The Federal Trade Commission (FTC) recently released “The FTC’s Merger Remedies 2006-2012.” The study, which evaluated systematically all 89 merger orders entered during that period, updated a previous merger remedy study completed in 1999. The report led the Commission to institute best practice recommendations that may have important implications for some future merger remedies.
Almost all the 89 merger orders reviewed involved some divestiture of assets. The Commission generally prefers structural remedies, such as divestitures, to prevent competitive harm. Many mergers that raise competitive concerns do so in only a subset of the markets where the merging parties operate, so many times limited divestitures are sufficient to protect competition while allowing the merger to proceed. While some of these divestitures involved ongoing businesses, others involved only limited packages of assets. The report analyzed both types of divestiture.
The report gave greater scrutiny to remedies in certain industries, for which it used additional information in its analysis. It also used a different standard for judging if a divestiture succeeded in different industries. The goal of a merger remedy is often described as maintaining or quickly restoring the competitive situation that existed before the merger, i.e., to restore the pre-merger world. Ideally, a remedy would seek to achieve what would have been the going-forward competitive situation without the merger, i.e., the world but-for the merger, which may be different than the pre-merger world. However, in this study, success was often evaluated using the pre-merger standard.
For 50 Commission orders in a broad range of industries, the report simply consisted of a case study. In those case studies, the FTC evaluated remedy success relative to a pre-merger world standard. This approach is understandable, due to the difficulty of constructing the but-for world, particularly given the number of cases that were analyzed. The case studies assumed that the pre-merger world is the but-for world, and analyzed the extent to which the competitive parameters that were identified in the original investigation of the merger still existed post-remedy. Using that standard to evaluate remedy success, the FTC case studies found that all of the divestitures involving ongoing businesses succeeded. By contrast, only about 70% of divestitures involving limited packages of assets succeeded.
A more detailed analysis was done of 15 orders in five industries: supermarkets, drug stores, funeral homes, dialysis clinics, and other health care facilities. That analysis included sending detailed questionnaires to buyers of the divested assets. With respect to these 15 divestitures, the standard of success was whether the divested assets were still operating in the relevant markets, i.e., whether the buyers that acquired the product lines at the time of the divestiture continued to sell them. These 15 orders involved divestitures to 43 buyers, and 39 of those divested businesses remained in the market. Thus, these divestitures were considered largely successful.
The most detailed analysis was of orders involving the pharmaceutical industry, which accounted for 24 of the 89 orders. Those orders were evaluated using Commission experience in this industry and reports from Commission-appointed “monitors.” The standard of success for divestitures involving products in production at the time of the divestiture was whether divestiture buyers continued to sell them. With respect to divestitures involving products that were only in development at the time of the divestiture, the standard was simply whether these assets were successfully transferred to the approved buyers—a narrow definition of “success.” The majority of the buyers that acquired products being sold at the time of the pharmaceutical divestitures still continued to sell those products, and all of the pharmaceutical products that were in the development stage at the time of the divestiture were successfully transferred.
The findings of the present study need to be understood in the context of the FTC’s 1999 divestiture study. That study, which evaluated 35 horizontal merger orders entered from 1990 to 1994, resulted in several changes to FTC merger remedy policies. Most important among those changes was that, for divestitures of less than an ongoing business, or assets that raised risks of deterioration if divestiture was not accomplished quickly, the Commission began to require that buyers be identified before it issued the divestiture order. When post-order buyers (approved by the Commission after the issuance of a divestiture order) were allowed, the default divestiture period was shortened from a year to six months. The Commission also increased its use of monitors. The present divestiture study attempted to determine how well those policy changes worked.
Based on the findings of the present study (and particularly the finding that divestitures of limited packages of assets sometimes did not succeed even when the buyer was identified upfront), the Commission instituted a number of best practices recommendations. Although these do not reflect major changes to the Commission’s current practices, they appear likely to have important implications for some merging parties. First, because the study confirms the Commission’s preference for divestitures of stand-alone ongoing businesses, rather than selected assets, the FTC staff will likely increase its scrutiny of proposed divestitures that do not involve stand-alone businesses. Second, to assure full analysis of potential buyers, the FTC expressed a preference that the parties proposing a divestiture remedy identify at least three potential “interested and approvable” divestiture buyers. Third, given the importance of attracting and retaining customers and the fact that the buyer does not always have an ongoing relationship with customers of the divested business, the FTC will increase its focus on facilitating the transition through such means as providing the divestiture buyer early access to customers, e.g., by assigning customer contracts. Fourth, the FTC likely will place increased emphasis on transition service agreements, like access to back-office functions and supply support, since the study found some buyers experienced unforeseen complexities in transferring critical back-office functions related to the divested assets. These agreements could involve longer entanglement between the divestiture buyer and seller, which the FTC has traditionally tried to minimize because of potential anticompetitive effects. Finally, for pharmaceutical transactions in particular, the FTC is likely to insist on divestiture of the product that can be more easily transferred to the buyer (e.g., because there is contract manufacturing). In the past, parties often had a choice of which products to divest.
Although the Merger Remedies study technically only applies to the FTC, the resulting changes in policy are not likely to be limited to that agency. The Antitrust Division of the Department of Justice has increasingly been applying similar standards to its remedies.