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Smaller Deals are Subject to Antitrust Scrutiny Too
January 22, 2009
Companies planning mergers or acquisitions often breathe a sigh of relief when they conclude that no premerger filing is required under the HSR Act. But their relief may be short-lived if the parties fail to consider whether the deal presents any substantive antitrust issues. Regardless of size, any deal between competitors should be vetted for effects on competition. Both the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) regularly exercise their power to monitor, investigate and even challenge deals that are below the HSR Act thresholds or otherwise non-reportable. In fact, both agencies have recently sought to unwind non-reportable deals.
For example, the FTC recently challenged Ovation Pharmaceuticals, Inc.’s January 2006 non-reportable acquisition of a drug called NeoProfen.1 Because Ovation already owned a drug called Indocin IV, the acquisition gave Ovation 100 percent of a specific drug-therapy market. Indocin and NeoProfen are the only two drugs approved by the FDA to treat certain congenital heart defects most often seen in babies born prematurely with low birth weights. (A third drug to treat the condition, a generic version of Indocin, was approved by the FDA in July 2008 but has not yet entered the market.) A primary motivation for the FTC’s challenge was likely Ovation’s conduct immediately following its acquisition of NeoProfen. Ovation raised the price of its existing drug, Indocin, nearly 1300 percent — from $36 to $500 per vial — and set NeoProfen’s price just below the $500 level when it was launched several months later. The FTC seeks not only to unwind the acquisition but also disgorgement of Ovation’s profits, a remedy that has only rarely been used by the FTC. Interestingly, FTC Commissioner Jon Leibowitz, who rumor has it is the leading candidate for Chairman of the FTC, suggested in his concurring statement that the FTC should seek disgorgement “more frequently.”
The DOJ has similarly recently challenged a non-reportable transaction. In July 2008 Microsemi Corporation (“Microsemi”) acquired from Semicoa Inc. (“Semicoa”) assets relating to certain semiconductor devices used by the U.S. military and space programs. According to the DOJ, the acquisition created a monopoly for small transistors and decreased the number of defense department approved providers of ultrafast recovery rectifier diodes from three to two. Although the DOJ’s complaint does not point to specific price increases like the ones the FTC identifies in Ovation, the DOJ does assert that prices for small signal transistors have increased and are likely to continue to increase, that delivery times will lengthen, and that terms of service are likely to become less favorable. The DOJ seeks to force Microsemi to sell the Semicoa assets.
A common thread in these cases is a substantial increase in prices after the deals closed. Such increases can be used as direct evidence of a decrease in competition in violation of Section 7 of the Clayton Act. In Ovation, in fact, the price increase was so dramatic that it seemed to demand an investigation. One wonders whether the government would have pursued these deals, especially the Ovation transaction, if the parties had been more cautious in their pricing policies. Now, the parties face not only expensive and difficult government litigation, but also the risk of private sector antitrust lawsuits.
Companies entering into “small” deals would be wise to learn from Ovation and Microsemi’s mistakes by proactively analyzing any substantive antitrust issues and considering the possibility of post-consummation antitrust challenges. The possibility of such a challenge should be considered as parties negotiate the merger agreement and as they develop post-merger business plans.
In addition to a substantive antitrust review (however brief), the parties to smaller deals should also consider antitrust restrictions on due diligence and integration planning. In particular, due diligence and integration planning processes in smaller deals between competitors should be monitored for antitrust risks. Small deals sometimes present especially thorny antitrust issues during due diligence because they often involve closely held companies with only a handful of executives making the decisions regarding both the deal and the day-to-day operations of the business. Without proper advice, well-meaning executives can run inadvertently afoul of the antitrust laws. With a little antitrust guidance, however, even direct competitors in small markets can safely exchange necessary competitive information and prepare for a merger without significant risk.
For all these reasons, parties to deals that are below the HSR Act thresholds or otherwise non-reportable should pause to check with counsel before they prematurely dismiss antitrust issues.
1 Ovation is not the only case the FTC brought in 2008 seeking to undo an already consummated transaction. In September 2008, the FTC challenged Polypore International, Inc.’s $76 million acquisition of another battery separator manufacturer, Microporous Products L.P. A final decision has not yet been reached in Polypore.