If your company is merging, and you want to avoid getting the hairy eyeball from the Federal Trade Commission, you would be well advised to avoid deals that involve "hot documents" or customer complaints. And it really would be best if you didn't work for a pharmaceutical company.
These are some of the conclusions that can be gleaned from an FTC report released in January that details the agency's merger enforcement activity from 1996 until 2011.
Breaking down the competition issues in 464 investigations, the report found that in horizontal mergersthose in which direct competitors seek to combinethe agency issued a second request for documents in 264 cases? need some kind of noun here these are all about the 464 investigations (see beginning of sentence) , or 57 percent. In vertical mergerstypically between a supplier and a customersecond requests were issued just 28 times (about 11 percent) during the 16-year period covered by the report.
The report also showed that 46 deals were closed after a "quick look," that is, an investigation that was dropped by the FTC "due to the insignificance of one of the merging parties." In 86 instances, companies abandoned their proposed deals while the FTC investigation was ongoing.
Deals where the agency uncovered "hot documents" had a tough time winning approval. According to the report, "A document is 'hot' if it predicts that the merger will produce an adverse price or nonprice effect on competition. The most obvious situation involves acquiring party documents that predict a price effect stemming from the merger."
The FTC discovered such hot documents in 28 proposed mergers, and took enforcement action against 25 of themor 89 percent of the deals. In the 230 mergers without hot documents, the FTC took action against 150, or 65 percent.
Even more damning were strong customer complaintsinstances where customers (not competitors) "expressed a credible concern that a significant anticompetitive effect would result if the transaction were allowed to proceed."
In the 114 mergers where the FTC received such complaints, the agency took enforcement action against 111 deals97 percent of the time. In 122 deals without strong customer complaints, the FTC took action against 53or 43 percent.
The report also found that pharmaceutical mergers were the least likely to survive FTC scrutiny unscathed. Of 122 deals involving pharmaceutical markets, the FTC sought some kind of relief (such as a divestiture) in 119 (98 percent). By comparison, of the 20 hospital deals subject to second requests, the FTC took enforcement action in just eight (40 percent) and let the balance proceed without concessions.
A version of this story appeared in The National Law Journal, a sibling publication of Corporate Counsel.