A Matter of Trust

A look at the deals of 2002 suggests that regulators are listening to acquirers.

As two straight years of dramatically lower deal-making threaten to stretch into three, silver linings are in short supply. Megadeals all but evaporated in 2002, with only 1 transaction topping $10 billion, compared with 8 the prior year. And 4 of last year’s top 10 deals were really spin-offs of business lines.

Here’s one bright spot to consider, though: for deals that are proposed, fewer run into the kind of antitrust obstacles that derail them completely.

The Department of Justice knocked out just two deals in 2002, including Hughes Electronics-EchoStar. And indeed, since June 2001, only five combinations have been squelched entirely by the DoJ, although two were biggies: UAL-US Airways and General Dynamics-Newport News. (Of course, GE-Honeywell fell victim to a European ruling that year— a rejection that was recalled uneasily in November when Pfizer’s $58 billion purchase of Pharmacia was stalled by an EU request for more information.)

Perhaps more telling, the DoJ’s tally of canceled deals came in September congressional testimony by outgoing antitrust chief Charles A. James, who spent more time discussing how the division’s challenges often lead to remedies that allow deals to go through. Of 20 successful challenges during James’s 15-month term, he said, 9 were resolved with “fix-it-first” restructurings and 6 with consent decrees.

While no one thinks the feds have gone soft on merger regulation, the dearth of deals actually scotched by America’s antitrust cops does create speculation about why certain transactions make it through the gauntlet these days. Many merger-and-acquisition experts suggest that, for one thing, DoJ and Federal Trade Commission (FTC) staffers pay much more attention to the economic issues being faced by the industries that are involved in regulatory reviews. And the regulators’ increased understanding may be improving the chances of deals being completed — if perhaps contingent on significant divestitures or other remedies to protect consumer interests.

Bill Sippel, a former government antitrust official in the Carter and Reagan Administrations, is one who sees “a greater willingness of the government to view the dynamics of particular industries.” Specifically in cases where there is an excess capacity in the industry, “there’s greater room for arguing that you have efficiencies from the merger of two firms,” suggests Sippel, now with the Minneapolis law firm Oppenheimer, Wolff, & Donnelly.

Government staffers certainly weren’t impressed with the UAL-US Airways overcapacity arguments, too, which were overridden by anticompetition concerns. The airlines’ plight, of course, worsened after that particular deal was blocked — two months before the 9/11 terrorist attacks. Now, after more than a year of airline-industry depression, both carriers are operating under bankruptcy-court protection.

Were antitrust regulators to give economically challenged industries more of a break in 2003, it certainly wouldn’t be the first time the bar was lowered to reflect special needs, says Sippel, pointing especially to “the steel industry in the 1980s, when deals went through that wouldn’t have been permitted in earlier years.”

While it is tempting to tie more-agreeable regulatory reviews to George W. Bush, the nation’s first MBA President, experts see a trend evolving through both Democratic and Republican administrations during the past 25 years. And CFOs? They tend to give less credit to regulators for the improved regulatory environment — and more to corporate efforts to avert antitrust challenges.

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