What’s the interest in partial interests?

Most mergers reviewed by the Commission involve the acquisition of an entire company, or an identifiable set of assets – that is, the buyer seeks to control the assets of the seller through an acquisition. But sometimes companies acquire only a partial interest in a competitor – and such an interest, even a minority interest, can raise antitrust concerns, too.

Last week’s final order in Hikma Pharmaceuticals/Roxane Laboratories is an example. Prior to the acquisition, Roxane sold generic flecainide tablets, a drug used to prevent and treat fast heart rhythms. Three other companies also market generic versions of this drug. Hikma owned the U.S. marketing rights to a generic flecainide product in development at Unimark Remedies Ltd., in addition to a 23 percent interest in Unimark. According to our analysis, Hikma, with Unimark, is one of a few suppliers that can enter the U.S. market for this product in the near future. The Commission’s order resolves concerns that combination of an existing competitor with a firm that has a 23 percent interest plus marketing rights to a competing product in development would adversely impact future competition for the drug. Hikma agreed to return its rights to market generic flecainide tablets in the U.S. to Unimark, and to sell its equity interest in the company.

As explained in Section 13 of the Horizontal Merger Guidelines, even if a partial-interest acquisition does not result in effective control, it may nonetheless change a competitor’s incentives post-acquisition in a way that substantially lessens competition. The acquisition of a partial interest short of control can raise competitive concerns in three ways:

1. Giving a competitor the ability to influence the competitive decisions of a rival through, for example, board representation or having veto power over significant issues like budget or strategy.

Here’s an example of how that can come into play: In TC Group, Carlyle and Riverstone, two private equity firms, together held a 50% interest in the general partner controlling an energy company – Magellan – when they acquired a combined 22.6% interest in a rival energy company, Kinder Morgan. The combination of Kinder Morgan and Magellan would have affected competition in eleven markets. Even though the ownership interests in the two energy competitors were partial ones, the PE firms had their own representatives on each company’s board. The Commission concluded that this representation, which also came with the right to veto certain decisions at Magellan and access to competitively sensitive information about both competitors, was sufficient to trigger a Section 7 violation.

2. Muting the incentive to compete. A minority interest in a competitor may reduce the incentive to compete vigorously because a partial interest-holder profits even when it loses business to the rival. This type of anticompetitive effect becomes more significant the greater the ownership interest.

This concern arose last year in when GlaxoSmith Kline and Novartis formed a joint venture to combine their respective consumer healthcare businesses. The agreement gave GSK a 63.5% share of the JV with Novartis holding the rest. Before the JV, GSK and Novartis were the only two suppliers of branded nicotine replacement therapy (NRT) transdermal patches in the United States, so an outright merger of the two NRT businesses would have raised obvious competitive problems. However, the JV was structured to include only the GSK NRT business—the Novartis NRT business was retained by Novartis. The Commission determined that even with the carve-out, Novartis’ partial interest in the JV still raised competitive issues because it gave Novartis the incentive to raise prices on its own NRT products, both branded and private label. The concern was that if Novartis increased prices and lost sales, those lost sales would be diverted to the GSK products in the JV, which would revert partially back to Novartis. As the Commission explained: “With an interest in its most significant competing product, Novartis would have an increased incentive to raise prices for its NRT patches post-acquisition.” To proceed with the JV, Novartis agreed to divest the rights and assets related to its NRT transdermal patch business to a Commission-approved buyer.

3. Providing a competitor with non-public, competitively sensitive information, which can increase the risk of anticompetitive unilateral or coordinated behavior. This risk is greater if the information sharing goes both ways.

In a few cases, the Commission has addressed concerns about gaining access to commercially sensitive information and the ability to exercise control via a small equity interest in a competitor. For instance, at the time it agreed to buy Guidant, Boston Scientific held a 10 to 15 percent equity interest in Cameron Healthcare, a start-up that was working to develop a new type of implantable defibrillator. Guidant already had a commercial product, and the Commission was concerned that the combined Boston Scientific/Guidant would have access to non-public information about Cameron’s development effects and the ability to exercise control over Cameron’s decision-making, provisions that were originally designed to protect Boston Scientific’s investment and option to acquire the company. In another merger, Medtronic/Physio-Control, an investment agreement gave Medtronic the right to name a member of the board as well as access to competitively sensitive information for a company developing a product to compete with Physio-Control’s automated external defibrillators. The Commission was concerned that the acquisition would bring two competitors under the influence or control of Medtronic, to the detriment of competition.

What’s the fix for competitive concerns raised by partial interest acquisitions? As with complete mergers, the remedies are tailored to address the specific competitive concerns. The Commission may determine that a divestiture of assets is needed to preserve competition, as it did in GlaxoSmith Kline/Novartis, or it may require the merged entity to sell its ownership interest and other rights to a competing product, as it did in Hikma/Roxane. Or, the Commission may impose order provisions that limit a firm’s influence over its rival. In TC Group, the Commission’s order ensured that the two companies continued to operate independently by removing the PE firms’ agents and directors from the Magellan board, limiting the flow of non-public information, and requiring the companies to provide notice before acquiring any more interests in Kinder Morgan. In Boston Scientific/Guidant, the Commission imposed a firewall to prevent the flow of commercially sensitive information and prevented Boston Scientific’s interest in Guidant from affecting its approval of Cameron’s decisions. In Medtronic/Physio-Control, the Commission made Medtronic a passive investor.

These cases serve as a reminder that partial ownership interests can raise significant antitrust concerns, even at levels that do not confer control, when the partial interest gives a competitor the ability and incentive to behave in a way that threatens competition in the future.