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San Jose, Calif.-based eBay Inc. and Mountain View, Calif.’s PayPal Inc. scored a regulatory coup Tuesday when the U.S. Justice Department announced it would close its antitrust investigation of their $1.4 billion merger. The Justice Department granted the deal so-called early termination, which means it plans no further review of the transaction. The disclosure was included in the list of early terminations released Tuesday by the Federal Trade Commission, which coordinates pre-merger filings for the two agencies. EBay and PayPal echoed the Justice Department’s announcement, releasing a statement early Tuesday saying the deadline passed Monday without the antitrust division issuing a “second request” for more details on the deal. PayPal’s shareholders must still approve the deal. The companies said they expect to close the transaction in the fourth quarter. The Justice Department had been widely expected to issue a second request because of the size of the transaction and because it would combine the biggest e-payment system with its most significant rival. The merger also raised vertical foreclosure issues because it combines the largest auction site with the dominate e-payment system. “We are gratified the Justice Department reached the right result so quickly,” said Mark Kovner, a partner at Kirkland & Ellis who represented PayPal. “The deal will generate real and significant synergies and efficiencies that will benefit all of PayPal’s customers.” EBay’s lawyer, Christine Varney of Hogan & Hartson in Washington, D.C., was on vacation and could not be reached for comment. Three sources said the Justice Department’s antitrust division decided that even if it had issued a second request, it would not have received enough evidence to successfully block the merger in court. A source said the government focused primarily on the vertical aspects of the merger — whether eBay could use PayPal to force customers that use rival auction sites to switch to its auction site. Known as vertical foreclosure, this alone is grounds to block a merger. But two sources said the companies argued that eBay would have little incentive to raise the price for using PayPal off eBay. That’s because vendors would be just as likely to switch to other payment processors as to move to eBay. The source noted there are more than 100 companies that make it possible for small companies to accept credit cards indirectly, much as PayPal does. EBay cannot afford to risk losing PayPal’s non-eBay business, one of the sources said, because the auction company based part of its valuation of PayPal on its non-eBay revenues. Sources also said the antitrust division did not appear overly interested in the “horizontal” aspects of the merger. These issues could have been a problem because PayPal is the largest payment processor on eBay and its biggest competitor is Billpoint, which is eBay’s own product. A source said Billpoint has not proved a successful rival to PayPal, which made the horizontal aspects of the deal less alarming to regulators. Also, there are about 80 other payment processors that serve eBay vendors. A second source said the antitrust division decided the market was broader than just PayPal-like payment systems, which permit consumers to send money via e-mail by charging a credit card or debiting a bank account. The source said the antitrust division concluded that credit cards are a viable substitute for a majority of transactions because many vendors have the ability to accept credit cards directly rather than using PayPal as a middleman. Regulators also concluded that entry to the e-payment market was easy, with up to four companies capable of quickly becoming major players, another source said. Finally, the economic evidence suggested eBay would only encourage more entry if it raised prices. Several lawyers said another reason eBay and PayPal escaped additional antitrust scrutiny is the longer-than-normal time the antitrust division had to review the deal. The Hart-Scott-Rodino Antitrust Improvements Act requires the antitrust agencies to decide within 30 days of the pre-merger notification whether to issue a second request. In this case, the antitrust division had several extra months because PayPal had gone to the Justice Department to complain about eBay’s anticompetitive practices. Knowledge of the market gained from that complaint made prior to the merger ultimately expedited its regulatory review. Robert Doyle Jr., a partner at Powell, Goldstein, Frazer & Murphy in Washington, D.C., said the companies also benefited because the deal was before the antitrust division rather than the Federal Trade Commission. “If this had been before the FTC, I’m certain there would have been a second request,” Doyle said. “The commission tends to be more thorough and aggressive in its due diligence.” Doyle and Andre Barlow, also of Powell, Goldstein, noted that the FTC issued a second request in TMP Worldwide Inc.’s failed 2001 effort to buy HotJobs.com Inc., concluding that the correct market was Web-based help-wanted advertising (TMP also owned leading online job site Monster.com.) This is a very narrow market definition, they said. That contrasts sharply with the eBay-PayPal deal, where the antitrust division defined a broad market, they said. “If you define the market as only online payment systems for auction sites, then you would have a big problem because PayPal is No. 1 and Billpoint is No. 2,” Barlow said. Some of the same network-effects issues from HotJobs also existed in eBay-PayPal, the lawyers said. In TMP-HotJobs, the FTC worried that a new service could not compete because it would lack the scale to rival HotJobs-Monster. Copyright �2002 TDD, LLC. All rights reserved.

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