“Increased regulation,” including aggressive antitrust enforcement, was cited by nearly 70 percent of Fortune 500 CEOs as the most frequent concern among their “top three or four challenges.” These fears are heightened by the wake of recent antitrust litigation challenging mergers both big and small—transactions such as Deere & Company/Monsanto, Energy Solutions/Waste Control Specialists, Staples/Office Depot, Sysco/US Foods, Halliburton/Baker Hughes, Comcast/Time-Warner Cable, Aetna/ Humana, and Anthem/Cigna, to name a few.
The data bears out these concerns. The Antitrust Division of the Department of Justice (Division) and the FTC are taking more time to investigate transactions and are expanding their review beyond traditional theories to determine whether transactions raise concerns for narrow customer groupings and upstream and downstream participants, more of which are resulting in litigation. And while the new administration may reduce the frequency of litigation, it will continue to apply the same analytical framework. Especially in the near term, the pace of investigations is unlikely to change materially.
But mergers and acquisitions offer opportunities for significant synergies and the chance to transform a company’s prospects. So, how can directors navigate deals through increasingly hostile antitrust waters? Engaging counsel early on—far before signing—to evaluate antitrust risk is a necessity, not only to understand prospects for regulatory approval, but also to protect vital business interests. Based on our review of recent enforcement trends, we offer the following recommendations to help provide a path forward to realize the synergies produced by strategic transactions:
- Develop a deal rationale that is centered on customer benefit. From the outset, parties should articulate (and reinforce) a transaction rationale that is predicated upon customer benefit in order to ensure that documents are written accurately and that key constituencies hear a consistent message about the purpose of the deal.
- Brace for longer antitrust review. Parties must build time into the definitive agreements to allow for agency investigation, including, if necessary, additional time to signal a credible threat of litigation against the government.
- Carefully allocate risk in the merger agreement and be prepared to use the provisions as a sword or a shield. Lawyers allocate risk using levers such as defining the conditions to closing, outlining efforts that parties must take to secure clearance, defining divestiture obligations and describing the consequences for failing to obtain clearance.
As antitrust enforcement agencies turn up the heat on mergers and acquisitions, businesses must adapt to manage antitrust risk. While we anticipate that the Trump administration may be more willing to accept that market forces will cure fears of consumer harm—and likely more receptive to structural and creative settlements—Trump himself has made statements that also point to continued scrutiny of business combinations. As directors consider the promises of synergies that business combinations bring, they should remain mindful of the potentially lengthy timelines for antitrust clearance, particularly where there are overlapping business segments and other interrelationships between the merging parties. Only then can businesses navigate the increasingly choppy antitrust waters.
View the full report here.