Merger Remedies Trends: Structural vs Behavioral

[00:00:02][Music] good afternoon and welcome to the capital forum sixth annual antitrust thought leaders interview series my name is karina Lubell and i am joined here today by Sarah Rossi who is a partner in the antitrust group at Simpson Thacher so thanks so much for joining us Sarah my pleasure um I think today what I'd like to talk about is some of the recent trends in merger remedies recently there's been a lot of discussion at both the FTC and the DOJ with me Candela Rahim and Bruce Hoffman talking or expressing a preference for structural remedies particularly when it comes to vertical deals is that largely rhetoric or have you seen a visible shift in enforcement well we've seen a visible shift no doubt until fairly recently in the past year so I would say the conventional wisdom among practitioners was that vertical deals could get approved with a vertical remedy I'm sorry with a behavioral remedy and with the recent DOJ challenge to the ATT time-warner transaction that clearly that conventional wisdom clearly is is no longer entirely sound seven years ago the DOJ allowed the Comcast NBC Universal transaction which involved very much the same fact pattern of a content distributor combining with the content producer and that deal was allowed with a behavioral remedy and clearly this that behavioral remedy that was proposed by the parties in AT&T Time Warner most recently was not allowed and OJ has challenged the transaction outright so what we have now I think are broad implications across many industries and most recently not only in telecom but also in industries such as healthcare we're seeing significant vertical deals proposed and so this could have ramifications I think that could be quite significant and so does this have an impact on how you counsel your clients who are considering vertical mergers yes absolutely we need to really think about vertical implications and not just think of them as an adjunct to horizontal concerns because many transactions will have both start both horizontal and vertical implications so we need to really focus on the vertical concerns individually and we need to ask what are the incentives that the agencies could be concerned about being changed and ultimately leading to the kind of concern that the agency could move to block a deal rather or to insist upon a structural remedy as opposed to merely allowing it to go forward with a behavioral remedy sure and I'd like to talk a little bit more about structural remedies because particularly at the FTC in in the recent past we've seen several failed divestitures in it's a structural context and one in supermarkets and other in rental cars and I understand that you counseled a client doing a super another supermarket deal shortly after the failures in or the shortcomings in the Albertsons Safeway deal became apparent and I'm just wondering if you saw any changes in how the FTC vetted your proposed divestiture buyers or sort of how they looked at the remedy in that instance yes so I represented one of the parties in the first supermarket merger that came up following the Safeway Albertsons divestiture and and I did perceive that the staff was highly focused on remedy and that they were very risk-averse when it came to any sort of remedy proposal that maybe was not the the clearly conventional supermarket chain buyer to take on the divested stores and so as it related to any buyer that was perhaps lesser known or any buyer that was smaller independent perhaps or even a financial buyer that didn't have operational experience in the relevant market that that those buyers were to receive heightened scrutiny by the staff and I do think that that was a reaction in a way to the staffs experience following Safeway Albertsons that being said I think the structural or the rather substantive criteria were largely the same there wasn't a major shift but it was it was sort of the heightened sensitivity or risk aversion that I think that the staff it was was demonstrating and probably rightly so that that they felt the need to to make their process as rigorous as possible to ensure that a similar outcome didn't happen you know or really with the next supermarket merger up following following that one that received a lot of attention of course for for the divestiture not having been successful right when it seems that another preference that the agencies have expressed is for the divestiture of an entire business unit obviously that's not always possible and we still see those deals going through many of them also in retail can you maybe talk about some of the things that the agencies are looking for in a set of assets short of a business unit but that give them comfort that a divestiture will be successful so we have seen of course divestitures that have been approved or deals that have been allowed to go forward with divestitures of something less than an entire business unit and nevertheless the agencies clear preference is for an ongoing business and one that's severable and doesn't require sort of the piecemeal or selective to best teacher of assets I do think it's going to be potentially tougher going forward to get deals approved with something less than an ongoing business unit we're hearing statements from agency officials from both DOJ and FTC to that effect and so I think we're going to have potentially a heightened burden on us on the merging parties to to demonstrate that that the that a selective asset divestiture is going to be sufficient and the way I would think about it is first of all what is the remedial concern that the agency has and then how do we match the particular assets being divested and the buyer being proposed to demonstrate that together the buyer with those assets will be successful in restoring competition and so there's no kind of easy answer it's it's going to be very fact-specific but I do think that the merging parties will need to think about assets all the way from manufacturing distribution intellectual property and even our D going forward sales personnel management personnel and the like because ultimately the agencies are looking for the remedy to restore competition from day one and on into the future and in if innovation concerns are partially motivating the agency challenge then we'll need to be sure that our D assets and other kind of ongoing capabilities around development are established in the divestiture package sure I just want to go back to I know you talked about the the divestiture buyer in particular in the context of supermarkets and I'm just wondering more generally the sorts of things that the agencies are looking for in a divestiture buyer obviously it's going to depend on whether it's an entire business unit or not and I'm sure that there are other factors but are there specific things that they're looking to see from the proposed or the prospective divestiture buyer are there red flags that make it seem that that buyer would not be suitable so maybe if you could just talk about buyer suitability yeah so buyer suitability is again is going to be specific to the relevant market and the types of the industry the types of assets that are being divested but in general the agency wants to see a market tested buyer they don't want to take a chance on someone you know they want to see that the buyer has operational experience that they have financial capability and that they have a long-term commitment to the market there I think a red flag would be a buyer that perhaps can't establish that they're in it for the long haul or that they would be inclined to exit the market if the early returns weren't good or successful with that kind of commitment and operational experience I think most likely you've got a buyer that can ultimately be approved I think that another red flag that that sometimes our our clients are surprised by is is having a presence in the relevant market so that although we would think well this is an established buyer because perhaps they've already established themselves in the relevant market they're competing where they have a foothold that alone may be disqualifying if the staff would view that as a new overlap or a new competitive concern arising from the buyer already having a toehold in the market I see yeah it sounds like it's probably challenging to come up with a buyer who both has experience but not so much experience in that direct market that they might be compete with the emerging parties right and ideally it could be expertise or experience in an adjacent market so maybe they're not in Harrisburg Pennsylvania but you know they're in Philadelphia and so they have they have some established reputation in the region more generally but they're not already locally competing got it okay I wanted to ask you about retail mergers I know you've a lot of experience with not just supermarkets but retail more generally and it seems that that is an area where we have seen a number of failed divestitures and I'm just wondering or at least a disproportionate number and I'm just wondering if there there's something special or unique about the retail markets that makes them more or less likely to succeed or structural remedies less likely to succeed or if there's anything you've observed or could tell us about that well I think it's it's a fair question but I don't think there's anything specific about retail that that makes it more likely that a divestiture may fail I do think retail can be a tough business it can it can be one in which substantial distribution capability is required and an inefficiency is needed in order to ensure that a buyer can expand their scale and scope in a way that will make them a successful buyer where stores are dispersed across a large geography so this is why I think the FTC staff has demonstrated a preference for chain buyers because they already have a large footprint they are have the ability to take on stores of a large number to add to their own scale and scope if you have a small buyer which is looking to take on many stores and dramatically expand their scale and scope they are more likely to have challenges in in getting getting up to up to scale so I think that's maybe one reason why we've seen divestiture failures in retail because you may have buyers biting off more than they can chew right well it'll be interesting I suppose to see with the particularly FTC since they deal with retail but with their increased interest and scrutiny of the divestiture buyers and the assets whether we continue to see those same types of failures going forward I think though we are about out of time but I appreciate you joining us this afternoon Sarah and I hope that we will have the pleasure of speaking together again so thank you thanks for having me [Music]