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The Department of Justice (DOJ) recently reached a settlement with Univision Communications Inc. (Univision) and Hispanic Broadcasting Corp. (HBC) regarding Univision’s proposed acquisition of HBC, the nation’s largest Spanish-language radio broadcaster. [FOOTNOTE 1]The proposed final judgment joins the growing list of DOJ and Federal Trade Commission (FTC) settlements designed to address the competitive effects that can arise from one competitor’s partial ownership interest in another. [FOOTNOTE 2]More important, the Univisionproposed final judgment offers one of the best explanations to date of the government’s concerns regarding such ownership interests. UNIVISION/HBC Univision, the largest broadcaster of Spanish-language television programming in the United States, does not operate any Spanish-language radio stations directly. However, Univision holds a 30 percent interest (as well as significant governance rights) in Entravision Communications Corp. (Entravision). According to the DOJ, Entravision is HBC’s principal Spanish-language radio competitor in several geographic markets in the United States. [FOOTNOTE 3]Thus, the DOJ’s concern was that after the acquisition, the combined Univision/HBC would hold a significant interest in Entravision, a direct competitor; resulting in the anticompetitive skewing of Univision/HBC’s post-acquisition competitive incentives. [FOOTNOTE 4] The DOJ reasoned that Univision’s 30 percent equity interest in Entravision would reduce Univision/HBC’s “incentives to compete against Entravision for advertisers seeking a Spanish-language radio audience because Univision/HBC, as a substantial owner of Entravision stock, will benefit even if a customer chooses Entravision rather than HBC.” [FOOTNOTE 5]In addition, according to the DOJ, because Univision only receives a fraction of Entravision’s profits, but, after the acquisition, would be receiving all the profits from HBC, Univision would have the incentive to exercise its governance rights in Entravision in a way that would discourage advertisers from doing business with Entravision. [FOOTNOTE 6] The proposed final judgment remedies the predicted anticompetitive effects of the proposed acquisition by requiring Univision to reduce its equity interest to “no more than 15 percent of Entravision shares within three years and no more than 10 percent within six years.” [FOOTNOTE 7]Univision also agreed to “exchange its Entravision stock for a nonvoting equity interest with limited rights [and to refrain] from participating in Entravision governance, or trying to improperly influence the conduct of Entravision’s radio business.” [FOOTNOTE 8] THEORY OF DUAL HARM Taking account of partial ownership interests in merger settlements is not unprecedented. Previously, the FTC required a restructuring of Tele-Communications Inc.’s (TCI) ownership in Time Warner Inc. (Time Warner) that resulted from Time Warner’s acquisition of Turner Broadcasting System Inc. (Turner). [FOOTNOTE 9]As a result of Time Warner’s acquisition of Turner, TCI, the leading national cable system operator and one of Turner’s shareholders, would acquire a 7.5 percent interest in Time Warner (the number two national cable system operator) and the right of first refusal on the 7.4 percent interest in Time Warner to be held by Turner’s chairman. [FOOTNOTE 10]The consent order required TCI “to divest all of its ownership interests in Time Warner or, in the alternative, [to cap] TCI’s ownership of Time Warner stock and [deny] its controlling shareholders the right to vote any such Time Warner stock.” [FOOTNOTE 11] Though arguably resting on the same theoretical underpinnings as the Time Warner consent decree, the proposed Univision/HBC settlement is notable insofar as the DOJ clearly articulates the two distinct competitive concerns that can flow from partial ownership by one competing firm of another. The DOJ’s systematic treatment of the dual competitive effects of such partial ownership interests closely follows the analysis outlined by Daniel P. O’Brien and Steven C. Salop. [FOOTNOTE 12]O’Brien and Salop, both of whom were consultants in the Time Warnermatter, [FOOTNOTE 13]have co-authored an article in which they reject the view that “[a] ‘non-controlling acquisition has no intrinsic threat to competition at all,’” [FOOTNOTE 14]and further explain how partial ownership interests can pose a two-fold threat to competition. [FOOTNOTE 15]It appears that the DOJ has wholeheartedly adopted O’Brien’s and Salop’s views on partial ownership in explaining the rationale of the proposed settlement in Univision/HBC. O’Brien and Salop observe that one potential anticompetitive effect of partial ownership stems from the financial interest and concomitant incentives of the partial owner. Consider, for example, a situation in which Company A holds a partial financial interest in Company B, a close competitor. If Company A unilaterally increases its prices, it is certain that some customers will stop buying from Company A and buy from Company B instead. However, because of its partial economic interest in Company B, Company A will not lose all of the profits from these lost sales. Rather, it will receive a portion of the profits generated by the sales Company B captured from Company A. Thus, as a result of its partial economic interest in Company B, Company A will have an increased incentive to raise its prices. [FOOTNOTE 16] The second potential anticompetitive effect of Company A’s partial ownership interest, according to O’Brien and