Anticompetitive Merger Review

• Publication year: 2022

Anticompetitive Merger Review

Samuel N. Weinstein
Benjamin N. Cardozo School of Law, samuel.weinstein@yu.edu

Anticompetitive Merger Review

Cover Page Footnote
Professor of Law, Benjamin N. Cardozo School of Law. The author would like to thank Christopher Buccafusco, Richard Buxbaum, Peter Carstensen, Dale Collins, Gregory Day, Eleanor Fox, Daniel Francis, Joseph Harrington, Michael Herz, Jeremy Kress, Kate Levine, Joseph Matelis, John Newman, Menesh Patel, Michael Pollack, Alex Reinert, Dan Rubinfeld, Chris Sagers, Fiona Scott Morton, Carl Shapiro, D. Daniel Sokol, Spencer Weber Waller, Matthew Wansley, and Ramsi Woodcock for their insightful comments and suggestions. The Article also benefitted from helpful comments from participants at the 2022 Next Generation of Antitrust, Data Privacy, and Data Protection Scholars Conference at the NYU School of Law, the 2020 National Business Law Scholars Conference at the University of Tennessee College of Law, and the 2020 University of Pennsylvania Journal of Business Law Symposium: The Interplay of Antitrust Laws and our Current Business Environment, at the University of Pennsylvania Law School. Thanks also to Stjepan Klinar for his excellent research assistance.

ANTICOMPETITIVE MERGER REVIEW

Samuel N. Weinstein^*

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U.S. antitrust law empowers enforcers to review pending mergers that might undermine competition. But there is growing evidence that the merger-review regime is failing to perform its core procompetitive function. Industry concentration and the power of dominant firms are increasing across key sectors of the economy. In response, progressive advocates of more aggressive antitrust interventions have critiqued the substantive merger-review standard, arguing that it is too friendly to merging firms. This Article traces the problem to an additional source: the merger-review process itself. The growing length of reviews, the competitive restrictions that merger agreements place on acquisition targets during review, and the targets' resulting loss of strength harm competition and consumers. As a result, an enforcement regime designed to protect competition is damaging it instead. The rise of antitrust reverse termination fees (ARTFs)—payments from the acquirer to the target if the merger fails antitrust review—demonstrates the anticompetitive effect of the review process. This Article argues that these fees represent the parties' negotiated prediction of the competitive costs to the target of entering the merger agreement (and therefore the competitive gains to the acquirer and other rivals in the relevant market). Reform proponents have suggested several potential ways to shorten merger investigations, such as limiting enforcement agencies' discovery demands, but these modifications only reduce the problem at the margins. This Article

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proposes a more effective reform: a requirement that the antitrust enforcement agencies announce a "merger watchlist"—a group of highly concentrated markets in which they are likely to challenge any proposed merger, unless one of the firms is failing. This strategy, which the antitrust agencies have employed in an ad hoc fashion in the past, will discourage anticompetitive mergers and eliminate lengthy reviews that harm consumers.

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Table of Contents

I. Introduction..................................................................1060

II. Merger Review in the United States.......................1069

A. framework...........................................................1070
B. current state of u.s. merger-review process 1075
C. critiques of the merger-review process........1081

III. Anticompetitive Merger Review..............................1085

A. merger agreements' effects on competition. 1085
B. antitrust reverse termination fees...............1091

IV. Reforming Merger Review........................................1107

A. current reform proposals...............................1107
B. a more effective approach to reform.............1112

1. Benefits of Reform...........................................1113
2. Operationalizing Reform................................1115
3. Risks................................................................1120
4. Altering Agency Incentives.............................1123
5. ARTF Reform..................................................1124

