered to divest substantial portions of their businesses before the agency filed its complaint. The agencies rejected these packages as insufficient to ensure that the level of post-merger competition (including innovation competition) would remain robust. As AAG Baer remarked at a press conference announcing the Halliburton complaint:
Halliburton wants the United States to agree to the most complicated array of piecemeal divestitures and entanglements that I have ever seen. Halliburton’s various proposals – and those have been a moving target – involve selling a grab bag of assets in certain product lines. . . . At the end of the day, Halliburton’s purported settlement would eliminate a formidable rival – Baker Hughes – and replace it with a smaller, weaker rival that is not the equivalent of Baker Hughes today.
These and other comments by agency leaders underscore the stricter scrutiny remedy proposals have received in recent years, particularly where the divestiture package (i) spans multiple business lines, (ii) is national or global in scope, (iii) requires that the merged firm provide extensive long-term support services, (iv) does not identify a buyer or includes a buyer with inadequate scale and resources, and (v) requires the agency to devote substantial resources over many years to supervise.
The DOJ also demonstrated that in certain cases it would require the parties to consummated mergers to disgorge what DOJ views as unlawful profits from an anticompetitive transaction. In March 2015, the DOJ and the New York State Attorney General settled the long-running investigation into Twin America, the joint venture between Coach USA Inc. and City Sights LLC, created in 2009. The lawsuit, which was filed in 2012, centered on hop-on, hop-off bus tours in New York City. The DOJ and NY AG alleged that Twin America had a monopoly over the hop-on, hop-off bus tour market in New York City and that the transaction had enabled Twin America to raise ticket prices by 10%. The settlement required the parties to divest all of City Sight’s Manhattan bus stop authorizations and disgorge $7.5 million in profits from the joint venture.
We noted in last year’s Update that the FTC had announced a second merger remedy retrospective, following on the heels of the Commission’s similar 1999 study. That effort has undergone the notice and comment process and is now underway. The Commission is gathering data from various parties–both voluntarily and by the use of compulsory process–and we expect the study to be released in late 2016 or 2017. We believe that the study is an integral component of a broader FTC effort to obtain more robust (and correspondingly onerous) merger remedies, including by requiring parties to divest more assets, provide more substantial transition services, and take various other steps to ensure that buyers are positioned to succeed in selling (or developing) the divestiture product(s).
The DOJ and the FTC Hold the Line on Merger Reporting Requirements
The agencies have continued to prosecute parties who failed to file the proper HSR notifications, regardless of whether the underlying transaction raised substantive antitrust issues. In April, DOJ filed a lawsuit against ValueAct seeking fines of at least $19 million – a record for an HSR Act violation – for failing to file before acquiring shares of Halliburton and Baker Hughes. As detailed above, Halliburton and Baker Hughes abandoned their proposed merger following a separate antitrust lawsuit from the DOJ. ValueAct allegedly purchased shares in both companies “with the intent to influence the companies’ business decisions as the merger unfolded,” and as a consequence its purchases did not qualify for the “investment-only” exemption to HSR’s notification requirements. This lawsuit follows a string of cases brought by the DOJ and FTC in recent years against activist investors that are alleged to have improperly claimed the investment-only exemption.
In September 2015, the DOJ fined Leucadia National Corp. $240,000 for violating the premerger notification rules by improperly relying on the institutional investor exemption when it acquired shares in KCG Holdings, Inc. in July 2013. Similarly, in October 2015, the DOJ fined Len Blavatnik $656,000 for violating the premerger notification rules when he acquired shares in TangoMe, Inc. in August 2014. Mr. Blavatnik purchased shares that brought his stake above the reporting threshold and failed to report the transaction. The multi-year gaps between the violation and DOJ prosecution underscores that the DOJ will seek penalties for failures to comply with the HSR Act whenever it learns about the violation.
The Commission made a point of enforcing the reporting requirements of the Hart-Scott-Rodino Act, securing nearly $900,000 in fines for two separate alleged violations. A year after fining Berkshire Hathaway nearly $900,000, the Commission fined a holding company $240,000 for failing to report a new investment–its second HSR violation since 2007. In October 2015, famed investor Len Blavatnik and his company paid a $656,000 fine for a similar violation, which came on the heels of a prior violation in 2010. These actions, which both involved unintentional violations of the HSR Act’s reporting requirements, reflect the seriousness with which the FTC polices its review process even where the transaction at issue does not pose antitrust concerns.
