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FTC Takes Another Look at Merger Remedies

15 February 2017

Antitrust and Competition Alert

On 3 February 2017, the U.S. Federal Trade Commission (FTC) released its Merger Remedies Study, which analyzed the success of merger remedies imposed by the FTC from 2006 to 2012. Nearly two decades after it issued a similar report, the FTC has concluded that the remedies in the vast majority of transactions from 2006-2012 successfully maintained or restored competition in their respective markets. The FTC concluded that the report therefore largely confirmed the effectiveness of its existing practices for designing and implementing merger remedies. Although the FTC does not intend to significantly alter its current merger remedies policies, the study provides valuable insight into the FTC's perspective for companies considering transactions that may require a divestiture. The report also provides new recommended best practices for remedies.

Background

The FTC released its first study of merger remedies in 1999, evaluating 35 consent orders from 1990 to 1994. Following the report, the FTC implemented several changes to its policies and practices, including requiring upfront buyers when parties divested less than an ongoing business, shortening the time period to find a divestiture buyer to less than six months, more frequent appointments of independent divestiture monitors, and establishing a program to track the progress of buyers of divested assets.

In conducting the most recent study, the FTC examined 89 consent orders from 2006 to 2012 – 50 using a case study method across a range of industries, 24 involving the pharmaceutical industry, and 15 in the supermarkets, drug stores, funeral homes, dialysis clinics, and other health care facilities markets.

The study's findings

The study found that:

  • All of the merger remedies in which the entire ongoing business was divested were 100% successful. This will remain the FTC's clear preference going forward whenever possible.
  • Divestitures of less than an ongoing business did not always succeed, although they had a fairly high 70% success rate. Even with an upfront buyer, these transactions will receive close scrutiny from the FTC and will only be approved if the parties can demonstrate to a skeptical regulator that the divestiture of selected assets is likely to maintain or restore competition.
  • Divestiture buyers raised concerns about limited time for due diligence and inability to access the parties' facilities and employees; difficulty in transferring back-office operations; the impact of transition services agreements and supply agreements that expire too early; and buyers' failure to communicate proactively with FTC staff as issues arise. The FTC is already addressing these concerns through various measures, including the best practices discussed below.
  • The FTC achieved only limited success in merger remedies involving consummated mergers (only 26% were successful). The Commission acknowledged that it is "particularly difficult to restore the pre-merger state of competition if the merging parties have commingled, sold, or closed assets; integrated or dismissed employees; transferred customers to the merged entity; or shared confidential information." In these cases, "remedial options may be severely limited."

Best practices

The FTC concluded the study by providing a number of best practices for merging parties and potential divestiture parties as recommendations when navigating the merger remedy process. As the study notes, parties "proposing a remedy must demonstrate that the proposal will solve the likely competitive problem identified by the Commission. The Commission will not accept a remedy unless it determines that the remedy will address the competitive harm caused by the merger and serve the public interest."

  • Defining the Assets to be Divested – Because of the lower success rate of divestitures of less than the entire ongoing business, the presumption is that parties will divest the business unit rather than selected assets. Those proposals should explain how the divested business could be operated on its own immediately after the divestiture. If parties propose a divestiture of only limited assets, the proposal would only be accepted if the parties can demonstrate that a more limited set of assets are "likely to maintain or restore competition." To rebut the presumption that an ongoing business should be divested, the parties would need to explain why a full unit divestiture is "inappropriate or infeasible," how the selected assets can effectively and viably compete, and would need to provide the buyer with sufficient time to conduct due diligence. Proposals of more limited assets are likely to receive heightened scrutiny from the agency.
  • Vetting the Proposed Buyer– Nearly as important as defining the assets to be divested, the proposed buyer for those assets will receive careful review by the FTC, including the buyer's sources of financing for the transaction and documentation supporting its business plans and financial viability under adverse and unforeseen circumstances. The FTC would likely interview not only representatives of the buyer in management, sales, and marketing roles, but also representatives of the entities financing the acquisition of the divested assets. In addition, the parties should propose at least three potential buyers likely to be approved.
  • Supporting Implementation of the Remedy – In response to concerns from buyers who participated in the study, the FTC proposed several ways the parties can ease the burden of implementing the remedy:
    • Due Diligence – Because the buyer and seller will compete after the assets are divested, the selling parties' incentives to provide full disclosure and access are limited. The FTC reiterated that the buyer should have sufficient time to conduct due diligence, including access to necessary information, facilities, and employees.
    • Customer and Third-Party Relationships – Unlike the selling parties, the buyer does not always have an ongoing relationship with customers of the divested business and may be buying the business outside of the customers' typical contracting cycle. As a result, some buyers reported difficulty in attracting or retaining customers since they were only prepared to support the divested business. The FTC encourages the selling parties to provide early access to customers and other third parties, aid in communications about the buyer and divestiture, assign contracts to the buyer when possible, and assist in obtaining any necessary governmental or regulatory approvals.
    • Transition Services and Supply Agreements – The selling parties are often required to provide certain back-office or supply support to the buyer for a period while the buyer builds out its own systems and supply infrastructure to support the divested business. The FTC has traditionally preferred short periods for such agreements because of the potential anticompetitive effect of entangling the divestiture buyer and the seller, but some buyers complained that these interim arrangements were not sufficiently lengthy to allow the buyer to effectively compete. As a result, the FTC will closely examine these agreements to ensure that transition services and necessary supply inputs are available to the buyer for a sufficient period. The FTC may also require contract terms allowing the buyer to extend the agreements for a reasonable period or terminate early without penalty.
    • Hold Separate Orders – These orders preserve the competitiveness of the assets pending divestiture. While independent managers are appointed to oversee the continued operation of the divested business during the holding period, some buyers expressed concern that the assets became less competitive, lost sales, and depleted inventory. Other buyers complained about outdated or missing information about production and sales. The FTC will monitor these orders to ensure that the manager of the divestiture assets has the full cooperation of the parties and is responding to market conditions in operating the divested business.
  • Communicating Early and Often – The FTC encouraged all parties to a divestiture transaction to bring any issues or concerns to the attention of agency staff and the monitor as soon as they arise (as advised in the 1999 study). The FTC will remain in contact with the buyer at least until the assets are fully divested and the parties have provided all of the services to the buyer required under transition and supply agreements.
  • Specific Guidance for the Pharmaceutical Industry – While all of the best practices above apply to the pharmaceutical industry as well, the FTC provided additional guidance for divestitures affecting pharmaceutical products. In particular, in recent transactions involving generic drug overlaps, the FTC has required the divestiture of the easier-to-divest product where possible, especially if a third party manufactured one product under an agreement that could more easily be transferred to the buyer. Parties should think strategically about which overlap product would likely be divested when structuring their transaction.

Although the new FTC Merger Remedies Study only involves the FTC, it has been our experience that the Antitrust Division of the U.S. Department of Justice is increasingly applying similar standards to its remedies. In addition, the 2016 Merger Remedies Guide of the International Competition Network also was informed by past FTC merger remedies studies, so similar considerations are often applied by competition authorities outside the U.S.

Contacts

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