In remarks presented today before the Cutting Edge Antitrust Conference of Law Seminars International at New York City's Empire Hotel, Federal Trade Commission Chairman Robert Pitofsky outlined certain factors the FTC considers in determining whether and to what extent restructuring can save an otherwise anticompetitive merger proposal, stressing the need for transparency on behalf of federal regulators as restructuring proposals become more complex.
"My intent today is not to describe a new or revised policy," Pitofsky began by saying, "but to describe what we are doing, and have been doing, for some time ... to set out more fully than before the various factors that influence, in my mind, decisions to restructure." In recent years, he said, enforcement agencies have been offered more ambitious and complicated restructuring proposals to address overlaps and other potential anticompetitive effects. To demonstrate this, he presented hypothetical examples illustrating how the Commission might approach issues such as competitive overlaps in existing markets, complex divestiture proposals, and anticipated efficiencies of scale and scope.
Pitofsky stated that in complex cases involving extensive restructuring, "the likelihood of success of restructuring often depends on sophisticated predictions about technical and financial factors in the market, turning on a detailed knowledge of particular industries, and antitrust lawyers and economists may not be the best people to undertake those tasks."
"I do not mean to suggest that extensive restructuring should never or even rarely be an acceptable solution to merger problems," he emphasized, however, citing the FTC's recent Divestiture Study which concluded that most divestitures do establish viable competitors. "When proposed mergers can be restructured in a feasible way that fully protects competition, the FTC will work with the parties to eliminate the problems and clear the transaction."
Often the proposed mergers have substantial efficiencies. "Mergers and restructuring are a consequence of an immensely dynamic economy and should be acceptable to an agency like the FTC - at least where the threat to consumer welfare is not unduly great," he said.
Responding to what he called an "almost unprecedented merger wave" of increasing complexity in the United States, Pitofsky next pointed to six important, but not exhaustive, concerns that the agency has taken -- and will continue to take -- into consideration regarding restructuring proposals: 1) How Effective is the Proposed Solution?; 2) Efficiencies; 3) How Complicated is the Proposed Restructuring?; 4) Effect on Future Transactions; 5) Experience with Past Transactions; and 6) Creation of New Law Through Settlement.
How Effective is the Proposed Solution?
"The law is clear that divestiture and other restructuring remedies should not be adopted unless they are likely to restore fully the competition lost as a result of the merger," the Chairman said. "But what factors should an agency like the FTC look to in assessing the effectiveness of the proposed solution?"
First, he noted, with respect to the buyers of divested assets, key questions include whether they will obtain assets sufficient to operate an effective competitive business, and whether they have sufficient incentives, competence, resources and experience to restore competition. "While we will certainly be influenced by the buyers' predictions of competitive viability," he said, "those predictions cannot be controlling; thus, the Commission often will make a separate analysis of the feasibility of the proposed restructure."
Even where the buyer has appropriate incentives, he continued, the question exists of whether it can restore the scale and scope economies of the acquired company. One way to ensure this occurs is to prefer - but not always insist upon - the divestiture of a complete going business. Pitofsky also stated that the concerns highlighted in the Divestiture Study had led the FTC to adjust its process modestly - by more often requiring up-front identification of a buyer and review of the buyer's business plans with respect to each asset being divested.
Regarding sellers, the most important question is whether the entity no longer has the ability to control or influence the divested assets, Pitofsky said. Again he cited the Divestiture Study, which showed that in six of the 19 divestitures where the seller had a continuing relationship with the buyer, that relationship was so detrimental that the buyer could not operate effectively. In seven other cases, the ongoing relationship was competitively harmful. "These findings should not mean that continuing relationships are never acceptable, but they should be approached with caution," he said.
Continuing on this theme, he said the most challenging issue agencies must address in regard to this factor is "how certain the enforcement officials and the courts must be that the restructuring will adequately protection competition." While stressing that "no simple bright-line rule" can be applied, Pitofsky concluded that "the bottom line is the divestiture must be effective and consumer welfare should not be asked to bear an unreasonably high risk that accompanies an uncertain and questionable undertaking."