Obama appointee named as judge to hear U.S. case against Google -filing
WASHINGTON- U.S. District Judge Amit Mehta, who was nominated to the court by President Barack Obama, has been selected to hear the U.S. Justice Department's case against Alphabet's Google, according to a court filing on Wednesday.
Mehta, who was confirmed to the U.S. District Court for the District of Columbia in 2014, heard a Federal Trade Commission fight to block a merger of Sysco and U.S. Foods. In 2015, he ruled for the government and the deal was abandoned.
In this case, the U.S. Justice Department is accusing Google of illegally using its market muscle to hobble rivals. It is the biggest challenge to the power and influence of Big Tech in decades.
The Justice Department lawsuit could lead to the break-up of an iconic company that has become all but synonymous with the internet and assumed a central role in the day-to-day lives of billions of people. The case is likely to take years to resolve.
Google did not immediately respond to a request for comment on Mehta. The search and advertising company has called the lawsuit itself "deeply flawed," adding that people "use Google because they choose to - not because they're forced to or because they can't find alternatives."
In May 2019, Mehta ruled in favor of a U.S. House of Representatives committee seeking President Donald Trump&rsquos financial records from his accounting firm.
Mehta was previously a partner at the law firm Zuckerman Spaeder LLP and was born in India in 1971 and moved to the United States at the age of 1. He also worked as a public defender in Washington for five years.
The federal lawsuit that was filed on Tuesday marks a rare moment of agreement between the Trump administration and progressive Democrats. U.S. Senator Elizabeth Warren tweeted on Sept. 10, using the hashtag #BreakUpBigTech, that she wanted "swift, aggressive action."
Still, coming just days before the U.S. presidential election, the filing's timing could be seen as a political gesture since it fulfills a promise made by President Donald Trump to his supporters to hold certain companies to account for allegedly stifling conservative voices.
Republican lawmakers have sought, without explaining how, to use antitrust laws to compel Big Tech to stop these alleged limitations.
Tariff cuts prompt new wave of Japanese firms
Japanese firms have begun to shift their investments to Vietnam’s trade and service sectors, amid a recent reduction of import duties.
A preferential import tariff, which began in April 2015 as part of the ASEAN-Japan Comprehensive Economic Partnership Agreement, will see over 3,200 tariff lines on Japanese imports reduced to zero percent.
This tariff will specifically focus on material goods, machinery, and electronic products.
Furthermore, under the ASEAN Trade in Goods Agreement (ATIGA) in the 2015-2018 period, many goods will become cheaper to import from other nearby countries than to produce domestically.
The reduction of tariff barriers has prompted Japanese businesses in Vietnam to reduce production and increase the import of goods sold in the domestic market.
Yasuo Nishitohge, general director of Aeon Vietnam, told VIR that the tax reduction will be beneficial for retail businesses. “The tax reduction will help Aeon diversify its products and reduce production costs to gain price competitiveness.”
Another Japanese retailer, Family Mart, affirmed that it would not withdraw from the Vietnamese market, although it previously sold its entire stake in 42 outlets to Thailand’s Berli Jucker (BJC), owned by billionaire Aswin Techajaroenvikul, which then set up a joint venture with Vietnam’s Phu Thai Group.
By the end of 2015, Family Mart plans to have 100 stores operating in Vietnam, with the figure reaching 800-1,000 stores by 2020, accounting for 30% of the local market share.
Tadahito Yamamoto, chairman and chief representative of Fuji Xerox, said that it plans to expand production in Vietnam by setting up a distribution centre here for export to the global market.
According to a survey by the Japan External Trade Organization (JETRO), in 2014, Vietnam licensed a total of 517 Japanese projects, with their total investment falling by 39.1% from 2013.
However, the number of projects in trade and service sectors increased sharply in number. JETRO predicts that Japanese firms will boost their outbound investment in trade and service sectors, amid the depreciation of the Yen against the US dollar and competitive advantages.
Recof Corporation, a leading M&A consulting firm in Japan, said that many Japanese businesses have shown interest in expanding operation in Vietnam. This corporation predicted that M&A deals on trade and service between Japanese and Vietnamese enterprises will strongly increase in the coming years.
According to statistics by the General Department of Vietnam Customs, Vietnam recorded a trade surplus of US$2.14 billion in 2014, the third consecutive year.
The country’s export-import turnover last year totaled US$298.24 billion, up 12.9% from 2013.