Salop, is exerted on the acquired firm, Company B. If Company A’s interest in Company B includes governance rights in the operation of Company B, then Company A will have the incentive to use those rights to diminish Company B as a competitive threat to Company A. For example, if Company A can influence the prices charged by Company B, then Company A could raise Company B’s prices. Such an increase will certainly cause some of Company B’ customers to switch to Company A. Although such a strategy reduces Company B’s profits, the loss will be borne by all of the owners of Company B, not just Company A. Conversely, Company A will reap 100 percent of the profits from its sales to customers who switch from Company B to Company A. [FOOTNOTE 17] O’Brien and Salop refer to the incentive to exercise corporate control to the detriment of the partially owned entity as the “free-rider effect.” [FOOTNOTE 18]As they explain: “A controlling shareholder with a minority stake in [a competitive] venture can gain a larger benefit from the joint venture entity charging a higher price than the loss it suffers from the reduced profits of the joint venture. The controlling shareholder in the total control structure does not take into account the harms suffered by the other shareholders from the reduced joint venture profits. Instead it takes a free ride on these losses.” [FOOTNOTE 19]Therefore, although it may seem counterintuitive at first blush, the smaller the controlling share holder’s financial interest, the greater the anticompetitive incentive of the partial controlling owner. [FOOTNOTE 20] TWO-PART FIX As subscribers to the dual harm theory of competitor partial ownership interests, it is not surprising that the DOJ insisted on a two-part remedy in the proposed Univision/HBC settlement. Creation of a passive interest would remedy the concern about abuse of corporate control, but it does not alter the partial owner’s post-acquisition heightened incentive to increase prices unilaterally. By contrast, a reduction of equity interest, without a reduction of corporate control, would actually exacerbate the partial owner’s incentive to abuse its governance rights because it would magnify the free-rider effect. Consequently, the Univision/HBC settlement requires Univision to give up all but 10 percent of its equity interest in Entravision and to assume the role of a passive investor (i.e., to surrender corporate control). [FOOTNOTE 21] Given the agencies’ enforcement history when competitor partial ownership interests are involved, parties to mergers should expect that the DOJ and FTC will have virtually a zero tolerance for the post-merger persistence of such ownership interests. Similarly, the government will strictly scrutinize one competitor’s investment in another in connection with � 1 Sherman Act conduct investigations. Neal R. Stoll and Shepard Goldfein are partners at Skadden, Arps, Slate, Meagher & Flom ( www.skadden.com ). Sara L. Bensley, an associate of the firm, assisted in the preparation of this article. If you are interested in submitting an article to law.com, please click here for our submission guidelines. ::::FOOTNOTES:::: FN 1Competitive Impact Statement, United States v. Univision Communications Inc., Civil Action No. 1:03CV00758 (May 7, 2003), available at www.usdoj.gov/atr/cases/f201000/201006.htm (“Competitive Impact Statement”). FN 2 See, e.g., Agreement Containing Consent Order, In re Medtronic, Inc., Docket No. C-3842 (issued Dec. 21, 1998), available at http://www.ftc.gov/os/1998/10/9810324agr.htm ; Complaint, United States v. Primestar, Inc., Civ.No. 1:98CV01193 (D.D.C. May 12, 1998), available at www.usdoj.gov/atr/cases/f1700/1757.htm (transaction abandoned); Amended Complaint, United States v. Northwestern Airlines Corp., Civ. No. 98-74611 (M.D. Fla. Dec. 18, 1998), available at www.usdoj.gov/atr/cases/f2100/2158.htm (lawsuit settled); Decision and Order, In re Time Warner, Inc., Docket No. C-3709 (Feb. 3, 1997), available at www.ftc.gov/os/1997/02/c3709.do1.htm (settled by a 3-2 Commission vote). FN 3Competitive Impact Statement. FN 4 Id. FN 5 Id. FN 6 Id. FN 7DOJ Press Release, “Justice Department Requires Univision to Make Divestitures to Complete Acquisition of Hispanic Broadcasting Corporation” (March 26, 2003), available at http://www.usdoj.gov/opa/pr/2003/March/03_at_181.htm . FN 8 Id. FN 9FTC Press Release, “FTC Requires Restructuring of Time Warner/Turner Deal: Settlement Resolves Charges that Deal Would Reduce Cable Industry Competition,” (Sept. 12, 1996), available at www.ftc.gov/opa/1996/09/timewarn.htm . FN 10FTC Analysis of Proposed Consent Order to Aid Public Comment, In re Time Warner, available at http://www.ftc.gov/os/1996/09/timewar.pdf . FN 11 Id. FN 12Daniel P. O’Brien & Steven C. Salop, Competitive Effects of Partial Owner ship: Financial Interest and Corporate Control, 67 Antitrust L.J. 559 (2000). FN 13Stanley M. Besen et al., “Vertical and Horizontal Ownership in Cable TV: Time Warner-Turner” (1996) in The Antitrust Revolution 452, 452 & n. (John E. Kwoka, Jr. & Lawrence J. White eds., 3d ed. 1999). FN 14O’Brien & Salop, supra note 12, at 562 & n.9 (quoting 5 Phillip Areeda & Donald F. Turner, Antitrust Law �1203d, at 322 (1980)). FN 15 See id.at 568-84. FN 16 See id.at 575-76. FN 17 See id.at 577-79. FN 18 Id.at 586. FN 19 Id. FN 20 Id. FN 21Proposed Final Judgment, United States v. Univision Communications Inc., Civil Action No. 1:03CV0078 (March 26, 2003), available at http://www.usdoj.gov/atr/cases/f200800/200874.htm .

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