Looking at Mergers the Way Federal Regulators Do

By Romeo, Jim | Journal of Accountancy, December 1999 | Go to article overview

Looking at Mergers the Way Federal Regulators Do


Romeo, Jim, Journal of Accountancy


EXECUTIVE SUMMARY

* WHEN A COMPANY CONSIDERS A MERGER, it's important to understand what may trigger a regulatory challenge. CPAs are most likely to focus on financial data, but they must look at postmerger market implications, too.

* FEDERAL REGULATORS SCRUTINIZE the relevant product market and the geographic market in each case. Such antitrust "watchdogs" assess a market by considering the likely consumer response to a "small but significant and nontransitory" price increase.

* IN CONSIDERING THE GLOBAL MARKET a company's location is not as important to federal regulators as how a merger or acquisition will affect competition within the United States.

* COMPANIES THAT WAIT UNTIL they are in the midst of the Department of Justice's approval process to bring in economic consultants who specialize in antitrust issues may be disappointed. A merger may get a thumbs-down if advisers are not familiar with antitrust economics.

What you'll need to know if your company is in an acquisitive mood.

At a time when mergers are proliferating in every business sector, federal regulators know that what's good for a company is not always good for the consumer. If you're a CFO or financial executive at a company that is seeking a more profitable position in the market through a merger or acquisition, it's important to understand what antitrust issues regulators will look at and challenge. CPAs are most likely to focus on financial data, but it's important that they consider postmerger market implications, too. Although it's relatively easy to understand domestic market share, global market issues are complicating the merger process.

THE AGE OF MERGERS

The number of mergers reported in 1998 was 4,728, a 200% jump from 1991, with the year's total volume exceeding $1 trillion. More mergers mean more regulatory activity and antitrust litigation. In 1998, the Federal Trade Commission's Bureau of Competition spent more hours on merger litigation than in any previous year, expending over 40 person years.

Companies merge to boost market share, eliminate competitors or acquire important suppliers needed by competitors. A red flag for regulators appears if a newly merged company will dominate a market. In one example that took place in 1998, United States v. Lockheed Martin Corp. and Northrop Grumman Corp., regulators challenged the proposed acquisition of Northrop Grumman by Lockheed Martin, an $11.6-billion merger that was the largest ever objected to by federal officials. The complaint alleged that the merger would have created unprecedented vertical and horizontal concentration in the defense industry, which substantially would have lessened, and in several cases eliminated, competition in major product markets critical to the national defense. The merger was disallowed.

Merging can create market power, and regulators scrutinize deals in terms of product or service concentration, geography and the availability of substitute products within a market, to be sure the new entity does not overwhelm all competition.

CRUCIAL TESTS

According to the Department of Justice, an acquisition does not restrict competition if it meets at least two conditions:

* The market is not concentrated after the merger.

* New companies can easily enter the market in the near term and provide effective competition.

When the government scrutinizes mergers, "there are no laws about strict market shares or number of players. The laws discuss only market advantage and consumer choice," says Nan Andrews Amish, a competitive strategy consultant with Synergy, in El Granada, California.

Federal regulators look at the relevant product market and the geographic market in each case. To determine these markets, some methodology is required. Antitrust "watchdogs" assess a market by considering the likely consumer response to a "small but significant and nontransitory" price increase. …

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