FTC sues to block P&G's acquisition of Billie, a razor startup for women
The Federal Trade Commission has sued to block Procter & Gamble’s acquisition of Billie, a NY-based startup that sells razors and body wash.
In the notice, the FTC alleged that the merger would “eliminate innovative nascent competitors for wet shave razors” to the loss of consumers.
Billie was founded in 2017 with the goal of fighting the “pink tax” on goods marketed to women, including razors and body wash. It went up against companies like P&G and Edgewell Personal Care by offering high-quality and cheap razors. The company announced its intent to be acquired by P&G after raising just $35 million in venture capital in June.
“As its sales grew, Billie was likely to expand into brick-and-mortar stores, posing a serious threat to P&G. If P&G can snuff out Billie’s rapid competitive growth, consumers will likely face higher prices,” Ian Conner, director of the FTC’s Bureau of Competition said in a statement.
P&G has been on a buying spree as of late. Along with the Billie news, Procter & Gamble acquired Walker & Company, which created Bevel, a grooming line for men of color, and Form, a hair-care line for women of color. In February 2019, P&G announced plans to acquire This is L, a feminine-care brand that sells tampons, pads and wipes.
If the FTC wins, this is another blow for direct-to-consumer brands on the base of competition dynamics. In May 2019, Edgewell Personal Care announced it intended to buy Harry's, another direct-to-consumer shaving brand. In February 2020, the FTC filed a lawsuit to block the deal from happening, similarly citing how the deal would limit competition and innovation in the razor market.
Unlike Harry's, Billie was bought before it broke into brick-and-mortar retail stores. If the deal doesn’t close, Billie lost precious time it could have used to expand into new locations and markets -- and P&G will lose some of its competitive advantage in the women’s shaving world.
Harry's and Billie’s blocks could negatively trickle down to hurt direct-to-consumer products looking at health and wellness more broadly.
Note that exit market isn’t as dull for all companies in the consumer packaged goods (CPG) world. We've seen deals close like Blue Bunny's buy of Halo Top, Mars' acquisition of Kind Bars and, of course, Unilever's $1 billion acquisition of Dollar Shave Club.
Andrea Hernández, a founder and consultant on food and beverage CPG, says that DTC companies often need to partner with mega-businesses to get the distribution scale they need, focusing more on omni-channel presence versus a single seller point.
"It’s very limited for these companies to scale at the same level and grow without incurring debt or needing constant injections of [money]," she said. "Or [you can go] the preferred route which is having BigDaddyCorp come whisk you away. You get a success story and the resources to continue your journey."
That said, the coronavirus has even impacted food CPG companies by forcing them to slash SKUs (or stock keeping units) and prioritize essential goods. Whereas before, CPG companies might stock a variety of goods for a variety of customer needs, they're now prioritizing a smaller slice of the pie to manage uncertainty among consumer behavior. Long-term, this means that CPGs might be buying fewer of the Billies and Harry's of the world and just focusing on what's working now.
Selene Cruz, the founder of Restore which gives DTC brands an offline presence, said that she's a"bit surprised to see the FTC claiming the acquisition kills competition. Billie going into brick & mortar doesn't mean instant success enough to take on a major conglomerate."
"If the FTC's goal is to not kill competition then I'd advise them not to diminish exit prospects for investors and founders," Cruz added. "This would hurt investment in the space and that's the real fear for innovators."
Additionally, Clearbanc founder Michele Romanow said that "while this isn't at all ideal for Billie, it means other growing D2C brands have a better chance to build a strong brand and gives consumers more options."
Regardless of how this plays out, today's news shows that the FTC is paying more attention than ever to consumer and tech.
Supreme Court Finds that Regulatory Boards Composed of “Active Market Participants” are Subject to Antitrust Laws if Not Actively Supervised by the State
Yesterday, the Supreme Court issued its ruling in North Carolina State Board of Dental Examiners v. FTC, finding that North Carolina&rsquos state board of dental examiners was subject to antitrust scrutiny under the Sherman Act and Federal Trade Commission Act. In reaching that decision, the court found that a state agency composed of &ldquoactive market participants&rdquo&mdashhere, a board responsible for supervising the practice of dentistry composed primarily of practicing dentists&mdashwas not immune to federal antitrust laws as a sovereign actor unless the state &ldquoactively supervised&rdquo that agency. The Court left open, however, just what sort of active supervision might be required.