Mergers, Acquisitions, Divestitures, and Related Issues

• Pages: 59-104

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CHAPTER IV

MERGERS, ACQUISITIONS, DIVESTITURES, AND

RELATED ISSUES

This chapter covers mergers, acquisitions, and divestitures subject to

review by either or both of the Federal Trade Commission (FTC) and the

Department of Justice (DOJ) on the one hand, and the Federal Energy

Regulatory Commission (FERC) on the other.

1

Part A concerns the

FTC’s review of oil and gas industry transactions. Part B considers

FERC’s analysis of electricity transactions and the limited FERC

regulation of oil and gas pipeline transactions.

A. Transactions in the Oil and Gas Industry

In its review of mergers and acquisitions, the FTC applies Section 7

of the Clayton Act,

2

which prohibits such transactions “where in any line

of commerce or in any activity affecting commerce in any section of the

country, the effect of such acquisition may be substantially to lessen

competition, or to tend to create a monopoly.”

3

The language of

1. FTC and DOJ have concurrent jurisdiction to review mergers and

acquisitions under § 7 of t he Clayton Act, 15 U.S.C. § 1 8, and the two

agencies ha ve jointly i ssued merger guidelines. See note 4, infra. Most

references in this chapter are to the FTC, however, as the FTC generally

has taken the lead role in reviewing mergers and acquisitions in the

energy industry (including oil, gas, and electricity).

2. 15 U.S.C. § 18. The legal standards applicable to the review of mergers

and acquisitions under § 7 are extensivel y reviewed in other ABA

publications, such as ABA SECTION OF ANTITRUST LAW, ANTITRUST

LAW DEVELOPMENTS (6th ed. 2007). The process by which the federal

agencies review proposed transactions is discussed in detail in AB A

SECTION O F ANTITRUST LAW, THE MERGER REVIEW PROCESS: A STEP-

BY-STEP GUIDE TO FEDER AL MERGER REVIEW (3d ed. 2006); see also

ABA SECTION OF ANTITRUST LAW, MERGERS AND ACQUISITIONS:

UNDERSTANDING THE ANTITRUST ISSUES (3d ed. 2008).

3. 15 U.S.C. § 18. In addition, the FTC may challenge a merger or

acquisition as a violation of § 5 of the Federal Trade Commission Act,

which prohibits “unfair methods of competition.” 15 U.S.C. § 45.

Although § 5 is understoo d to apply more broadly than § 7 of the C layton

Act, the FTC has interp reted the standard for challenging mergers under

60 Energy Antitrust Handbook

Section 7 is very broad and requires a prediction of the likely effects of a

transaction.

To help guide this process, in April 1992, the FTC and the DOJ

jointly issued Horizontal Merger Guidelines.

4

This joint statement by the

two federal enforcement agencies reflects the evolution from “wooden

rules of universal application . . . and provide[s] a more reasoned

analysis of the likely competitive effects of individual transactions based

on real-world market circumstances in which those transactions occur.”

5

The Merger Guidelines were revised in 1997 to elaborate on the

agencies’ approach to the evaluation of efficiencies claims.

6

The

underlying theme of the Merger Guidelines is that “mergers should not

be permitted to create or enhance market power or to facilitate its

exercise.”

7

In a report, the FTC described the review process applied to oil and

gas industry mergers this way:

The basic framework of analysis applied to petroleum and other

mergers has remained the same since 1982. This framewor k requires,

at first, the definition o f the relevant product and geographic markets in

which, postmerger, a hypothetical monopolist p rofitably would impose

at least a “small but significant and nontransitory increase in price”

(“SSNIP”). Once the relevant markets are defined, the agency staff

measures market shares and c oncentration in those markets. The staff

then assesses whether and how the merger might create or facilitate the

exercise of market power in those markets. The analysis continues

with an evaluation of whether ne w entr y would be timely, likely, and

the two sections as “coextensive.” Grand Union Co., 102 F.T.C. 812,

1027 (1983). It is not clear whether the FTC will hold to that position in

the future. See Negotiated Data Solutions LLC, File No. 051-0094, 2008

WL 258308 (Fed. Trade Comm’n Jan. 23, 200 8) (statement of the Fed.

Trade Comm’n); see also Thomas B. Leary, A S uggestion for the Revival

of Section 5, THE ANTITRUST SOURCE, Feb. 2009, http://www.

abanet.org/antitrust/at-source/09/02/Feb09-Leary2-26f.pd f (suggesti ng a

broader application of § 5 to merger cases).

4. U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER

GUIDELINES (1992) [hereinafter MERGER GUIDELINES] (with Apr. 8, 1997

revisions), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13 ,104.

5. Programs from the 40th Annual Antitrust Spring Mee ting, Report from

Officialdom: 60 Minutes with the Ho norable James F. Rill, 61

ANTITRUST L.J. 229, 236 (1992).

6. MERGER GUIDELINES, supra note 4, Introductory Note.

7. Id. § 0.1.

Mergers, Acquisitions, Divestitures, and Rela ted Issues 61

sufficient to counteract any anticompetitive effects, and whether

cognizable e fficiencies are of a character and magnitude such that the

merger is not likely to be anticompetitive in any relevant market.

8

The application of the guidelines requires a case-by-case analysis of

numerous factors to determine the relevant markets, assess the likelihood

and significance of possible competitive harm and procompetitive

efficiencies, and, in some cases, the fashioning of remedies to ensure that

competition is not reduced in those relevant markets and consumers are

not thereby harmed.

The remainder of this section discusses the FTC’s application of the

Merger Guidelines to analyze recent oil and gas industry transactions and

the factors and arguments the FTC has found most relevant to its merger

review. It also discusses the analysis employed by courts when the FTC

has litigated to challenge transactions.

1. Scrutiny of Oil and Gas Industry Transactions

The FTC “has been studying anticompetitive practices in the

petroleum industry literally since [its] creation in 1914,”

9

and has

investigated “every major merger in the petroleum industry over the past

twenty-five years.”

10

Historically the FTC has been much more

aggressive in investigating and challenging oil and gas industry

8. BUREAU OF ECONOMICS, FED. TRADE COMM’N, THE PETROLEUM

INDUSTRY: MERGERS, STRUCTURAL CHANGE, AND ANTITRUST

ENFORCEMENT 21 (2004) [her einafter PETROLEUM MERGER REPORT],

available at http://www.ftc.gov/os/2004/08/040813mergersinpetrolberpt.

pdf. A SSNIP of 5% is typically sufficient, but 1¢ per gallon has been

used i n petr oleum industry mergers. I d. at 22. The Merger Guidelines

have adopted the H erfindahl-Hirshman Index (HHI) as the princip al

measure of market concentrat ion. MERGER GUIDELINES, supra note 4, §

1.5. An HHI is calculated by summing the squares of the market shares

of the firms in the market. It is often useful to compare the pre- and post-

merger HHIs. The Commission is concer ned with a potential increase in

the ability of the merging parties to exercise market power by curbing

output unilaterally or by coordinating behavior with rival suppliers. Id.

§ 2.

9. Concurring Statement of Co mm’r Jon Leibowitz Regardin g the

Comm’n’s Report, “Investigation of Gasoline Price Manip ulation and

Post-Katrina Gasoline Price Increases” (2006 ), available at http://

www.ftc.gov/os/2005/07/gaspricerptconcurringstmn tcommleibowitz.pdf.

10. PETROLEUM MERGER REPORT, supra note 8, at 14.