Mergers, Acquisitions, Divestitures, And Related Issues

• Pages: 75-111

75

CHAPTER V

MERGERS, ACQUISITIONS, DIVESTITURES, AND

RELATED ISSUES

A. DOJ and FTC Analysis of Mergers and Acquisitions

One result of the regulation has been increase in the number of

restructuring transactions. Such mergers, acquisitions, and divestitures

have been subject to review by the FTC and the DOJ. The DOJ and FTC

review both electric utility and gas industry mergers under the Hart-

Scott-Rodino Act pre-merger review process.257 The FTC traditionally

has taken responsibility for merger enforcement in the gas industry, and

the DOJ has done so in the electricity industry. While antitrust agency

enforcement has been active in transactions involving natural gas assets,

and both agencies have participated in FERC and state regulatory

proceedings in the electricity industry, neither the DOJ nor FTC has

initiated proceedings in an electricity industry case resulting in an

approved merger by the FERC and applicable states.

The core of the DOJ and FTC analytical approach to mergers and

acquisitions is set forth in the agencies’ joint Horizontal Merger

Guidelines.258 The DOJ/FTC Merger Guidelines set out five steps for a

merger analysis: (1) define the relevant product and geographic markets

likely to be affected by the merger and measure the concentration in

those markets; (2) evaluate whether the extent of concentration and other

factors that characterize the markets raise concerns about potential

adverse competitive effects; (3) assess whether entry would be timely,

likely, and sufficient to deter or counteract any such concern; (4) assess

any efficiency gains that the merger applicants cannot reasonably

achieve by other means; and (5) assess whether either party to the merger

would be likely to fail without the merger, causing its assets to exit the

market.259

257 15 U.S.C. § 18a (1997 and Supp. 2002).

258. U.S. Dept. of Justice and Federal Trade Comm’n, HORIZONTAL MERGER

GUIDELINES, 57 Fed. Reg. 41,552 (1992) (DOJ/FTC MERGER

GUIDELINES).

259. See, e.g., Atlantic City Elec. Co., 80 FERC ¶ 61,126 (1997) (citing

MERGER POLICY STATEMENT at 30,118).

76 Energy Antitrust Handbook

The DOJ/FTC Merger Guidelines provide for market concentration

to be measured pre- and postmerger using the Herfindahl-Hirschman

Index (HHI).260 If the post-merger HHI is below 1000, the market is

considered unconcentrated and deemed unlikely to have adverse

competitive effects, regardless of any change in HHI resulting from the

merger. It therefore can ordinarily be approved without further analysis.

If the post-merger HHI ranges between 1000 and 1800, the market is

considered moderately concentrated. In such event, if the merger-induced

change in HHI is less than 100, the merger is presumed not to harm

competition. If, however, the HHI increment exceeds 100 points, the

merger is deemed to potentially raise competitive concerns. Finally, if

the post-merger HHI exceeds 1800, the market is termed highly

concentrated. In a highly concentrated market, an increase in the HHI of

more than 50 points creates significant competitive concerns, while an

increase of more than 100 points leads to a presumption that the

transaction in question will likely create or enhance market power.

In cases reviewed by the DOJ and FTC, the agencies generally

follow the steps specified in their guidelines.261 Where circumstances

warrant, the agencies may issue a second request for additional

information so that they can thoroughly investigate specific issues.262

260. The HHI is calculated as the sum of the squares of each company’s

market share, expressed as a percentage. For example, a market with two

equal sized suppliers has an HHI of 5000 ([50x50] + [50x50] = 5000).

261. The enforcement agencies may consider various forms of analysis,

including HHI studies and computer modeling of market behavior. In

commenting on FERC’s Merger-NOPR, the DOJ advocated the use of

sophisticated computer models to define markets and assess potential

behavior. Comments of the U.S. Dep’t of Justice at A-5 (Appendix),

Docket No. RM96-6-000 (May 8, 1996). In addition, the antitrust

enforcement agencies solicit information from customers and suppliers

concerning the anticipated competitive effects of a proposed merger or

acquisition. For a fuller discussion of merger enforcement policies and

actions by the DOJ and FTC, see ALD V, Ch. III.

262. For a more detailed discussion of procedures and practice tips in HSR

reviews, see ABA Section of Antitrust Law, The Merger Review Process

(2d ed. 2001).

Chapter V 77

B. Mergers and Acquisitions in the Natural Gas Industry

As noted above, the FTC traditionally has taken responsibility for

merger enforcement in the gas industry, and the DOJ has done so in the

electricity industry. The FTC has investigated a number of recent merger

transactions in the natural gas industry and, for the most part, has

resolved antitrust concerns through consent orders requiring partial

divestitures of overlapping pipeline assets to address market power

concerns. These enforcement actions are summarized below.263

1. Gas-Transportation Services

The FTC has traditionally focused on potential concentration in the

transportation sector of the natural gas industry.

In Panhandle Eastern Corp.,264 Panhandle Eastern sought to acquire

common stock of Texas Eastern Corporation. The FTC alleged that,

before the acquisition, Panhandle and Texas Eastern, through their

ownership interests in the Stingray Pipeline Company and the Texas

Eastern Gas Pipeline Cameron System, were direct and substantial

competitors in the business of transporting natural gas out of producing

fields and basins in one area of the Gulf of Mexico off Louisiana and

Texas.

In its complaint, the FTC charged that the effect of the acquisition

might be substantially to lessen competition or tend to create a monopoly

in the transportation of natural gas out of certain producing fields and

basins.265 Specifically, the FTC alleged that the acquisition would: (a)

eliminate actual and potential competition between Panhandle and Texas

Eastern; (b) eliminate actual and potential competition among

263. For a history of FTC activity, see D. Balto & J. Mangoven, Deregulation

and Merger Enforcement in the Natural Gas Industry, 69 ANTITRUST L.J.

527 (2001). FERC has limited authority to review natural gas mergers

and acquisitions. While FERC does not have statutory authority to

regulate natural gas mergers or voting securities acquisitions, the Natural

Gas Act gives it authority over asset acquisitions by requiring a

certificate of public convenience and necessity in order to operate

acquired assets. 15 U.S.C. §717(c). In addition, mergers or acquisitions

involving vertically integrated energy companies often require FERC to

both review the power and natural gas aspects of a transaction.

264. 54 Fed. Reg. 47,131 (FTC Nov. 9, 1989).

265. Panhandle Eastern Corporation, (Apr. 28, 1989).