Federal Focus on Anti-Trust Can Mean Problems for M&A

As the failed merger between AT&T and T-Mobile showed, federal regulators and lawyers have become far more intent on antitrust claims. Now they’re hiring litigators from major law firms to improve their record in court, trying to prevent mergers that they think will harm competition and, as a result, consumers.

The Department of Justice is on the warpath and companies had better be wary. Even without a business degree, most people know that mergers and acquisitions are critical to business success. That is why there’s been a 24 percent increase in the number of merger proposals from 2010 to 2011, according to Howard University School of Law antitrust professor Andrew Gavil.

That may be why the Obama administration seems to be addressing antitrust issues more vigorously than other recent administrations. Not that mergers and acquisitions are in total danger. International Paper just won approval to acquire Temple-Inland, a competitor. And Google got permission to acquire Motorola from both the U.S. and EU. And yet, last fall federal prosecutors prevented H&R Block from buying a manufacturer of competing tax preparation software.

On one hand, the Department of Justice currently seems ready to stop mergers that it considers over-reaching. On the other, companies are still managing to successfully undertake acquisitions. The difference between success and failure in getting antitrust clearance is an understanding of what the law demands.

The rule of thumb when it comes to showing that a company has a monopoly is having two-thirds of a market. For example, Microsoft was found to have a monopoly on PC operating systems in the late 1990s because of its total domination of the market. But the consideration is more than a strict measure of size. A company can show market dominance by having enough power to significantly raise prices over a period of time. Then there must be the risk of the company abusing its position to further reduce the ability of competitors to effectively address the market.

What executives must do is find ways of structuring deals that carefully avoid the concerns of regulators. For example, International Paper had to promise to divest three corrugated packaging plants before getting approval to buy Temple-Inland. Not that this always works.

AT&T said it was willing to sell off 30 percent of T-Mobile’s assets, but even that was not enough to appease FCC concerns about too much concentration of the mobile phone market. Perhaps better than determining which assets to sell is choosing which to buy to minimize any possible problem.

The Google and Motorola deal will likely pass muster because Google’s Android operating system is open source — companies like Amazon have adapted their own versions — and Motorola isn’t close to market domination in handsets, even in Android-based hardware alone. This suggests a key M&A strategy: find a company that doesn’t directly expand market domination. Instead, look for complementary capabilities that can expand opportunities without pushing into monopolistic territory. That said, beware of straying too far afield. The number of successful conglomerates has been relatively few.

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