"In-market mergers are the order of the day-everyone is looking for them," says banking attorney Brian Smith. The litany of hoped-for efficiencies such deals can produce make them attractive. They also set off warning lights on the government's antitrust meter.
The concern-among bank regulators, the Justice Department's Antitrust Division, and various state attorneys general-is that competition could be severely impacted when one neighbor merges with another. A handful of celebrated cases underscore a renewed emphasis on antitrust issues in bank mergers that can affect institutions of all sizes.
Fly on the wall. A case in point comes from Smith, of the Washington, D.C., law firm of Mayer, Brown & Platt. He recently represented a smaller banking company that was looking for a buyer.
Each of the leading bidders had a presence in the seller's market area. When the dealmakers crunched through their version of the Herfindahl-Hirschman indexes, which the government uses to measure market concentration, they found that a deal with any of the potential buyers would produce high concentration scores.
"Divestitures became the watchword of the bids," says Smith.
As it happened, one of the savvier bidders had gone into the negotiations with a divestiture plan in hand, says Smith. In fact, the bidder had even lined up an interested buyer for the branches it expected to spin off.
Then the regulatory process began, including investigations by the Justice Department's Antitrust Division. The division can advise regulators of its views on a merger's competitive impact and can challenge a regulator's approval of a deal for a limited time afterwards.
"The review by the bank regulators was markedly different from the review by the Department of Justice," Smith recalls. Justice took a nancower view of the product markets in determining anticompetitive effects of the proposed combination.
In its public pronouncements, the Antitrust Division stresses that its investigations are fact-intensive, not governed solely by index numbers. Smith found this an understatement.
The bidding party had to present an intensive analysis of the proposed divestitures, branch by branch, customer by customer. For each business borrower, Justice wanted details about their size and the nature of their relationship with the bank.
"Justice is getting more sophisticated about this process," says Smith. Antitrust investigators actually telephoned many of the borrowers, asking why they did business with that particular bank, and more.
Everyone's eligible. One of the lessons of this anecdote is that it's not just the big banking deals that can be examined for antitrust concerns. The selling bank was under $1 billion in assets.
"There is no transaction, from our standpoint, that has a competitive impact, that is too small to merit at least some competitive review from us," says Charles A. James, deputy assistant attorney general and acting head of the Antitrust Division. Discussions with banks, banking lawyers, and other experts indicate that the possible objections and resistance to a deal by the Justice Department is being factored into bank merger planning. (For a look at the standards with which Justice screens cases, see "Justice's Five-Factor Merger Test.") As the case above illustrates, some acquirors are beginning to anticipate the need for divestitures up front, and in fact often come to the table with an "ante."
"I have personal knowledge of several deals that didn't happen because the banks felt the required divestitures were too great," says Nevins D. Baxter, vice-chairman of the consulting firm BEI Holdings, Washington, D.C.
Indeed, the hardest deal to do these days may not be the megamerger, where there are numerous places to prune to the satisfaction of federal and state authorities, but the small in-market deal. Michael Shepherd, a former senior deputy comptroller of the currency and now an attorney with Sullivan & Cromwell, New York, ticks off several of the difficulties. …