Addressing efficiencies, Pitofsky said that while "the FTC's first responsibility is to preserve free and open competition," the agency should nevertheless take into account pro-competitive efficiencies in deciding whether to approve a proposed restructuring. If the efficiencies claimed are in the market where the restructuring is proposed, analysis is relatively easy, as they will be investigated during the review process. "The key questions would then be whether the efficiencies are clearly verified and are likely to be sufficiently substantial, and sufficiently likely to be passed on to consumers, to outweigh the risks that the restructuring will not fully restore pre-existing competition."
He stressed that "efficiencies asserted as a justification for restructuring must be merger-specific," pointing out that "efficiencies are often exaggerated and, perhaps even more often, can be achieved through nonmerger routes." Finally, he noted that the analysis of efficiency claims related to portions of the deal not affected by restructuring is often more complicated, since such claims would not ordinarily be investigated in initial competitive analyses. Reliance on such efficiencies, he concluded, may entail a tradeoff of the competitive interests of consumers in one market for the competitive interests of consumers in a different market. "I would not say that efficiencies in ... other markets would never be taken into account, but surely they should be viewed with a skeptical eye," he said.
How Complicated is the Proposed Restructuring?
In addressing this factor, Pitofsky cited the Divestiture Study's conclusion that a clean divestiture of assets comprising a going business was most likely to create viable competitors -- a conclusion consistent with longstanding judicial practice. He said that complications may arise when some smaller package of divested assets is made available to a buyer, "and even more complications arise when there are continuing business relationships between the merging parties and the acquirer of the divested assets." In such cases, he concluded, the Commission is often called upon to play a role in monitoring the arrangement "in a situation where the divesting party has incentives to cut corners, delay compliance or interpret the divestiture order in a grudging manner."
Effect on Future Transactions
"A decision to accept a certain kind of restructuring may lead firms in subsequent transactions understandably to demand the same treatment," Pitofsky said in outlining this factor. The law is clear, he said, that "the responsibilities of enforcement officials and courts is to weigh not only the anticompetitive effects of the particular deal at issue, but also the possibility that the transaction is part of a merger wave." This means taking into account where the industry, as a result of similar transactions, might be going. If the industry is undergoing a merger wave, antitrust enforcers must then consider whether the merger is anticompetitive, or whether it is occurring because economic factors have changed and the firms are pursuing efficiencies.
Experience with Past Transactions
Learning from experience gained from the past is also essential, Pitofsky said. "Enforcement agencies should not be expected, and would not be justified, in making the same mistakes over again," he stressed, saying that if restructuring in a particular industry under circumstances has been unsuccessful, "officials have a responsibility to determine why." And if similar problems are likely to arise again, "past experience should not be ignored."
Creation of New Law Through Settlement
Reiterating that few merger matters are fully litigated, Pitofsky went on to say that while disposition of merger matters through mechanisms such as consent agreements is often appropriate, "there is a downside to leaving the courts out of the game." In this country, he continued, the bipartisan consensus that strongly supports vigorous antitrust enforcement "depends in no small part on the view that agency enforcement decisions ultimately will be reviewed by an independent judiciary." On the other hand, "it is unfair and impractical to force the parties to litigate otherwise easy-to-settle matters just to give the judiciary an opportunity to review agency decisions." When otherwise appropriate, he concluded, "settlements should be pursued even where they depend on new interpretations of law, in the knowledge that either litigation or criticism from the bar and the academic community can be relied on to direct a spotlight on faulty initiatives."
In closing his remarks, the Chairman contended that "the burden of coming forward with adequate restructure proposals should be on the sponsors of the merger." The job of the Commission, he said is to "make it clear what its reservations are about the proposed transaction and to be available for a constructive dialogue on how any problems can be adequately addressed." Still, he stressed, "the FTC has been and remains willing to consider restructuring proposals, even those that are fairly extensive and complicated, if it is likely that the restructuring will preserve competition."
Copies of Chairman Pitofsky's remarks are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.