CHAPTER 10 ANTITRUST ISSUES IN MERGERS OR ACQUISITIONS OF NATURAL RESOURCES COMPANIES
| Jurisdiction | United States |
(Nov 1994)
ANTITRUST ISSUES IN MERGERS OR ACQUISITIONS OF NATURAL RESOURCES COMPANIES
Scott S. Megregian
Howrey & Simon
Washington, D.C. 1
INTRODUCTION
This paper discusses antitrust issues that can arise during mergers or acquisitions of natural resource companies and presents practical suggestions for maximizing the chances of avoiding antitrust challenges to such transactions. The antitrust laws apply fully to the mining industry. The legal standards applicable to mergers in the mining industry are the same as those in other industries. In this paper, we apply these standards specifically to mergers within the mining industry to highlight the particular issues that are important to mining industry transactions.
The U.S. antitrust laws seek to prevent mergers and acquisitions that are likely to result in increased prices or decreased output. The 1990s have witnessed a significant increase in aggressive antitrust enforcement both at the Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"). For example, as of October 9, 1994, the DOJ had challenged twenty-three proposed mergers this year, nine more than in any year since the 1970s. Still more mergers have been abandoned or modified without formal government intervention.
Since 1990, the government has investigated or challenged potential antitrust violations in an array of mining and natural resource industries, including aluminum, coal, silicon and ferrosilicon, rock salt, petroleum refining, crude oil refining, natural gas pipelines, coal terminals, feldspar, kaolin, offshore oil and gas pipelines, petroleum pumps, molybdenum, talc, iron ore and drilling equipment.
After discussing the reporting requirements under the Hart-Scott Rodino Act, this paper examines the five main issues that arise in merger investigations: (i) product market definition; (ii) geographic market definition; (iii) competitive effects analysis; (iv) entry conditions; and (v) efficiencies. These issues are explained in detail within the framework of horizontal mergers, vertical mergers
[Page 10-2]
and joint ventures. A separate strategy section presents suggestions for applying this analysis in successfully defending transactions before the DOJ or FTC.2
I. THE HART-SCOTT RODINO ACT ("HSR")
A. What HSR Requires
HSR requires parties to a merger, acquisition or joint venture to notify the DOJ and FTC of a transaction before it occurs so that the agencies can analyze the potential transaction and, if necessary, seek remedial action before the merger is consummated. HSR requires merging parties to provide certain statistical and market information about the parties and the transaction to the DOJ/FTC and prevents mergers from proceeding until certain statutory waiting periods expire. The initial waiting period is 30 days (15 days for cash tender offers). A second, 20 day waiting period (10 days for cash tender offers) may be required if the agency requests additional information. This second waiting period does not begin until the requested information is provided to the agency.
B. Determining Whether a HSR Filing Is Required
HSR covers most significant stock and asset mergers and acquisitions as well as corporate joint ventures. Transactions involving acquisitions of partnership interests may be exempt. Certain mergers need not comply with the requirements of HSR due to the modest size of the transaction or its participants. Two tests, both of which must be satisfied, determine whether a merger qualifies for HSR reporting:
1. "Size-of-Person"
Generally, HSR applies if either party has at least $100 million in annual net sales or total assets, and the other party has at least $10 million in annual net sales or total assets. When valuing the purchaser, all subsidiaries and parent companies are included. When valuing the seller, only value the corporation or asset being sold or divested. If the Size-of-Person test is not met, the parties are not subject to HSR requirements.
2. "Size-of-Transaction"
Generally, the Size-of-Transaction test is satisfied if the fair market value of stock or assets acquired is at least $15 million. Alternately, this test can be satisfied if the acquiring firm obtains at least 50% of the acquired firm's voting
[Page 10-3]
securities and the acquired firm has annual net sales or total assets of at least $25 million. If the Size-of Transaction test is not met, the parties are not subject to HSR requirements.
3. Exempt transactions
HSR specifies certain transactions as exempt from its filing requirements. Acquisitions of undeveloped, non-producing properties (such as undeveloped oil, gas or mineral properties) are exempt from HSR filing requirements. Also exempt are acquisitions of voting securities where the amount held does not exceed 10% of the target's outstanding voting shares and the acquiror is merely a passive investor.
