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Efficiency claims, a favorite defense for merging companies, are about to go under the regulatory microscope. U.S. Federal Trade Commission general counsel William Kovacic said Friday that within a year the agency will complete a major evaluation of past merger investigations, including whether efficiencies claimed by companies actually occurred. “We want to go back now and see how things turned out,” Kovacic said at an American Bar Association antitrust section forum. Staff members are meeting to develop review methods, Kovacic said. Actual work on the evaluation should start next month, with results released by the end of 2002, he said. The review will build upon the FTC’s famous 1999 divestiture study, one of the first evaluations of whether consent decrees successfully restored competition lost from a merger. It fulfills FTC Chairman Timothy J. Muris’ promise to do more merger policy research. The 1999 study concluded that about a quarter of consent decrees failed, often because companies allowed the divested assets to deteriorate before the sale. Former FTC Chairman Robert Pitofsky commissioned the study, citing the results when announcing in 1999 that the agency would increasingly demand upfront buyers for divested assets. European Commission competition czar Mario Monti has credited the 1999 study with influencing the EC’s review of its own antitrust remedies policy. Kovacic said the new review will look at instances when the FTC brought enforcement action and when it decided not to challenge a transaction. For challenged deals, the agency will study whether the outcome preserved competition. Such testing is necessary because the remedy process is highly experimental, Kovacic said, likening it to how scientists try different ways to cure a disease. “You can’t imagine a doctor administering treatment without looking back at the results,” Kovacic said. Hospital mergers are likely to receive significant attention. The FTC over the past several years has lost numerous hospital merger cases, with the court typically ruling that the efficiencies of the deals outweigh the anticompetitive harm. Kovacic said the agency plans to return to those deals to see if the resulting companies are in fact more efficient and whether those cost savings have been passed onto consumers. Dealmakers could find this information useful. Pitofsky, the former FTC chairman who has since returned to Georgetown University Law Center, praised the decision to examine agency enforcement efforts. “It is a great idea,” Pitofsky said, noting that it could prove especially helpful for the agency as it tries to decide how to apply antitrust policy to the fast-moving high-technology sector. Separately, Deborah Majoras, the principal deputy assistant attorney general for antitrust, suggested at Friday’s forum that the regulatory agencies are more receptive to efficiency defenses than in past years. To succeed, efficiencies must be the result of the merger, she explained. Majoras, however, said the agencies historically have set too high a bar to determine whether an efficiency was merger specific. Instead, she said, the guidelines give the agencies leeway to accept efficiencies when the alternative does not work as well as the merger. Two hospitals, for instance, could create a joint venture for their critical care units, which might achieve many of the same savings as a merger. But the joint venture might still be inferior because the deal would eventually expire. One of the hospitals could find itself in five years unable to compete because it suddenly lacks a critical-care unit. Majoras said few companies make detailed efficiency claims when presenting deals to the agency — they may be an afterthought not supported with data. That must change if dealmakers expect the antitrust division to take efficiency claims seriously, Majoras said. Copyright (c)2001 TDD, LLC. All rights reserved.

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