Wachtell Lipton Discusses U.S. M&A Antitrust Enforcement for 2019 and the Year Ahead

In a year of robust M&A activity, the U.S. antitrust agencies investigated and challenged transactions in many sectors of the economy.  The Federal Trade Commission and the U.S. Department of Justice initiated court challenges to block four proposed transactions and required remedies in 17 more.  Companies also abandoned five transactions due to antitrust agency opposition, including three transactions abandoned shortly after the agency filed its court challenge.  In addition, a coalition of state attorneys general challenged in federal court the merger of T-Mobile and Sprint, a transaction cleared, with the imposition of conditions, by the DOJ and the Federal Communications Commission.

Court Challenges

The antitrust agencies continued to prosecute court actions filed in prior years, showing how prolonged merger litigation can be.  The FTC’s long-running challenge of Tronox’s acquisition of Cristal was resolved in April, after the FTC agreed to a settlement requiring the divestiture of Cristal’s entire North American titanium dioxide business.  The DOJ’s challenge of AT&T’s acquisition of Time Warner — the agency’s first court challenge based on a vertical theory of competitive harm in 40 years — failed in February, when a three-judge panel on the U.S. court of appeals for the D.C. Circuit upheld the lower court’s decision allowing the merger to proceed.

Two court challenges initiated in 2019 highlight the agencies’ increased interest in innovation and nascent competition theories of harm.  In August, the DOJ challenged Sabre’s proposed $360 million acquisition of Farelogix, claiming that the transaction “is a dominant firm’s attempt to take out a disruptive competitor that has been an important source of competition and innovation.”  The DOJ’s complaint alleges that Farelogix is a nascent rival that has successfully gained a foothold in airline booking services through innovative solutions and competitive pricing, and that it represents a stronger competitive threat to Sabre than its small market share may suggest.  A federal trial of the so-called “killer acquisition” is scheduled to begin in January 2020.

Similarly, in December, the FTC challenged Illumina’s proposed $1.2 billion acquisition of Pacific Biosciences.  The FTC’s administrative complaint alleged that Illumina, with a 90% share of the U.S. DNA sequencing market and historically little competition, was seeking to acquire PacBio to “extinguish a nascent competitive threat.”  According to the complaint, PacBio, with a share of just 2-3%, “is poised to take increasing sequencing volume from Illumina in the future,” and therefore poses a significant threat to Illumina’s monopoly.  The FTC claimed that, absent the merger, Illumina’s response to that threat would include lower prices, improved quality, and innovative products, all of which would be lost if the transaction is allowed to proceed.  Just two weeks after the FTC filed its complaint, the parties announced the termination of their merger agreement, triggering the payment of a $98 million termination fee by Illumina to PacBio.

A coalition of state AGs filed suit in June to block the merger of T-Mobile and Sprint, two months before the DOJ announced a settlement with the companies to clear the transaction, subject to remedies.  The AGs’ complaint alleges that the merger would combine two of only four national mobile wireless carriers and eliminate substantial competition between the parties.  The AGs further allege that the DOJ’s consent does not restore the competition that would be lost as a result of the merger.  The trial is scheduled to end this month.

Difficult Deals Still Get Through

In November, the FTC required pharmaceutical companies Bristol-Myers Squibb and Celgene to divest Celgene’s Otezla, a popular oral treatment for moderate-to-severe psoriasis, as a condition to clearing Bristol’s $98 billion acquisition of Celgene.  The FTC alleged that Otezla would face direct competition from an oral product being developed by Bristol-Myers.  The FTC claimed that the divestiture, valued at approximately $13.4 billion, was the largest that a federal antitrust agency has ever required in a merger enforcement matter.  The FTC voted 3-2 to approve the consent, with Commissioners Chopra and Slaughter dissenting.  In their dissents, Chopra and Slaughter expressed concerns about the FTC’s analytical approach to reviewing pharmaceutical mergers, claiming that the focus on product overlaps may be too narrow and urging “a more expansive approach to analyzing the full range of competitive consequences of pharmaceutical mergers.”  These two Democratic Commissioners also dissented from their Republican colleagues in other merger enforcement actions in 2019, including, most notably, in connection with the FTC settlements relating to Staples’ acquisition of Essendant and Fresenius’ acquisition of NxStage, two transactions in which Chopra and Slaughter took issue with the majority’s treatment of potential vertical concerns.

What to Expect in 2020

In 2020, the agencies will closely scrutinize strategic transactions.  To the extent remedies are required to obtain clearance, structural divestitures will remain the remedy of choice, and the agencies will continue to require parties to address concerns as to the adequacy of any remedial package, including an upfront buyer.  Transaction parties should anticipate significant review periods at both agencies for transactions raising antitrust issues.

Healthcare mergers will continue to get special attention.  Partly in response to recent criticism of “under-enforcement” in the technology industry, the agencies will also closely scrutinize high-tech mergers, in particular acquisitions of nascent or potential competitors by allegedly dominant digital platforms.  More generally, transactions raising vertical, innovation, or nascent competition theories of harm will remain of particular focus.  In addition, a recent FTC enforcement action requiring the transaction parties to eliminate a non-compete clause from a business purchase agreement, and an upcoming FTC public hearing on non-compete clauses in employment contracts, highlight the increased scrutiny on these provisions.

Also worth watching in 2020 will be potential increased activism by state AGs in merger reviews.  Traditionally, state AGs have participated in the federal agencies’ review of mergers and sometimes joined them in court challenges or settlements. Rarely has an AG brought a challenge of a transaction reviewed and cleared by one of the federal agencies.  Last year’s challenge of the T-Mobile-Sprint merger, led by California and New York, is the most significant instance of such intervention to date, and a clear sign that state AGs are willing to pursue independent merger enforcement actions when they believe the federal agencies have been too lax.

Antitrust policy will remain in the political limelight in 2020 as Congress and Presidential candidates continue to call for more vigorous enforcement.  Careful analysis and planning at the earliest stages of potential M&A transactions will remain important, including a thorough evaluation of substantive antitrust risk and the development of an effective remedy strategy where necessary.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “U.S. M&A Antitrust Enforcement: 2019 and the Year Ahead,” dated January 6, 2020.