C. What to File
Each party must submit an initial filing called an HSR Premerger Notification and Report Form ("the Form"). The Form includes detailed information about the products, revenues, and prior transactions of the merging firms and their subsidiaries. The Form uses SIC codes to compare the products and revenues of the parties.
The most crucial aspect of the initial filing is any so-called "4(c) documents." Item 4(c) of the Form requires the submission of "all studies, surveys, analyses, and reports that were prepared by or for any officer(s) or director(s) for the purpose of evaluating or analyzing the acquisition" with respect to various aspects of competition. Such 4(c) documents can include board presentations, strategic analyses, memoranda analyzing the transaction, reports by marketing consultants or investment bankers, and offering documents or prospectuses.
II. SUBSTANTIVE ANALYSIS IN MERGERS BETWEEN ACTUAL/POTENTIAL COMPETITORS
This section discusses the five major antitrust issues (product market definition, geographic market definition, competitive effects analysis, entry conditions and efficiencies) and market share calculation within the framework of horizontal mergers. Horizontal mergers involve a combination of two firms that compete (or are potential competitors) at the same level in the market (e.g., two coal producers or two petroleum refineries). Examples of recent horizontal mergers that received DOJ or FTC scrutiny include the proposed merger of two suppliers of rock salt settled by consent decree in 1990 U.S. v. North American Salt Co., 55 Fed. Reg. 21,266 (Antitrust Div. 1990)), the merger of two talc companies (cleared after investigation in 1991), the merger of companies that mined and converted molybdenum (closed after investigation in 1993), and the merger of two Philadelphia-area petroleum refineries (FTC voted not to challenge in August, 1994).
[Page 10-4]
A. Product Market
1. Defining the product market
Under DOJ/FTC Merger Guidelines, the product market is defined as a product or group or products in which a hypothetical monopolist profitably could impose a 5%-10% increase in prices. (Merger Guidelines § 1.11). If, in response to such a price increase, a reduction in sales would make the increase unprofitable, then the product that consumers would substitute most often for the merging firms' product is added to the overall product group. For example, if a hypothetical monopolist's 5%-10% increase in the price of ball clay would cause enough purchasers to switch to kaolin so that the price increase would not result in additional profits to the ball clay producer, then kaolin would be added to the relevant product market. This process is repeated until a product market is created in which the hypothetical monopolist profitably could raise prices by 5%-10%. (Merger Guidelines § 1.11). The government will use the narrowest group of products that satisfies the above test. (Merger Guidelines § 1.11).
2. Major product market issues in mining transactions
The definition of the product market can be of great significance because, generally speaking, larger markets are less concentrated than smaller markets. In mining transactions, it is generally difficult to expand the relevant product market beyond the mineral in question due to the government's use of the "smallest market" principle. In order to expand the product market, the substitute product must be acceptable to downstream users without significant modifications to production facilities.
In analyzing product market issues, there may be narrower markets for minerals with specific characteristics. For example, quality differences may justify separate markets for particular types of a given mineral.
B. Geographic Market
1. Defining the geographic market
The geographic market is defined as the set of producing locations from which a hypothetical monopolist profitably could impose a 5%-10% increase in price. (Merger Guidelines § 1.21). If, in response to such a price increase, a reduction in sales would make the increase unprofitable, then the producing locations to which consumers would turn to satisfy their demand are added to the geographic market. For example, if a 5%-10% increase in the price of coal by a hypothetical monopolist in West Virginia would cause enough purchasers to buy coal produced in Pennsylvania to make the price increase unprofitable, then
[Page 10-5]
Pennsylvania would be added to the relevant geographic market. This process is repeated until a geographic market is found in which the hypothetical monopolist profitably could raise prices by 5%-10%. (Merger Guidelines § 1.21). The government will use the narrowest geographic market that satisfies the above test. (Merger Guidelines § 1.21).
2. Major geographic market issues in mining transactions
The definition of the geographic market is often the dispositive issue in antitrust...
To continue reading
Request your trial