On February 3, 2017, the U.S. Federal Trade Commission (“FTC”) released a study entitled “The FTC’s Merger Remedies 2006-2012” (“Remedy Study”). The Remedy Study, a report of the FTC’s Bureaus of Competition and Economics, examines 89 merger orders affecting 400 markets, with 79 divestitures to 121 buyers, and evaluates 50 of those orders using a case study method. To conduct the Remedy Study, the FTC interviewed nearly 200 businesses in a wide range of industries.
The Remedy Study confirms that the FTC’s practices related to designing, drafting and implementing its merger remedies are generally effective. At the same time, the Remedy Study identifies a number of shortcomings that the FTC needs to address to improve the remedy process.
Some of the key findings and adjustments include:
All buyers of an ongoing business succeeded in restoring or preserving competition, but buyers of a more limited package of assets sometimes did not succeed even when the buyer was identified upfront.
- The FTC found that divestitures of an ongoing business was always successful in preserving competition. Thus, a sale of an ongoing business poses fewer risks that the buyer will not succeed in maintaining or restoring the competition eliminated by the merger.
- Because the FTC requires upfront buyers, most, but not all, buyers of a more limited set of assets also succeeded in maintaining or restoring competition. This includes the sales of retail stores, which the Remedy Study, indicates have been relatively successful in restoring competition. Moreover, the FTC found that buyers of a limited set of assets were successful when they acquired brand names and key employees. As we would expect, the FTC concluded that divestitures of selected assets tended to succeed when buyers had similar existing operations, were knowledgeable about the relevant markets, and were familiar with the relevant customers.
- This means that going forward, merging parties and buyers of divested assets can expect that proposals to divest a limited package of assets will undergo more detailed scrutiny to reduce the risk that the buyer does not get what it needs to be an effective competitor. The FTC will only accept a proposal to divest a limited set of assets over an ongoing business if the merging parties and the divestiture buyer demonstrate that divesting the more limited asset package is likely to maintain or restore competition.
- In other words, the merging parties will be required to explain why an alternative ongoing business divestiture is inappropriate or infeasible, how the more limited set of assets can operate as a viable and competitive business, and how the divestiture buyer will be able to fill any gaps for aspects of an ongoing business that are excluded from the package. It also means that the buyer must be prepared to assess what other assets and services it will need to operate the selected assets as a viable and competitive business, show how it will obtain those assets and services, and provide estimates for how long it will take, and at what cost.
Some divestiture buyers experienced unforeseen complexities in transferring critical back-office functions related to the divested assets, and sometimes needed more time than expected to transition these services.
- A wide range of back-office services to support manufacturing and sales efforts such as legal, finance, accounting and tax, risk, insurance, environmental evaluation, or human resources are required to run a business. Back-office functions include complex information technology systems that rely on hardware, software and people to perform or monitor a variety of critical tasks. The FTC found that regardless of whether the divested assets included these functions or the buyers independently obtained them (possibly from their own operations), buyers sometimes encountered problems or delays. Where the respondents were providing these services on a transitional basis, buyers sometimes found that they needed more time to integrate these functions.
- This means that the FTC needs to broaden its investigation to determine the scope of back-office functions that relate to the product market and to the assets being divested. The FTC is now requiring the merging parties, who are knowledgeable about these systems, to explain the software, databases and other information technology that support the divested assets, and to identify any personnel or documentation that would help in the transition. The merging parties also need to ensure that the proposed buyer can conduct due diligence to understand what it will need in terms of back-office support services. If the buyer does not have and cannot acquire these services because they are specialized, the divestiture package will need to include these services; if it does not, the merging parties must provide critical back-office functions on a transitional basis to the buyer at no more than its cost.
Divestiture buyers need adequate funding to be successful.
- The Remedy Study found that a divestiture’s success over time depends, in part, on whether the buyer has adequate funding commitments to ensure success.
- This means that the FTC is now paying closer attention to the source of and limitations on funds available to a proposed buyer and how these factors may affect its competitive and financial viability. The buyer must provide detailed financial documentation and explain all sources of funding of the divestiture, including contingency plans if sales and other financials do not meet projections.
Buyers expressed concern that because of time constraints they did not conduct sufficient due diligence nor did they have adequate access to facilities and employees related to the divestiture.
- The FTC learned from several upfront buyers that they did not conduct sufficient due diligence because the didn’t have enough time nor access to important facilities and employees. These upfront buyers also said that the insufficient due diligence delayed their ability to compete or increased its costs.
- The FTC acknowledged in the Study that some upfront buyers do not raise concerns during the divestiture process.
- The FTC would like to make sure that the process works more like a normal arm’s length asset purchase where buyers have direct access to any key employees, information, and facilities. This means that the remedy process could take longer.
The FTC Remedy Study indicates that the FTC’s remedy process and past remedies have worked most of the time. The Study demonstrates that there are still issues, but the FTC will tweak its process going forward. As has always been its preference, the FTC will continue to encourage divestitures of an ongoing business over a more limited divestiture package because divestitures of ongoing businesses have a higher success rate than limited divestitures. The FTC will accept a more limited divestiture package only if the merging parties and the buyer can establish that the divestiture will restore and maintain competition. Thus, the FTC may require the divestiture of assets (including manufacturing facilities) related to additional complementary products, the use of brand or trade names, or other affirmative conduct obligations, such as those that facilitate the transfer of customers, to ensure the divestiture buyer’s viability. The FTC may also require the merging parties to provide critical back-office functions to the divestiture buyers through transition service agreements. The FTC will require buyers to explain how they will finance the acquisition and whether they have adequate funding to compete going forward. Finally, the FTC will try to ensure that the divestiture buyer gets adequate time to conduct due diligence and encourage the buyer to raise any concerns during the vetting process so that these concerns can be handled during the investigation of the divestiture package.