V. Conclusion....................................................................1125

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I. Introduction

In 2011, AT&T agreed to purchase T-Mobile for $39 billion.¹ The merger agreement included an antitrust reverse termination fee provision (ARTF) that required AT&T to pay T-Mobile a significant sum if the deal was terminated on antitrust grounds.² The merger would have reduced the number of national mobile wireless telecommunications carriers from four to three, with the merged entity becoming the new largest U.S. carrier.³ It faced an uphill battle with antitrust enforcers. The Antitrust Division of the U.S. Department of Justice sued to block the acquisition, and after litigating for several months, the parties terminated the deal.⁴ Before they did so, an industry analyst observed that AT&T was content to let the litigation process play out, but the lengthy merger review and litigation was harming T-Mobile, which was losing customers to other carriers.⁵ Under the ARTF provision, AT&T paid T-Mobile $4.2 billion in cash and other assets when the deal died.⁶

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The AT&T/T-Mobile saga is in many ways an antitrust success story. The Antitrust Division forced the firms to abandon what was almost certainly an anticompetitive deal, and T-Mobile rebounded to become a strong competitor.⁷ But this story also suggests serious problems with the U.S. merger-review process: lengthy reviews involving highly concentrated markets harm target companies and benefit acquiring firms, which enjoy reduced competition for the duration of the investigation and merger challenge (perhaps explaining why AT&T was in no hurry to resolve the litigation). More importantly, these lengthy reviews harm consumers, who suffer from this reduced competition, often in the form of higher prices.⁸ Acquiring firms sometimes are willing to promise to pay the target firm if a deal is abandoned, suggesting that ARTFs could function as a vehicle for buying competitive peace for the length of an investigation. The merger-review process, which is designed to protect competition, is rife with opportunities for anticompetitive mischief.

With industry concentration and the power of dominant companies increasing across key sectors of the economy, the U.S. merger-review regime has been subject to intense scrutiny over the past few years. Progressive critics have focused on lax enforcement and the substantive merger-review standard, which they argue is too friendly to merging firms.⁹ Concerns about the merger-review

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process typically are the province of corporate interests and the antitrust enforcement agencies themselves.¹⁰ But the process—the nuts and bolts of how the agencies conduct merger reviews—also raises anticompetitive risks that stem from the increasing length of merger investigations.

Merger reviews for potentially anticompetitive acquisitions are taking longer than ever. The Antitrust Division reported that in 2017 "significant merger reviews" by the Division and the Federal Trade Commission (FTC)¹¹ (together, the Agencies) "took an average of 10.8 months to resolve," an increase of 65% from an average of 7.1 months in 2013.¹² By 2019, that average had risen to 11.9 months, and in 2020 and 2021 it was 11.4 months.¹³ There are a number of possible reasons for this increase, including the ever-

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growing quantity of data and documents that merging parties retain and are required to review and produce and the increasing number of transactions involving multiple international jurisdictions.¹⁴

Proponents of merger-review reform, including past Antitrust Division leadership, argue that the lengthy process is problematic because it burdens both businesses and the Agencies themselves.¹⁵ They also assert that delaying procompetitive mergers is harmful to consumers who must wait to reap the benefits of any merger efficiencies.¹⁶ Critics of the merger-review process observe that, in its current form, it bears little resemblance to what Congress intended when passing the 1976 Hart-Scott-Rodino Antitrust Improvements Act (HSR),¹⁷ which created modern merger review. They contend that the goal of HSR simply was to require merging parties in a limited number of significant acquisitions to notify the Agencies of the transaction before closing the deal, and, for those deals that the Agencies were worried about, to mandate that the parties produce a modest amount of additional information for the Agencies to evaluate.¹⁸ In the view of these critics, HSR currently applies to too many transactions and gives the Agencies too much power to make demands on merging parties.¹⁹

These critics are right to worry about the increasing length of merger reviews, but they are wrong about the reasons. I contend

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that such reviews are anticompetitive, not because of forfeited efficiencies—which often are doubtful in contested mergers and rarely passed on to consumers²⁰ —but because acquisition targets are competitively hamstrung once a merger agreement is signed and tend to lose a significant amount of competitive strength during the merger-review process. Merger agreements typically restrict the target's activities in a variety of ways, essentially barring it from undertaking any new competitive initiatives. Such agreements prohibit the target, absent acquirer approval, from entering any material contracts, paying dividends, acquiring any assets, increasing employee or director compensation, taking on any debt, or changing its business strategies in any way that does not comport with past practice.²¹ Further, it is well understood that once...